Weekly forecast – May 12, 2023

Forecast updates

This week there was little new data and spot market performance was consistent. That said, there are some notable changes to this week’s forecast.

  1. Increased CME/NDPSR butter through 2023.
    1. Commercial disappearance continues to perform well with sizeable increases estimated for March.
    2. As milk moves to vats that will slow cream production and ultimately butter output in Central state – the primary driver behind this year’s build.
    3. Trade should be a non-issue.
    4. Evidence more bulk butter is reported on NDPSR vs. CME.
  2. Decreased May and June cheese prices
    1. Based on Western manufacturers without sales and further cancellations, it seems reasonable to expect CME spot volumes for blocks and barrels to remain elevated.
    2. That could drum up export interest as EU and NZ Cheddar prices increase making US cheese cost-effective.
    3. Should export orders increase – that could reduce the sell-side pressure allowing Q3 prices to lift.
  3. Reduced whey prices as more product is expected later this year and demand remain lackluster.
    1. There are some bright spots for whey – China’s infant formula imports are rising and whey is cost-effective in hog rations.
  4. Reduced Q2 NDM prices, but increased Q4 through 2024.
    1. Like butter, most US NDM is coming from Central states, which will slow as new cheese capacity comes online.
    2. Slaughter rates are picking up globally – that suggests milk production could begin to contract impacting NDM/SMP/WMP first.

Milk Market

Seasonally, milk production in Europe and the United States is close to its seasonal peak. But, schools are letting out throughout the United States, slowing intake to bottling plants and pushing more milk to manufacturing plants. That should keep the milk flowing for four to six more weeks. After that, milk could tighten up as new capacity starts to come online.

Additionally, dairy producers globally are sizing up cows and increasing culling as margins get squeezed from declining milk prices and stable feed prices. Despite months of forecasting lower soybean meal prices, that has yet to come to fruition. Corn also remains high. In the United States, Class III milk prices forecasted in the $16-$17/cwt range through July could create further distress, causing dairy producers to reduce their herd sizes to manage costs. This is happening from China to the United States to New Zealand. That could set up higher prices later in the year and into the next, but that will hinge on whether demand holds up.

Cheese Market

CME spot market volumes remain elevated and currently, May is on track to reach April volumes. Barrel monthly volume trading has not been this high since 2018 and blocks since 2021. It is evident some western cheese processors are short of sales – it has gone as far as some switching from barrel to block processing to keep from overwhelming markets. This week the CME barrel price averaged 1.5115/lb, down 4.55¢ from the previous week on – 58 trades. Cheddar blocks averaged $1.6085/lb, down 5.4¢ from the previous week on 20 trades.  Given higher European and New Zealand milk prices, US spot cheese and futures cheese prices are highly competitive through the end of this year. That may help lift volumes for exports. Additionally, current prices could allow for more promotional activity at retail and for foodservice.

Ceres estimates March cheese commercial disappearance at 1.15 billion pounds – 2.3% less than the previous year. While March was lower Q1 2023 was 2.4% higher compared to last year. Based on anecdotal reports, IRI scan data and restaurant performance that was not unexpected. Higher prices on store shelves and on menus could be causing consumers to slow purchases. Certainly, promotions were slower than they have been in recent months which would negatively impact flow. Likely the end of March spot price did not do much to help sales and exports. All of that said, prices have corrected lower making US cheese a deal for retailers and foodservice. Overall, these lower figures could help lift sales for Q3 2023 – at the least, it presents an opportunity.

Butter Market

CME spot butter traded two loads this week – making it a rather quiet week. Price eased on Monday and dropped further into Tuesday. This week CME butter averaged $2.4055/lb, down 1.55¢ compared to the previous week. Prices lifted a bit into the end of the week, but a gap between spot and futures remains. So far this year, CME butter prices are moving more than NDPSR prices. While CME tumbled into the upper $2.30s this week May and June futures remained between $2.42 and $2.44 – a sizeable gap. As of late, it appears spot is more inclined to move up to close the gap rather than futures moving lower. A growing basis between CME and NDSPR prices this year could create some issues for hedgers.

Ceres estimates US March butter commercial disappearance was 212.6 million pounds – 19.6% higher than last year. 2022 was off-trend as exports and AMF production diverted cream away from butter churns. Additionally, consumers slowed purchases in response to higher prices. Retail prices are still elevated, but more promotion dollars this spring brought consumers back. Add to that fine dining continues to outperform last year – that is a good consumer of butterfat. It appears that domestic butter demand is back on track and capable of rising well above last year’s levels – assuming prices stay in check. That could be difficult given the YoY gaps through Q2 – which could continue to deplete stocks at a faster pace relative to last year.

NDM/SMP

Reports of plant disruptions continued this week. Markets pulled back a bit, but remain supported. With weeks remaining for peak 2023 production, it appears markets may be close to finding a bottom. Certainly, recent data suggest that the spot lows may be in for now – barring substantial demand declines. At this point, global markets are starting to consolidate and appear to be forming a bottom. CME NDM prices averaged $1.1795/lb down 0.6¢ from last week. Next week’s GDT should provide some price direction for the end of May. Recent auctions and NZX futures suggest that prices could lift a bit. Domestically, Dairy Market News (DMN) prices were steady to higher this week. As was the case at the end of March, the sizeable spot volumes reported in the final week of April were followed by normal volumes and prices lifting. It seems reasonable to expect that could occur again in May and possibly June as processors look to quickly convert inventory to cash while accepting discounts.

Ceres estimates US March NDM commercial disappearance was 60.8 million pounds – 4.8% higher than last year. While March 2023 bettered last year, Q1 was 3.8% behind last year’s pace. NDM competes with condensed skim and discounted raw milk – both were plentiful this year.  2022 was one of the lowest commercial uses of NDM last year given the relatively higher protein value vs. Class III milk. That appears to be shifting this year, but with plummeting cheese values in Q2 and available milk – cheese processors are unlikely to increase NDM standardization at this point in the year. Production remains modest, but this will put pressure on US exporters to move products this year. The bright spot may be that Mexico’s YoY milk production is slowing while the demand picture remains positive.

Whey & Lactose Products

CME whey prices were too high earlier this year relative to other domestic and international prices. In May, CME whey prices carry a sizeable discount to those same price series. This week spot whey prices dropped to 30¢ for the first time since July 2020 when markets traded at 28.75¢. CME whey averaged 30.9¢, down 2.15¢ from the previous week. DMN Central mostly averaged 37.75¢, down 2¢ from the prior week. DMN western mostly averaged 39.5¢, down 0.5¢ from the previous week. The story for whey and lactose prices remains the same – higher-value whey products are oversupplied and prices remain under pressure. There is rising demand for whey for feed uses and there could be more opportunities into China for infant formula. But given lofty prices last year it could take time for markets to stabilize.

Ceres estimates March 2023 domestic lactose commercial disappearance at 12.2 million pounds, 50% less than last year. Lactose consumption is off to its worst start since 2010 – that means more reliance on the export markets. Ceres estimates March 2023 domestic whey powder commercial disappearance at 32.1 million pounds, 16.1% more than last year. Given higher soybean meal costs – whey is viable as a feed input for domestic hog producers.