Monthly Forecast – January 2023

Global markets continue to decline as demand slows further and milk production rises. In typical fashion, higher dairy product prices that encourage dairy producers to increase output are the same prices that cause consumers to reduce purchases. Early 2023 appears to be a reset period with prices headed lower – at least through the year’s first half. Europe seems to be the most unsettled market searching for demand for excess dairy products – that is always concerning as they tend to push prices significantly lower to clear commodities. New Zealand and the United States are following Europe lower, causing markets to drop. What may be different this time around, dairy producers may begin culling later this year to reduce milk supplies to stabilize prices. While dairy producers reportedly earned record-setting margins last year, the 2023 forecast could erode those warchest quickly through the year’s first six months. Further, with Europe’s new Farm-to-Fork policy that moves the region down the Path to Paris, nations may be reluctant to support excess production as it is a self-imposed price decline.

• Dropped Q1-Q2 butter prices. US prices stayed too high in December – meaning the market could be due for an overcorrection in early 2023. Further, European and New Zealand prices are lower – it appears New Zealand is prepared to keep a consistent buffer to US prices to make imports more attractive this year.
  • Lower 1H 2023 markets could put markets back into carry should the back half of the year remain near current levels – that would allow processors to store butter and take some sell-side pressure off spot markets.
  • US exports are reportedly running into competition as European, and New Zealand butterfat prices are well below current spot and futures prices – the opposite of 2022.
  • With less domestic AMF production, more butter will be reported making it seem like there is considerably more butter than last year (it is simply reported vs. unreported production).
• Reduced 1H 2023 cheese prices.
  • Some of the current market participants at the CME on the buy-side have limited needs – therefore if exports slow they are unlikely to absorb the volume that could be turned back.
  • If US exports slowed to 90% of last year, nearly 100 million pounds of cheese would need to be absorbed in the domestic market this year. Add to that new capacity that comes online in Q2 that could keep prices in check for a time.
  • European processors are slowing cheese production – that could catch up to markets later in the year, helping to lift prices again.
• NDM adjusted lower due to weaker overseas price signals. In addition, Europe is moving more milk to SMP away from cheese, indicating further weakness and pushing spot prices to the low $1.20s.
  • GDT prices dropped on January 3, signaling NZ is looking to match EU-27 prices.
  • China continues to buy more volume from GDT, but imports are still well below 2021 levels, making the market feel surplus.
  • As the situation improves in China, more demand could return to the market. Additionally, China’s ability to increase output at the double-digit pace last year seems less likely.
• Whey prices could ease, but given the cost of soybean meal, Chinese hog producers are likely to favor whey more this year than last year as it is cost-effective. At the same time, ho-hum protein markets are going to provide a cap.