Weekly forecast update – Aug. 5, 2022

Forecast updates

Added 2025 forecast for milk and all dairy products.
Reduced the Class III milk and related product outlook.
Adjusted AUG22 cheese prices lower; however still forecasting a market recovery before the end of year above $2/lb.
Presently, spot markets are disconnected from the commercial markets suggesting they better reflect specific company issues rather than the overall cheese complex economics.
That suggests when these companies reduce spot Cheddar sales at the CME the market could spring up 15-20 cents with little effort. That is considered in the current forecast.
Burger and sandwich season will start to wind down in August as kids return to school. However, the 22/23 season will not have free meals and that could reduce milk and cheese to that channel this year compared to last year.
June export data was positive and foodservice continues to perform well with Blackbox Intelligence reporting the modest price decline has brought customers back to restaurants in recent weeks.
Overall cheese prices could stay above average, but likely sub-$2/lb for most months. Should the impact of the recession further slow demand that could cause prices to dip in early 2023 and not recover to 2H 2023 – that is considered in the current forecast.
Reduced whey price outlook given declines in EU price. EU prices should seasonally recover – but given weaker demand from China and whey replaced with permeate prices could trend lower at the start of 2023.
Long-term whey outlook may present a modest recovery; however, given new capacity additions in 2025 prices could remain muted.
The current outlook has reduced the 2023 forward Class III price compared to 1H 2022; additional Class III is below Class IV for a prolonged period. While that seems unlikely, NDM prices between $1.35 and $1.60 and butter between 2.30 and $2.50 result in + $20/cwt Class IV milk. It seems reasonable that those price gaps could contract with stronger cheese prices.
Reduced the Class IV forecast – skim lower, butterfat higher
Adjusted the 2023 butter price higher.
Presently butterfat demand, whether cream or butter, remains strong domestically and internationally. It seems pricing returning to $2.20-$2.30 prematurely could create stronger demand that could result in prices moving up. As a result, Ceres revised its butterfat forecast higher for 2023 forward – albeit less than this year.
Reduced NDM prices.
Still forecasting a modest Q4 recovery; however, reduced those prices to $1.50-$1.60 levels.
Expect 2023 prices could retreat. While most will watch China – lower demand is already factored into current prices.
EU27 policy is causing cow numbers to contract.
A La Nina weather pattern tends to negatively impact Oceania productions.
Lower on-farm margins this fall and early next year could cause milk to contract anew.
That could support prices in the $1.50s despite slower buying from China.
Those modifications have resulted in a stable Class I price forecast with prices fluctuating between $20 and $22/cwt between 2023 and 2025.

Milk Market

USDA announced the July Class III price this week at $22.52/cwt – down from June at $1.81/cwt suggesting the peak prices for 2022 passed. Class IV was $25.79/cwt down just 4¢ from June. Sizeable NDM price resets this week have pulled Class IV futures for the remainder of 2022 lower, but the strong butter price continues to prop up that milk price and keep it premium to Class III. Q3 Class III milk futures continue to toy with $19/cwt milk as the cheese prices decay. Spot prices are selling off this week leading to markets under tremendous pressure. In some cases, the pressure may be more than market fundamentals and commercial markets portray currently. Additionally, 2H 2022 milk production from Europe and New Zealand appears poised for an unchanged to modestly lower performance than last year based on current forecasts. Markets tend to find a bottom and lift as participants grapple with largely positive news, and concerns that starkly lower milk prices contrast against expensive feed could result in a correction.

Hot, dry, and, in some cases, humid weather is stifling milk production in the United States and Europe. At the same time, the weather is interfering with crop production and that is starting to lift cost expectations.

Cheese Market

The sell-side pressure at the CME this week seems to be out of step with commercial markets. Information was largely positive this week, but spot markets told a different story. CME blocks averaged $1.8270/lb – down 9.5¢ from the previous week with prices reaching the $1.70s. Barrels followed suit shedding 9.5¢ and averaging $1.819/lb. The block-barrel spread of 0.8¢ aligns with anecdotal reports. It appears when current sellers relent prices move up as they did on Friday. Still, the sell-side pressure has reduced the current outlook for AUG22 and SEP22 cash-settled cheese and Class III milk futures. Commercially, the retail business is consistent but less than last year. Foodservice is improving, but the results for June were negatively impacted by higher costs.

US June cheese production totaled 1.16 billion pounds, 2.72% more than the previous year. American cheese production totaled 462 million pounds – 1% more than last year with only Wisconsin less than last year for reporting states. Cheddar cheese was 333.5 million of the total with output up 1.12% – suggesting other styles grew at 0.74%. Mozzarella production totaled 385.2 million pounds, up 5.7% compared to last year. That indicates higher export potential and stronger demand from pizza – consistent with restaurant reporting. All reporting states produced more Mozzarella compared to last year. Parmesan output slowed by 6% compared to last year. Given market declines and the amount of time in aging it is reasonable to expect lower output until markets normalize.

US June cheese exports were a whopping 30.8% higher compared to last year and totaled 95.8 million pounds. Exports to Canada, South Korea, and Central America pushed exports significantly higher. That puts US exports on track to reach one billion pounds this year.

Butter Market

Spot butter prices rose above $3 on Tuesday and held above that level all week – the first time that prices have maintained a $3 price for more than a day or two. Prices averaged $3.0280 – 2¢ higher than the prior week. That said, Friday offers stacked up, and markets settled 4¢ lower without trades. Cream demand remains elevated as many are scrambling to source products – which is causing multipliers to climb ahead of the holiday build. Additionally, the higher multipliers is slowing bulk and general butter production – micro-fixing is kicking into high gear and will likely stay that way until November. Overall, global butterfat demand remains strong – especially in North America – which may suggest that futures could be overestimating the market’s ability to decline by the end of the year.

US June butter output totaled 160.5 million pounds 2.3% more than the previous year. California’s output was 0.83% less than last year, but Pennsylvania increased 2.4% over the same period last year. Seasonally, butter production is declining to suggest that prices could be supported as cream demand remains elevated at the start of August.

US June butterfat exports totaled 16.2 million pounds – 81.7% more than the previous year. YTD exports are running 41% more than last year. Canada drove exports higher as volumes reached 133% more than the prior year. While US prices are higher, they are still less than Canadian prices. Canada’s butterfat price is set to increase 8% next month to compensate dairy producers for inflationary pressures. Exports to Mexico rose 4X compared to last year.

NDM/SMP

CME spot NDM retreated with prices sitting at $1.50/lb by Friday and 2023 futures tumbling into the low-to-mid $1.40s. GDT SMP prices eased this week falling 5.3% compared to the previous auction and prices near $1.61/lb. That should have done little to shift market sentiment, but it may have. It would have been more surprising had prices remained unchanged given Fonterra added 41.5% more SMP volume to this auction compared to last year. CME NDM averaged 1.5845/lb – 13.75¢ lower than the previous week. Reports suggested that Southeast Asian (SEA) buyers were reluctant to pay GDT SMP – it makes sense given US prices are well below the current GDT prices. Presently, there are sizeable US NDM/SMP exporters racing to lock in large volume fall sales – they seem to be willing to compromise price to get the volumes confirmed. That said, reports suggest buyers were comfortable with $1.50-$1.60 NDM prices. For now, the race to the bottom is on – suggesting 2023 prices could correct higher should sell-side pressure relent. Currently the CME NDM 2023 futures forecast is favorable for Class II SNF buyers.

US NDM output totaled 169.7 million pounds in June – down 8.6%. YTD NDM production is down 7.2%. Like butter, California’s NDM production was down 11.3% compared to last year (suggesting California is sending more milk to cheese production), but Pennsylvania was up 1.9%. Seasonally, NDM output appears to be declining. SMP output totaled 45.2 million pounds – down 16.6% compared to last year. YTD US SMP production is down 25.8% compared to the previous year -a sizeable YoY gap that suggests that export demand from SEA could be slower. US MPC output totaled 19.2 million pounds – 5.4% ahead of last year. YTD output is up 11.3% – that data continues to indicate US processors are diverting more milk to MPC and away from NDM/SMP production.

US NDM/SMP exports totaled 151.1 million pounds in June – down 13.5% compared to last year. YTD volumes are down 10.2% compared to the same period the previous year. Exports to Mexico and Indonesia accounted for 80% of the YoY declines. Still, lower US NDM/SMP output may account for a considerable amount of the gaps.

Whey & Lactose Products

CME whey averaged 43.2¢, down 1¢ from the previous week. DMN central mostly price was 45.5¢ down 3¢ from the previous week. Western prices were unchanged this week 51¢. The lactose price was 45.5¢ this week, unchanged from the previous week. European prices are starting to form a bottom – which could be supportive to US prices over the near term. The Abbott – Sturgis, MI plant has started to move products to retail -still, there are reports that despite best efforts, there are still stockouts. After a quiet week, more whey data hit the markets.

USDA reported June whey production at 79.4 million pounds – 5.6% higher vs. last year. Wisconsin output was up 11.5% vs. last year – which may explain some of the pressure on Central prices. US lactose output was 102.3 million pounds and 6.3% more than last year. US WPC (25-49.9%) was 16.1 million pounds – 28.3% more than last year. US WPC (50-89.9%) was 28.9 million pounds – 11.4% more than last year.

US whey exports totaled 41.8 million pounds – 9.2% more than the previous year. Exports to China fell by 41% but higher exports to Canada and Malaysia more than offset those declines. Higher exports may have helped to lift market sentiment at the end of the week.