Weekly forecast – June 30, 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.

Milk Market

USDA announced the June class prices this week. Class II was $18.83/cwt, down 28¢ from May. The Class III milk price tumbled to $14.91/cwt – down $1.20 from May. Not only was this the lowest price since 2020. Class IV milk prices were $18.26/cwt and up $0.16/cwt from May. This could make de-pooling more likely this summer. Futures are forecasting a $3/cwt Class III-IV spread. That will reduce the Class I skim milk price based on the average of plus $0.74/cwt overall, which will contribute to rather low milk checks that could cause culling to pick up. That said, dairy producers suggest they can “ride out” this storm, but as stated above, that assumes this is a short-lived event and not a demand issue.

Warmer weather and, in some cases, sweltering heat and humidity should work to curb milk production as July gets underway. Bottling is at its seasonal low point. More milk will head to manufacturing next week during the July 4th holiday – although a mid-week holiday could reduce the impact on manufacturers.

Cheese Market

This week CME blocks and barrel prices started the week under pressure which continued until Friday. Barrels were under more sell-side pressure this week as 56 loads changed hands. While 106 barrels traded in June, less than in April and May. Barrels averaged $1.3835/lb, down 12.34¢ from the previous week. Cheddar blocks declined, but the drops were modest by comparison. Spot blocks averaged $1.3335/lb., down 6.46¢ from the prior week. The block-barrel spread closed to 5¢ this week, but barrels remain premium to blocks. Markets are still unsettled, and sellers seem to have plenty of spot cheese available. There are some discussions that volumes could subside in July as reports suggest some cheese processors booked additional export orders, but that has yet to be proven out. Futures forecast a price recovery through Q3, but prices are well below the five-year average and considerably less than last year.

According to Blackbox Intelligence, the may food service had a consistent, slightly better performance than in recent months. Sales were up 1.9%, driven by higher ticket prices, and traffic was down 3.5% – consistent with April. Inflation appears to have impacted the best and worst performing restaurants, with Italian and family-style dining in the best category and fine dining and pizza in the worst. Interestingly, this time around, it was checks prices decelerating versus slowing foot traffic. Takeout and delivery continue to help restaurants that cannot handle in-store dining. That is helping to drive demand. This continues to be a good consumer experience driving better results and the figures being pulled down by inferior service levels.

Butter Market

After prices jumped up on Tuesday, markets were unchanged with nine trades. CME spot butter averaged $2.416/lb, up 4.16¢ higher than the prior week. It will be interesting to see if the market shook off the recent bearish sentiment that appeared in mid-June. While spot markets recovered to the $2.40s this week, futures are forecast lower prices for August and September – an unusual and rare counter-seasonal move. While stocks were higher in May, current reports suggest that microfixing is full-steam ahead and that cream intake for butter plants in Central and eastern states dropped. That and more demand from ice cream and sweltering heat should slow butter production suggesting the peak is in the rearview mirror. Butter seems to indicate that consumer demand will continue to slow into the end of the year – contrary to scan and consumption data through June. That is not to say it can’t happen, but it has not happened so far.

News this week was from overseas. European butter output in April slowed compared to last year, down 1.8%. Production totaled 412.7 million pounds. Despite the first YoY loss of the year, YTD output is still 2.5% higher compared to the same period last year. Germany produced almost the same amount of butter a year ago, down 0.5%. France had the largest decline, down 6.1% vs. last year. Ireland produced more butter, up 5.5%, which may be behind some recent spot butter price declines reported in Europe.

NDM/SMP

CME spot NDM prices sold off again this week, averaging $1.1195/lb, down 2.55¢ from the previous week. NDPSR prices were contrarian, with prices moving up for the final week of pricing and nearly 5-6 higher than spot prices. Trade volumes were lower, indicating a good amount of sell-side pressure on markets. It is likely export interest remains lackluster – consistent with overseas reports as of late. Reports indicate more sellers than buyers and older powder that could create issues for newer milk powders. Futures indicate that July and August will continue to trend lower, which comes as little solace to milk powder manufacturers.

US May slaughter totaled 249,100 cows, 10.6% higher than last year. That was led by higher slaughter from Texas and New Mexico – likely due to the catastrophic dairy failure and more exits for newer and leveraged dairies. That was followed by higher slaughter from mountain states and California / Arizona. Those increases result from poor margins and better returns from cull cows. As the dairy herd remains higher than last year – about as many cows came back into the system last month. YTD slaughter is running 5.74% higher compared to last year. Slaughter rates will likely pick up as on-farm returns fade headed into Q3, and prospects look poor for months. Weekly slaughter rates rose above 4% from the high 3.8% levels in late May. Due to the new capacity, a shrinking herd will disproportionately impact butter/NDM versus cheese whey. Slaughter may need to be +6% to reduce the herd size and slow output.

Whey & Lactose Products

Prices eased again this week with a chasm opening between spot and NDPSR prices. NDPSR whey averaged 31.09¢, down 0.75¢ from the previous week. CME whey was 26.69¢ down 0.91¢ from the previous week. Dairy Market News losses accelerated this week, with western mostly falling to 30.1¢ down 3.4¢ with the first signs western DMN prices could fall below the 30-cent mark. Central mostly was 27.35¢ down 1.4¢ from the previous week. Overall, whey prices continue to decline as markets anticipate more capacity later this year. There may be some positive news from China, but it is weather dependent.