Monthly Forecast Update – Mar. 2022

Given the unprecedented events and uncertainty surrounding Russia’s invasion of Ukraine, Ceres made significant upward revisions in this month’s forecast, resulting in the highest forecast issued to date. If trends continue, milk and dairy product prices could set new records or be some of the highest in history. The story remains a deficit market with constrained supply, compared to demand causing prices to remain elevated. Globally, the world’s largest dairy product exporters’ milk production lagged last year. With feed, fertilizer, energy, and fuel prices surging at the beginning of this month, it is likely the break-even milk production price in the United States is somewhere between $20-$21/cwt currently and higher in Europe. While there are no guarantees that milk prices afford margins for dairy producers, it seems probable markets trending toward the $20 mark could cause further slowdowns.

At the same time, demand remains elevated, and higher energy and oil prices are affording some nations a more remarkable ability to buy products. After the Gulfoods show ended, anecdotal reports suggest there was good interest in dairy products, and the general sense was that buyers could be under-committed. Algeria recently completed its latest tender. On the opposite end, New Zealand exports indicate that Chinese imports could be slowing at the beginning of this year. But with the backdrop of slowing milk production, this news remains mostly bullish and supportive of prices.

Finally, the availability of substitute products is somewhat limited and getting tighter in the beginning months of the year. Malaysia palm oil, a substitute for butterfat, is $6,276/MT – that is off recent highs but well above the five-year average. With sunflower oil exports from the Black Sea region disrupted due to the Russia-Ukraine war, palm, soy, canola, and other vegetable oils are poised to move higher. That is supporting butterfat demand and elevated prices. Reports are surfacing that India could be 100,000MT tons short on vegetable oil purchases and that the country is asking Malaysia to increase palm oil output.

Eventually, these price hikes will take a toll on consumption – but that could be somewhat delayed than a “normal” timeline. Given the pandemic over the last two years that confined people into their homes, roiled supply chains, and led to an extremely tight job market – people do not seem to want to stop spending, travel, dining out – all things necessary to curb demand. Eventually, things will get too expensive or too scarce, and people will slow demand, but that seems to be more likely in early 2023. Today, there is still pent-up demand that needs to work through the system suggesting higher prices for an extended period. For those reasons, Ceres reduced the 2023 forecast, but most projected prices are still some of the highest on record. Consider, by 2023, European environmental measures will be enforced with expectations most nations will be curbing the size of their dairy herds by tens of thousands of animals. 2024 may reflect a more steady-state – assuming the conflict in Europe does not deteriorate and that a recession is still off in the future.

Raised Cheddar blocks to the highest annual average – $2.0937/lb – rivaling the 2014 record high. Increased barrels, less than 2014, but comparable. Reduced the block-barrel spread throughout most of the year. There are a few periods of reset – like past runs higher.
Increased butter to a $2.83/lb average price – and maintained above $2/lb averages through 2024. Although US butter prices are higher than the last two seasons, they are less than world prices. There is good demand for fat and vegetable oil prices are higher and the product more difficult to obtain outside the United States. Given expectations of lower YoY output through the first half of the year, that could cause prices to spike and remain above $3 during the holiday demand season.
Given lower milk production, most nations will focus on producing cheese, resulting in less NDM/SMP production. At the same time, there is still good demand for these products. Given oil prices above $100/barrel, NDM prices can be supported between $1.70 and $2/lb for an extended period. Expect NDM/SMP to be one of the first products to correct lower in 2023.
Expect whey prices to moderate throughout the year but slowly given higher soybean meal prices to support above-average whey powder prices.
Buttermilk prices are forecast higher due to stronger butterfat and solids, not fat prices.