Monthly Forecast – February 2023

Spot prices are increasing as news from Europe indicates that processors are more comfortable with stocks and have discontinued distressed product sales. In those same reports, European processors are reporting higher-than-expected milk intake, which undermines the first statement or at least makes it relative. For now, European sellers are pausing to reassess current demand compared to milk intake. That doesn’t mean that sales won’t increase again, but more for now, older stockpiles of dairy products may have cleared.

US brokers and traders interpreted that news positively and encouraged buyers to seek coverage before prices increase. That is certainly true, CME futures projections of US dairy product prices are more favorable relative to last year, but calling the bottom of this market may be too soon. There are signs that markets are looking better than economists expected at the end of last year as hiring news was positive, unemployment is the lowest in 50 years, and inflation is abating – but demand resurging at this point in the market seems less likely. News abounded this week with reports that Whole Foods, Kroger, Walmart, and other retailers were seeking price concessions from suppliers to relieve consumers grappling with food costs that are 11% more than last year. Additionally, food service data for November and December were lackluster, with those months posting the lowest same-store sales figures since August. While data suggests markets and demand could look better yet this year, it seems too early for that call, and a lack of demand sent markets plunging last month.

At the same time, the milk spigot opened up. Milk flows less than in previous record-setting price years, but milk is expanding. Modest expansion at the end of last year, combined with retreating demand, caused prices to collapse. While futures predict prices that could create considerable pressure for dairy producers – switching from expansion to contraction always takes longer than markets expect. Many US and European dairy producers are well capitalized after last year and can make do with a few months of lower price projections. Add to that that heifer stocks set a new low, and some dairy producers may be looking to retain cows. This is the market phase where everyone looks to outlast the weaker players, which means months of milk despite prices that would suggest otherwise. Just like it took months for dairy producers to respond to higher prices, the converse is also true.

Short-term domestic supply disruptions exist as cheese processors have quality and production issues. That has resulted in dumped milk and may have temporarily tightened up the supply. That may explain some short-term price increases. That said, reports indicate that export bookings in March and April are lower than expected, which will be an opportunity to recover.

Rising domestic butter prices are puzzling. Data doesn’t appear to support higher prices as butter is one of the products that performed poorly during the second half of last year as consumers purchased fewer butterfat products due to higher retail prices. At the same time, trade data indicates that US AMF imports are rising, as is production. That data seems to paint a bearish picture for the near term making the recent price increases stand out.