Monthly forecast – July 2023

Forecast updates

While dairy data looks adequate through the year’s first half, market sentiment remains bearish. Supply has not changed dramatically year-to-year. Markets are more focused on what could be a demand issue or a headwind facing the economy. Additionally, US exports slowed considerably – that may be the primary culprit behind the Q2 market imbalance, especially for cheese markets. Moving forward, US cheese will rely on exports to balance supply and demand, meaning if traders lift markets beyond supportable price levels – more cheese could remain in the domestic market as it did during Q2 2023. There will be consequences that markets that move too high will have the opposite reaction, with prices dropping for longer periods to restore balance.

Milk prices are now in the $14/cwt level for Class III, with futures projecting prices to remain there for most of August. As the June advanced milk checks arrive next week, dairy producers may be stunned at how far prices have dropped – the lowest since the onset of the pandemic. For those with Class IV-based milk prices, there will be some mitigation. Still, milk checks may surprise dairy producers in the Upper Midwest and those on cheese yield as the values will barely cover feed costs after deductions for items like hauling, cooperatives, and check-off. While dairy producers indicate they can ride out this storm, modestly slowing milk supply may be insufficient if this is a demand issue. That said, milk production is slowing and the slaughter rate is rising – which could have milk production decline below last year’s levels by Q3.

International demand is in a similar state. The data looks consistent with last year, but there is a lot of concern that sellers are outnumbering buyers. That is typical for the end of Q2 and the start of Q3 so it is difficult to determine whether this is seasonality or something larger.

Cheese:

  • Reduced 2023 prices forward.
  • Still forecasting a sizeable price recovery in Q3, but the top end of prices could remain below $2/lb.
  • USDA issued and awarded a bid for October 2023 to June 2024 cheese deliveries. The impacts are difficult to assess as this may be related to the annual purchase, suggesting no additional demand. On June 23, Sec. Vilsack announced $2.7 billion in spending, with $1.3 billion earmarked for schools and $1 billion for states to fund food banks. As relatively new news, it is unclear the impact on markets.
  • Some anecdotal reports suggest US cheese processors were able to secure export volumes for Q3 – that may take some pressure off of spot markets.
  • Scan data looks good and foodservice is mixed, with some sectors expanding and others less than a year ago.

Butter

  • Stocks expanded, but butter demand remains strong.
  • Expect 2H 2023 production to slow as new cheese plants ramp up.
  • Heat spreading across the country will further slow production seasonally, which should ramp up ice cream demand.
  • Commercial disappearance remains elevated.
  • No significant changes to this month’s forecast and outlook for 2H 2023 and 2024.

NDM

  • Reduced Q3 NDM/SMP price expectations. While markets appear poised to recover, it could take a bit longer, given the demand concerns.
  • So far, China continues to ramp up imports suggesting milk production remains less than last year.
  • Reports suggest that the EU may have older product to market – that could create a two-tier market for a time.
  • The short-term concern, widely available spot milk and low Class III skim values will further reduced NDM to cheese vats this year placing more pressure on exports.

Whey

  • No significant changes to 2023 forecast. Reduced 2024 and 2025 due to more cheese and whey capacity coming online.
  • A slowing Chinese economy could be problematic for demand moving forward.