Weekly forecast – June 9, 2023

Forecast updates

There were a few changes to this week’s forecast.

  1. Updated June 2023 prices based on spot markets
  2. Adjusted 2024 Cheddar blocks and barrel prices 5-10 higher.

Milk Market

The peak production may have passed, but plenty of milk is floating around, causing intermittent dumping and persistent discounts. Processors are still working through lower seasonal bottling demand – which will take a few more weeks to absorb into the system and for milk production to slow a bit. Dairy producers received May advanced milk checks, causing margin and viability concerns. Anecdotal reports indicate that milk checks may be closer to $12/cwt in June once adjustments come out – those are very low given current feed prices. Dairy producers cite that maintenance costs are high and that repairs are being done slower. With the slaughter pace lifting in June, the market is primed to move back to contraction in Q3 2023. A slowdown could support second-half prices, especially if demand remains stable.

Globally, milk appears poised to slow as milk prices falter on unchanged feed prices. For instance, Mexico’s 2022 milk production increased by 2.8% compared to 2021 – that pace slowed to 1.9% higher this year than last year. Similarly, China’s milk production growth in April was +1.7% vs. last year – that compares to a 9.6% YoY gain in January – reflecting a sizeable slowdown. Western European countries are slowing output, causing cooperatives to lift milk prices to encourage dairy producers to keep milking cows. At issue, if cows leave the system, futures do not offer an incentive to most dairy producers to add cows down the road suggesting a slower response to higher prices, much like last year. While May Class III prices were low, if spot markets remain near current levels, June will be even lower.

Cheese Market

Spot cheese trading remains volatile. Blocks reach $1.5225/lb midweek before tumbling again. Barrels reached $1.6525/lb before following a similar path lower. Blocks averaged $1.4615/lb, up 1.59¢/lb compared to the prior week. Barrels averaged $1.582/lb, up 7.83¢ versus the previous week. That widened this week’s block-barrel spread to -12.05¢ with barrels premium to blocks again. The story remains the same, the US market tipped to surplus, caused by the lack of Q2 imports. As suspected, US exporters were shut out of the Southeast Asia market due to higher prices in Q1, especially March – a critical time for negotiating Q2 and some Q3 sales. That left more cheese at home, which was more than the current level of domestic consumption could handle. As has been the case for years, spot sales are the yin to the export yang – meaning lower exports had no other outlet than the CME spot market in Q2. But, given current futures and spot markets, US cheese is highly competitive for second-half sales – that should provide some opportunities for exporters this year.

There was plenty of US data this week. US April cheese production totaled 1.17 billion pounds – 0.2% less than last year – YTD production is up 0.72%. While overall cheese production is less than last year, the product mix shift reflects US export decline in Q2 vs. last year as processors focused on Cheddar cheese production. Several states, including South Dakota and Wisconsin, produced significantly less cheese this year compared to last year. While California, Minnesota, and Pennsylvania increased output vs. last year. Cheddar cheese rocketed higher to 346.2 million pounds and 5.8% more than last year – leaving little surprise as to why so much cheese moved to Chicago in April. Mozzarella, a stalwart export cheese, export fell 1.3% to 381.7 million pounds. Despite ample carry markets – Parmesan output was lower, down 7.5% and 37.4 million pounds.

US cheese imports totaled 31.4 million pounds in April. That was 9.7% less than the previous year. While less than last year, it was more than the five-year average pace for April. Year-to-date imports are up 0.2% – marginal as imports from Europe slow. Most of the declines in April came from Italy – down 30.9% on reports that Parmesan cheese sales are slowing. There were several increases including Canada, Spain and Norway – but declines were more than offsetting these improvements. US cheese exports totaled 80.8 million pounds, 11.8% less than last year – an lower than 2021 also. Exports landed as expected with Mexico stepping up and US exports to SEA, especially South Korea plummeting as US cheese was expensive compared to New Zealand and Europe. YTD exports are down 0.6% compared to last year with January gains offsetting April losses. US exports to South Korea fell 53.9% compared to last year, followed by Japan down 22.7%. Increases to Australia up 39.9% and Mexico up 8.1% were insufficient to offset declines to South Korea. Interestingly, exports to China are still higher than last year. Grated cheese (incl. pizza blends) was up 37%, but Cheddar and Fresh cheese were 34% and 24%, respectively.

Butter Market

Spot butter prices retreated this week despite higher Global Dairy Trade (GDT) results and somewhat expected production and trade data. CME butter averaged $2.3745/lb, down 7.43¢/lb. After months-long higher prices, markets appear to relent as production data indicated more cream moved to churns in April than last year. Interestingly, current butter stocks are consistent with the five-year average. Additionally, international prices lifted over the last few weeks closing the gap on US prices – unlikely to support US exports, but it could eventually slow the rate of imports. GDT butter prices were $5,088/MT, up 0.5% ($2.37/lb on an 80% eq), and AMF increased 1.8% to $4,728/MT ($2.65/lb on an 80% eq) – that begins to make imports more expensive than in recent months. This week’s reports suggest that cream churns continues to slow as ice cream demand picks up seasonally. At the same time, new cheese plants are still ramping up and taking a bit more milk – which will slow milk to butter and power headed into Q3 – a factor that will comparatively slow churning during the year’s second half.

It was little surprise that US April butter production surged to nearly 195 million pounds and 7.6% more than last year. YTD butter production is 3.3% more than last year. April’s butter came from California, where output expanded to 4.7%; Pennsylvania was down 4.4%. Other western states added 2.5% output compared to last year.  Central states pushed more butter – up 13.7% – a significant uptick. There are 50.4 days of production on hand – more than last year’s 49.4 million pounds but consistent with the five-year average for this time of year. Still, there has been an argument that US butter prices have been too high for too long, and this may be the news that suggests that prices could retreat a bit.

US butter is trading at a deficit. US butterfat exports returned to 2020 in April, with exports down 64% compared to last year, totaling 5.4 million pounds. Exports fell to all trade partners, led by declines in Canada and Mexico, down 28% and 84%, respectively. Like other products, US butterfat is more expensive than products from New Zealand or Europe, and purchases have slowed considerably. Exports to South Korea and Malaysia were also lower, down 95.6% and 99%, respectively. US butterfat imports totaled 16.2 million pounds and 3.1% more than last year. There were interesting shifts that indicate that India could be slowing exports consistent with reports in that month to mitigate inflation. US imports from Ireland, New Zealand, and Mexico were all higher – up 70.1%, 58.7%, and 179.2%, respectively. Imports from India plummeted down 96% – that would reflect policy vs. pricing differences.

NDM/SMP

CME spot NDM prices were mostly stable this week – with the June 6th GDT SMP results showing much of the same. On Tuesday, GDT SMP ended unchanged at $2,755/MT ($1.25/lb); WMP dropped 3% vs. the previous auction closing at $3,173/MT ($1.44/lb). While market participants hoped to glean more data from this week’s information release, there was little to move markets in one direction or the other. CME NDM averaged $1.1625/lb, down 0.19¢/lb. Until milk production slows more, markets will likely remain in the same range they have for most of the spring $1.15 to $1.17/lb. That said, as new cheese plants ramp up and if milk production slows, that will disproportionately impact NDM/SMP production during the second half of the year – a factor that could cause prices to lift. Additionally, slowing milk in Mexico and China could promote imports later this year.

US April 2023 NDM production data landed near expectations and totaled 199.6 million pounds – up 1.9% compared to last year with YTD up 4.1%. SMP production was 22.6% less than last year and totaled 34.5 million pounds. While Central states produced more butter, less NDM was produced during the month. Western states increased NDM output by 5.7%. California’s NDM production was up 0.9%, indicating most of the NDM came from other western states. Wisconsin’s NDM output was down 45%; Pennsylvania’s was up 4.9%. US Manufacturers’ stocks of NDM totaled 309.2 million pounds, up 3.4% compared to last year. March to April stocks declined – that compares to an increase last year. Lower production may have driven the results.

Similarly, US April 2023 NDM exports totaled 147.9 million pounds, down 9.8% compared to the previous year. That was the first time this year that a month dropped below the five-year average, but well within expectations given New Zealand and Europe blanketing Southeast Asia with product this spring. As anticipated, Mexico’s imports increased by 31.1% – but it was still insufficient to offset SEA declines. Exports to the Philippines, China, Malaysia, and Thailand all fell – down 47%, 54%, 70%, and 50%, respectively. While US exports were competitively priced, New Zealand and Europe blanketed SEA with discounted products.

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.