Weekly forecast update, Oct. 22, 2021

Forecast updates

  • Given the severity of the global supply chain issues, it appears likely it will extend into 2022 and could worsen before it gets better. With shipping between China and the West Coast now taking 71 days, up from 40 last year, there are concerns that delays and slowing ocean transportation could cause safety stocks to increase. Further, the current delays and rising costs make it unlikely international buyers will reduce current holdings.
  • US milk is slowing, and global milk appears set to be idle. Slowing milk production growth could support prices into 2022. While there is a good likelihood that prices could eventually encourage more milk – higher input costs have stifled growth so far this year.
  • USDA buying programs focused on providing free meals in schools and greater funding for the Supplemental Nutrition Assistance Program (SNAP) may be consuming more milk causing lower-than-expected milk headed to manufacturing and balancing plants resulting in slowing output.
  • For this forecast increased the following products:
    • Increased the NDM price through Q1 2022 with prices expected to moderate in 2022 on slowing demand by mid-year. Still, expect prices higher than the past few years due to slowing milk output growth.
    • Increased whey prices through 2023. Demand for WPC80 remains elevated. With milk production moderating – Europe has diverted some supplies to butter/SMP slowing cheese and whey output.
    • Reduced the block-barrel spread. Increased the barrel price as more cheese headed to exports in 2022 could reduce barrel production, resulting in a lower block-barrel spread.
    • Increased the 2022 butter forecast expecting prices could reach over $2 after the midpoint of the year given higher demand for all high-fat butter products.
    • In turn, these changes increased all milk prices. In addition, Class I is forecast higher due to Class III and IV prices closer, causing the 74-cents/cwt add to be added.

Fluid Milk Market

USDA surprised markets this week with the significant revisions to August milk production figures. The modifications included cow numbers, output-per-cow, and total milk production. USDA removed 22,000 cows from the August estimate and 75 million pounds of milk. While most expected hot weather in August to reduce output, the changes’ magnitude was more than most expected. September milk production totaled 18.1 billion pounds – 0.2% more than last year and 0.3% less than the revised figures for August. New Mexico and Washington led the declines on a percentage basis – while Great Lakes and Midwestern states continue to make headway against last year. Georgia surprisingly bettered previous year by five million pounds.

USDA announced the Advanced Class I price for November at $17.98/cwt – 90¢ more than October. The Class II advanced skim price is $11.23. The Class I base price is the highest since June and the second-highest this year.

Cheese Market

Cheddar barrels increased to the highest price this year and the highest price in nearly a year. Cheddar barrels averaged $1.824/lb, 5.6¢ more than last week on 19 trades. Cheddar blocks averaged $1.764/lb, 2.1¢ less than last week on a single trade. Blocks jumped higher on Friday, returning to the $1.80s, but still unable to close the gap on barrels. The block-barrel spread last week was a negative 6¢. Markets are pricing November currently and still forecasting a $1.92/lb price – down from earlier in the week. While spot prices are elevated – futures are expecting even more increases over the next few weeks.

USDA released September 30 Cold Storage holdings this week. The United States held 1.46 billion pounds of cheese in warehouses –1.8% more than August and 7.7% more than a year ago. American cheese stocks totaled 844 million pounds – 2% higher than August and 9.3% more than last year. Despite less milk – more cheese moved into the warehouse. That was a larger American cheese stock build between August and September – +17 million pounds compared to the previous five years; similar for the year-over-year growth increasing 71.6 million pounds. Total cheese grew 25 million pounds between August and September – driven mainly by the increase in American cheese. If production were lower in September and stocks up – that would suggest a demand slowdown.

Butter Market

This week’s spot CME butter prices reached the highest levels since April, but prices retreated a bit on Friday. Trading volumes were similar this week compared to last week, with 30 loads changing hands. Volumes available to the market and interest remain high. Still, interest in frozen butter could wane in a matter of weeks when peak demand passes. That said, cream demand, especially on the East Coast, is elevated and keeps butter churning to a minimum. Anecdotal reports suggest that it is challenging to obtain bulk butter and that processors are busy until the year’s final week.

USDA reported 330.1 million pounds of butter in cold storage as of September 30. That was more than the five-year average of 300.6 million pounds. Still, slowing production, exports, and likely strong demand helped reduce butter stocks piles compared to August by nearly 9% and last year down 4%. Inventories are declining seasonally, but faster than a year ago, with August to September dropping 32.6 million pounds, the most for that period since 2016 when stocks dropped nearly 50 million pounds. The YoY decline of 13.8 million pounds was the first over the last five years since 2017 when stocks dropped 13.3 million pounds – all other years increased.

NDM/SMP

CME NDM peaked on Monday at $1.54/lb – the highest price in over seven years. CME NDM averaged $1.531/lb – 3.7¢ more than the previous week with 15 loads changing hands. Brokers are still looking to acquire more products, and domestic buyers may be concerned about how much product they have on hand. That could result in more buying that could further constrain limited supplies. Add to that, some of the largest milk slowdowns have milk powder-producing assets. All of that is helping to support and lift future prices.

Global Dairy Trade hosted the final event of October with the index rising 2.2% – whole milk powder (WMP) prices increased 1.5% compared to the previous event, with prices recovering from the first October event. SMP increased 2.5% to settle at $3,401/MT ($1.54/lb) – most of the increase came from European, and US SMP offered at the event – New Zealand price increases were slight. Markets interpreted more buying from Northern Asia positively – suggesting China returned to the market. That helped to lift EEX, NZX, and CME NDM/SMP futures. CME NDM futures set new contract highs this week.

In September, China imported less SMP and more WMP compared to last year. That was a mixed result but still largely supportive to product prices through early 2022. SMP imports totaled 67.3 million pounds, 14% less than last year. WMP imports were 79.2 million pounds  – the most for that month on record and 56% more than last year.

Whey & Lactose Products

CME spot whey prices averaged 60.6¢/lb this week, 0.55¢ more than the previous week with only two loads trading compared to seven loads the last week. Prices reached the highest level so far in October and the highest price since June. Futures prices accelerated with contracts reaching new highs this week, with first-half 2022 futures prices reaching 60 cents. Increases in whey prices caused most of the Class III price appreciation since the beginning of the month.

China imported 124.1 million pounds of whey and whey permeate in September – that was 1.95% more than last year but 6.4% less than in August. Imports from the United States increased 26% compared to the previous year. However, until US exports are released in early November – it is difficult to determine whether China imported more permeate or whey. Over the last few months, China has been importing more permeate.