Weekly forecast – June 2, 2023

Forecast updates

This month’s data suggests that the difference between the Class III and IV prices could be substantial for the foreseeable future. Typically, these gaps don’t last that long – meaning Class IV would decline or Class III increase. The latter appears more realistic as butter prices appear well supported, and declining supplies could cause NDM/SMP prices to rise. All of that said, more cheese is coming into the system, and exports will need to increase, especially to SEA, to keep the domestic markets balanced. As evidenced by the low Q2 2023 prices, exports slowed, and markets are out of balance, causing more cheese to head to the spot markets. For those reasons, prices are different from the last forecast.

1. Expect milk production to move to contraction as futures forecast low milk prices domestically and overseas. That should curb further declines in milk prices Q3 forward with Class III expected to make sizeable inroads and Class IV to rise.
   1. Given the average of pricing – higher Class IV prices will be muted by lower Class III prices meaning Class I is expected to be less than Class II and Class IV through the end of the year – that could mean depooling is on the table.
   2. Ceres has Class III June 2023 forecast sub-$15/cwt – the lowest prices since May 2020. That will put tremendous pressure on dairy producer margins and likely cause culling to pick up faster as the spring flush has past.
   3. US cheese prices are the lowest in the world and futures are well below spot prices from Europe and New Zealand – that should promote and facilitate more US cheese exports through 2H 2023.
   4. USDA’s bid should begin removing cheese out of the system in Q4 – but more will need to be seen with the September bid -is this more cheese or half of the annual bid volumes.
2. Moderated cheese prices – but there could still be some upside to 2H markets should exports pick up.
   1. Maintained a wide block-barrel spread with barrels above blocks in July.
   2. Expect cheese could run above $2/lb – that will depend on demand and supply.
   3. Reduced 2024 cheese price forecast as more cheese is expected to come to market. That could be subject to revision higher should demand remain consistent and milk supplies slow down internationally.
3. Increased butter forecast through November 2023 – prices have been supported, and ice cream demand should increase over the next few months.
   1. Additionally, NDPSR pricing could cause prices to remain elevated for longer.
   2. Expect a modest seasonal adjustment lower for butter to be higher in 2024 and 2025 as slower milk off the farm and more American cheese will tighten butter and NDM supplies domestically.
4. Reduced the whey forecast. Demand is lackluster, and more supply will begin in 2H 2023. With infant formula demand ho-hum, that could imply too much product, and prices will need to moderate more.
5. Made modest adjustments to the NDM/SMP forecasts. Prices could lift as supply falters; however, that will be contingent on demand.

Milk Market

Heat over the weekend in the Mideast and East may have slowed milk production. Some reports show that milk is peaking but may be coming down a bit slower than expected. The persistent report bottling demand is seasonally lower, putting tremendous pressure on manufacturing to the point that free milk is being passed by. While some cheese plants could purchase heavily discounted milk, some are concerned that it is not worth it due to lackluster demand. That is resulting in intermittent dumped milk this spring. CME June milk futures are forecasting $15.35/cwt – but current spot markets would result in lower prices – those not seen since May 2020 – the peak of the pandemic panic. Currently, on-farm margins are the worst since the 2009 financial collapse when considering deeper milk basis discounts and higher feed premiums – if futures are accurate, dairy producers will barely cover feed costs in May and June and possibly July – that is sure to slow milk production and increase culling this summer.

USDA announced the May Class III milk price at $16.11/cwt, down $2.41/cwt from April and $9.10/cwt less than last year. It was the lowest Class III price since August 2021. Class IV was $18.10/cwt, $0.15/cwt more than April, but $6.89/cwt less than last year –the lowest price since November 2021.

As dairy producers react to significantly lower milk prices, China’s milk production continues to slow. While 2023 output is still higher than last year, the April gap was 1.7% – down from 9.6% in January. China’s milk price in May was 3.88 yuan, down 0.06 yuan from April and the lowest since September 2020. Those declines and higher feed costs are causing dairy producers to cull cows and dump milk. Higher internal milk production has resulted in fewer imports – slowing milk could result in more imports later this year.

Cheese Market

Once again, blocks ended the week discount to barrels as modest sell-side pressure caused prices to drop on Friday while barrels increased. Trading volumes remain elevated. CME blocks averaged $1.4456/lb, down 11.99¢ from the previous week. Barrels averaged $1.5038//lb, down 0.33¢. that was a 5.82¢ block-barrel spread with barrels premium to blocks. Despite heavily discounted spot prices, futures remain elevated, creating tremendous market carry premiums. Q3 prices have moved below the five-year average, which has caught the interest of interested hedgers. That buy-side interest is keeping Q3 prices elevated while June prices languish. Should spot prices persist, June Class III prices could drop below $15/cwt resulting in the lowest prices since May 2020.

Dairy news was somewhat quiet last week, but there was wider economic data that could support demand through at least Q3 2023 – but not without concern. Since the start of the year, TSA traveler numbers have improved with January and February exceeding 2019 levels. This year, travelers are up 10-25 million people per month versus the four-year average. Compared to 2019, March to May was less, but it was by 226,000 to 1.6 million people. More travel bodes well for foodservice demand this year – expectations are for more travel during the summer months.

But, according to Blackbox Intelligence, Restaurant sales were slow in April, with the performance at +1.3% lowest since July 2022. That was the third month that sales growth slowed to earlier months. April was the second worst-performing month over the last two years. Smaller guest checks caused the lower performance; foot traffic improved somewhat. -3.5% was better than Q4 2022 at -3.7%. Like retail sales, customers are still dining out but trading down and seeking value or discounts. While inflation still impacts restaurants, rates are trending lower over the last three months.

Butter Market

Spot butter prices increased this week as more cream moved to ice cream production and butter churns quieted. Heat spreading across the country could kick demand into gear, suggesting the butter build peak is near. CME butter averaged $2.4488/lb on six trades, up 1.43¢ compared to the previous week. For now, June through Q3 futures are in the mid-$240s, but given modest trading, it seems reasonable to expect prices could increase. But next week’s April trade data will likely show another reversal with more butter imported than exported. Butter trading is quiet compared to other products suggesting the market remains balanced. Given more milk headed to cheese during 2H 2023, that could continue supporting US butter prices – especially as international prices increased over the spring.

As of this week, Congress passed the debt ceiling bill averting a financial crisis. That, along with the Federal Reserve suggesting it will slow rate hikes, has global markets more optimistic about performance for the rest of this year. In April, consumer spending increased by 0.8% – helping to keep the US economy from entering a recession as the economy expands, albeit at a slower pace. Inflation-adjusted spending was still up 0.5% – the fastest growth since January, surprising markets. Despite inflation, consumers continued spending in April, with automobile purchases pushing 6.2% above last year – suggesting some pent-up demand for scarce products. In April, for workers in their prime working years, employment rates were the highest in two decades. Additionally, corporate executives surveyed are less pessimistic about the economy. Overall, that could suggest demand is consistent – implying lower milk production could impact prices.

NDM/SMP

CME spot NDM prices started the week trading at the low end of the spring range, but by mid-week, prices increased to $1.17/lb, the high end of the recent range. CME NDM prices averaged $1.1644/lb, up 0.24¢ compared to the previous week. Dairy Market News price series also increased modestly over the last week. The news suggests that spring milk is starting to peak, suggesting the most NDM/SMP production is now in the rearview mirror. Add to that, Mexican demand remained consistent and new reports suggest that milk production globally is starting to moderate – all things that are supportive to NDM prices. Add to that recurring dry operation issues this spring, and prices appear to form a bottom. But, most market participants will await the June 6 GDT before forming an opinion. The GDT Pulse auctions at the end of May suggest that prices could decline somewhat – but volumes are limited so market price indication could be questionable.

DMC payments in May are highly likely as milk prices plummeted against more modest changes in feed prices. With the announcement of April Ag Prices this week, DMC margins were $5.84/cwt, down 24 cents from March and $6.45/cwt less than last year. This is putting additional pressure on farm margins as it doesn’t incorporate basis, which remains sizeable for milk and feed.  Futures predict that May and June DMC margins could track lower, with margins potentially as low as 2009 and surpassing even the initial months of the pandemic in 2020. Futures predict that June could be sub $4/cwt, triggering the minimum coverage levels. Margins return to above $7/cwt after September – but if milk prices continue to retreat, it is possible that 2023 could be the worst year for margins since the financial collapse.

Whey & Lactose Products

Domestic whey prices continue to slide with little, suggesting that prices do much of anything through the end of the year – this is the biggest impact on the YoY Class III milk price difference. CME price averaged 26.5¢, down 0.35¢ this week. DMN Central prices were 31¢, down 1.5¢. DMN Western prices were 35.5¢, down 1¢. NDPSR prices were 34.18¢, down 3.83¢. Overall, prices are still under pressure and trending lower. This should make feed-grade whey competitive, but demand for higher-value protein remains the concern, especially as infant formula production is back online and demand projections are flat. Given more WPC forecasted this year – that could continue to pressure prices lower.