Weekly forecast – Mar. 3, 2023

Forecast updates

Recalibrated the monthly forecast. Early 2023 has been marked by higher-than-average milk and dairy product prices; however, data is starting to suggest that stocks are mounting globally as mounting supplies are met with weaker demand. News indicates that China’s economy is on the mend, which could imply a post-Covid demand boost similar to the United States, Europe, and India when each of those regions came out of the pandemic – but the run higher could be a few months away (typically this occurred in late spring/early summer). Additionally, China’s manufacturing sector is much improved – which could relieve those awaiting chips, parts, etc. At the same time, there is some news at home about mounting consumer short-term debt that could pose problems as interest rates continue to rise – that could provide for tepid recovery later this year.

As milk supplies continue to increase, processors are storing more products. If demand is strong, that could lift prices seasonally, but additional products in storage could prevent prices from reaching levels that reduce demand. If demand is modest, that could lead to oversupply later this year. US dairy producers receive the first advanced milk checks at significantly lower prices. Given the value of feed and cull cows, it is better to liquidate than to continue producing milk – but whether contraction begins is yet to be seen. European cooperatives are starting to reduce prices – primarily those in Ireland and France in response to higher and consistent milk supplies. That could slow things down – but it still may take time as prices remain relatively high as feed prices are beginning to moderate.

  • Reduced the 2023 cheese forecast.
    • Still expect a lift later in the year – how strong may be determined by demand from Mexico and China. Given more production, it will be incumbent upon stronger exports that rival last year to keep the domestic markets balanced.
    • Widened the winter/spring block-barrel spread through 2025. Expect that as US exports strengthen into 2024 that the spread will moderate.
  • Reduced the 2023-2025 butter forecast.
    • Given China’s increased and consistent WMP production that may reduce needs over the next few years – assuming less milk is needed for fluid demand.
    • If that persists New Zealand, Europe and the United States will shift focus to SMP/butterfat products.
    • Additionally, butterfat in milk continues to rise.
    • That could provide sufficient butterfat to meet demand – easing prices from recent highs.
    • Drops below $2/lb could be problematic as that reduces milk prices too much.
  • Adjusted NDM/SMP forecast
    • Reduced 1H 2023 forecast – lifted back half into 2025.
    • China has been buying more SMP and moderating supplies could lift prices again.
  • Reduced whey
    • Data doesn’t seem to support current US price strength – a sizeable gap between US and EU prices doesn’t tend to last for that long.

Milk Market

USDA announced the Class III and IV milk prices for February this week at $17.78/cwt and $18.86, respectively. The Class III milk price was the lowest since October 2021; November 2021 for Class IV. Futures forecast that milk prices during the first half of this year could remain near these levels. This week, US dairy producers are receiving the first advanced milk check with substantially lower milk prices, causing concern. Feed prices remain high along with other costs, making a return to “normal” milk prices uncomfortable and something that could cause culling to pick up. Presently, the value of cull cows is rising – with economics indicating cows and feed are more profitable sold than as milk.

Overseas reports indicate that cooperatives in Ireland and France are starting to reduce milk prices quickly as milk supplies continue to expand. Spot prices are declining in response to the uptick in output. It could take prolonged contract price declines to materially slow output.

Cheese Market

CME Cheddar barrel trading picked up this week, with 25 loads changing hands – 20 on Friday. A larger barrel user was present at the market, willing to own as many barrels as were offered. On Friday, there were 14 unfilled bids left on the board. That helped lift market sentiment and futures at the end of the week. Barrels averaged $1.5675/lb, 0.5¢ less than the previous week. By comparison, block trading was modest, but prices slowly rose throughout the week but fell short of the prior week. Prices averaged $1.916/lb, down 2.15¢ versus the prior week. The block-barrel spread remains wide until barrel demand or exports pick up.

In January, US cheese production totaled 1.21 billion pounds – 3.2% more than last year and 1.2% more than December on a daily average basis. California produced 2.3% less cheese, which was more than offset by increases from Idaho, New Mexico, New York, and the Upper Midwest. That was January’s most pronounced YoY gain over the past six years. That increase makes the Cold Storage reports interesting, indicating that cheese did not go into storage or that volumes on export were exceptional. Cheddar cheese production totaled 356.1, up 7.1% compared to last year; again, a stark contrast to the Cold Storage report. Mozzarella output was 394.8 million pounds and 0.02% less than last year, with California and New York reducing output. The shift toward American-style cheese may support earlier reports that US cheese exports are slowing.

Butter Market

After weeks of persistently high prices, this year’s “new crop” season was marked by lower prices as buyers stepped back from markets this week. That is unusual for the first day of March Trading. Early in the week, futures dropped, indicating that spot was likely to follow. CME butter averaged $2.394/lb., up 0.15¢ from the prior week. Cream was disrupted in the East this week, but multipliers rose in Central states. Easter preparation is likely underway and will pull some cream away from butter churns for a time; however, most anecdotal reports suggest that cream is plentiful, and Easter is unlikely to slow churns substantially.

US January 2023 butter production totaled 201.4 million pounds, 7.3% more than in December and 3.8% higher than last year. The YoY increase was typical for January. California produced 3.2% more butter than last year; Pennsylvania 1.7%. The stock gain over the same span was larger suggesting a slowdown in deman. Regular hard ice cream output – a sizeable user of cream was 4.4% more than last year – and the largest YoY increase over the last six years. That is a significant turnaround from last year’s decline.

NDM/SMP

NDM prices were under pressure this week. CME NDM averaged $1.183/lb, down 3.3¢ from the previous week. That put US prices back in the teens. These prices are more consistent with anecdotal reports. Some overseas demand appears to be moving in the upper teens; reports indicate domestic demand has slowed. Some buying interest that appeared a few weeks ago vanished over the last few weeks. It could be that buyers perceive markets could become more favorable as seasonal demand eases and milk supply rises. That said, news from China indicated the nation was seeing a favorable economic uptick since the start of the year and the end of the zero-Covid policy. That may provide some price stability later in the year. With next week’s GDT, markets will likely pause until the first auction for March happens.

US NDM production was 177 million pounds in January and 3.95% more than last year. Interestingly California’s production was down 0.25% vs. last year. Central states drove the output gains, with production soaring 28.8% higher compared to last year. That supports reports that milk supply remains surplus in the Midwest with milk flowing into any available capacity – including powder. SMP output was 42.8 million pounds and 1.47% less than last year – an indication that some export to Southeast Asia could be slower, resulting in more milk headed to NDM instead. NDM stocks totaled 271.7 million pounds on January 31, 3.87% more than last year. That was an average December to January increase.

Whey & Lactose Products

CME whey prices were modestly lower this week – but the wide gap between US and EU whey prices remains. US prices can maintain a premium, at times, to EU prices, but the gaps since the start of the year are vast suggesting some price correction could be on the horizon. Prices averaged 45¢, down 0.94¢ from the previous week. Dairy Market News (DMN) prices were higher. The central mostly price was increased 1¢ to 41.50¢; western mostly prices were up 1.15¢ to 43¢ this week. NDPSR whey prices moved up 0.38¢ this week to 40.28¢. European whey prices were mostly stable at 32.9¢.

In January, US whey powder production totaled 77.9 million pounds 3.1% less than last year. WPC (25-49.9%) production was 15.9 million pounds and 7.3% less than last year. WPC (50-89.9%) output was 26.7 million pounds and 11% lower than a year ago. WPI production was 9.79 million pounds and 15.7% lower than a year ago. It is unusual that all whey output was lower while cheese was up during the month.

Despite lower production whey and derivative stocks increased in January. As of January 31, whey stocks were 66.6 million pounds and 19.5% more than last year. WPC (25-49.9%) stocks were 31.2 million pounds and 36.8% higher. WPC (50-89.9%) were 53.8 million pounds and up 23%. WPI was 23.5 million pounds and 82% more than a year ago.