Weekly forecast – Sept. 1, 2023

Forecast updates

Weekly updates:

  • Added 2026 forecast for all products
  • Cheese
    • Maintained SEP23 price levels near current.
    • US prices continue to maintain a premium to EU and NZ prices – that could be problematic for Q4 2023 exports; however, the gaps are minimal compared to the spring suggesting that US may be capable of regaining some share in SEA.
    • Mexico and stronger domestic demand could keep prices elevated this fall as reports suggest some cheese plants are running below capacity.
    • That could keep cheese headed to Chicago, IL limited this fall.
  • Whey
    • Whey prices are lifting as domestic production of WPC80 tumbles seasonally due to 1) new capacity start-up being postponed and 2) less milk intake.
    • Similar reports from Europe, WPC80 stocks are depleted, lifting whey prices.
    • Reports from EU indicate whey prices contracted in Q1 2024, approaching 35 cents.
    • Given lower WPC80 stocks and production that could support prices.
    • The offset that could cap runs – widely available permeate and Chinese whey demand is so-so.
    • Overall, that could lift the price outlook into 2024 for whey and derivatives – WPC34 less so as that is interchangeable, in some uses, with NDM/SMP.
  • Butter
    • USDA revealed retail ads this week at $3.30/lb – 90 cents less than two weeks ago.
    • YoY butter production will likely slow into 2H as cream demand remains positive and some cream is moving into cheese production vs. last year.
    • So far, butter demand remains elevated and could surpass last year.
    • Given anecdotal reports of microfixing that could cause butter stocks to deplete, supporting higher prices, but less than a year ago.
  • NDM/SMP
    • Fonterra (NZ) releasing data that is is more optimistic about demand prospects later in the year.
    • Milk is slowing.
    • Lower milk in California and Southwest this summer likely resulted in lower milk powder production.
    • Given slowing Chinese milk production that could increase imports relative to last year. Rabobank stated that Chinese milk could grow at a slower pace 1.5% vs. 7% through the end of the decade.
  • As a result of those conditions, we increased the whey forecast, moderated the SEP/OCT NDM forecast, and made very few changes to butter and cheese.

Milk Market

USDA released the August 2023 Class III and IV milk prices this week. Class III reflected a sizeable recovery to $17.19/cwt, up $3.42/cwt from July. Class IV was $18.91/cwt, up 65¢ compared to July. While those were sizeable recoveries, it may come as little solace to dairy producers still reeling from lower Q2 and July milk prices. Certainly, the milk production report for July reflects that sentiment. Some anecdotal reports suggest dairy producers are still looking to exit, while others are looking to slow expansion. That could keep milk tight and cause some of the sizeable discounts in the market for the last ten years to dry up. As capacity expands in Nebraska, Texas, and New York, that could mean more milk competition or the system will rely more on output-per-cow moving forward. In either case, the shoe may be on the other foot headed into the end of this decade.

US July dairy cow slaughter pace remained above last year, but less than June. In July, 244,200 dairy cows were culled – that was 6.1% higher than a year ago. YTD slaughter remained 6.3% above the same period last year – that accounts for the decline in the herd size. The slaughter pace in mountain states like CO, MT, WY was 50% higher than last year. NM, OK and TX increased 26% over last July. The slaughter pace slowed in the PNW, down nearly 10% vs. last year.

Cheese Market

CME blocks were bookended with mid $1.90s prices this week. CME blocks averaged $1.9745/lb, up 2.75¢ from the previous week. Mid-week prices lifted, but there were few trades last week, making some wonder whether that represented spot markets well. Barrel markets picked up at the end of the week. Barrels averaged $1.8675/lb, up 1.75¢. That reduced the block barrel spread this week to 12.45¢. Overall, reports remain consistent – milk is tight, constraining output, keeping young cheese – the type that trades at the CME limited. That could keep trading modest. For now, anecdotal reports suggest that demand is seasonally ramping up and should look a bit better as college returns to session and football season gets underway next week.

The National Restaurant Association reported the Restaurant Performance Index up 1.2% in July – the highest RPI result since March. Most surveyed restaurants noted higher same-store sales than last year, but 40% of those surveyed stated that sales slowed compared to June. Foot traffic continued to lag last year, with only 35% of those surveyed noticing that they service more customers. Interestingly, most restaurants are investing in their operations or new outlets, providing an optimistic long-term view. 52% of restaurants believe the next six months of business will be better than the past six months. Still, markets must contend with student loan repayments restarting after a three-year hiatus. Additionally, consumers are underwater on car loans. Those could keep people looking for deals and cutting costs where they can this fall.

Butter Market

CME markets continued the down week trend with prices dropping to $2.62/lb before recovering into the end of the week. Prices average $2.643/lb, down 5.9¢ from the previous week. More cream was expected to head to butter churns over the long weekend, but some speculated that cream demand could pick up. Still, there was some speculation that cream remained tight in the Upper Midwest and East relative to the last two years. Other reports suggested that cream was widely available, and that caused prices to tumble. As is typical, cream multipliers pulled back. USDA reports higher dairy promotions in early September, with a butter averaging $3.30/lb compared to $4.20/lb a week ago. That may attract consumers, resulting in strong demand heading into the fall. Cream is transitioning from ice cream to cream cheese – but given record-setting heat over the weekend – ice cream production could keep pushing along.

Despite widespread discussions of a recession for the past year, the US economy grew at 2.1% in Q2 2023 in the face of modestly higher prices and recent interest rate highs that are now expected to last. This appears to be the final phase of pandemic spending – the first year reflecting pent-up experience spending (concerts, games, travel) and lifting foodservice demand globally. While the data has supported dairy consumption so far, there are some concerns that as the fall approaches and school resumes, consumers go on a bit of a spending hiatus, causing demand to slow again. There are more short-term consumer debt, student and car loans that are taking sizeable shares of consumer wallets, which could cause consumers to go into deal-seeking mode. Still, Circana suggests that consumers are still looking to throw parties and celebrate this fall – something that could mean a shift from dining out to retail purchases – a factor that could support butterfat consumption.

NDM/SMP

NDM spot and futures prices tumbled this week. The news was quiet, but sellers are worried about demand prospects yet this year despite more upbeat reports from Fonterra this week. Ahead of the Sept. 5 GDT auction, Fonterra forecast higher results. They have noted better demand prospects from China and the stabilization of the Chinese economy as reasons for being more upbeat. Additionally, Fonterra reduced the amount of WMP and SMP available at the Pulse auction for the next 12 months. That did not stop CME NDM prices from averaging $1.0895/lb, down 1.05¢ from the prior week. Milk production is slowing, but so far, domestic interest remains subdued, and that may be causing sellers to seek futures coverage for the final quarter of the year – but that may be at the lowest prices so far this year at NOV23 dipped to $1.06/lb.

Interestingly, reports surfaced that China’s older WMP may be out of spec and more likely reflecting off-spec holdings vs. fresh holdings. At the same time, Chinese milk continues to slow. Add to that, China suggests that stimulus may help consumption – all of that suggests a bullish fall – consistent with typical New Zealand reports at this time of year. Rabobank forecast that China’s milk production growth through 2030 could slow to 1.5% YoY increases compared to 7-8% for the last ten years. That likely reflects a maturing dairy industry that has reached critical mass. Interestingly, these reports come on the heels of Fonterra reducing Pulse auction volumes and what could be lower GDT volumes released tomorrow. This is consistent with New Zealand reports at this time of the year but seems consistent with slowing milk supplies and consumer demand. Along that vein, New Zealand suggests a slow 2023/24 season start.

Whey & Lactose Products

CME whey prices increased, rising above 30¢ for the first time in months. CME whey averaged 29.3¢, up 0.3¢ from the previous week. DMN Central mostly whey averaged 27¢, up 1.75¢ from the previous week. Western mostly whey averaged 34¢, up 2¢ from the previous week. Lactose continues to appreciate, up 1.5¢ to 22.5¢ this week.

News shifted as more reports surfaced that WPC80 products could be tighter than expected this fall. First, new capacity start-up has reportedly been postponed until early 2024, and milk intake to cheese plants is lower, reducing spot product available to the market. Similar reports are coming from Europe. That seems to be providing some support for nearby prices. Seasonally, whey production will trend lower, which may be why prices moved above 30¢ for the first time in a while. Additionally, European reports suggest prices for Q1 24 contracted near 35¢ – a sizeable improvement. All reasons to be positive, but if it remains lackluster, China’s demand could keep prices from moving much higher.