Weekly forecast update – Dec. 2, 2022

Forecast updates

One of the most significant considerations for this forecast is if and when China will return to markets. Historically, when China’s demand eases, no other nation or group of countries can absorb that lost volume – it appears 2022 may be no different. So far, milk production from major exporting regions lagged last year, with the United States and Europe pulling ahead in recent months. While milk production has been slow to materialize, the lost volume from the world’s largest dairy product importer has outpaced supply slowdowns making markets sluggish as the year-end fast approaches.

  • Months of higher prices have started to encourage milk production. Add to that, major plant expansions in the middle of the United States are helping to bring new cows and dairies online. However modest, those gains are starting to drag on dairy product prices.
  • For this forecast, Ceres revised NDM prices lower for 2023-2025. Prices should remain elevated compared to the previous five years but less than this year due to lackluster demand from China.
    • While China has announced efforts to reduce its zero-Covid policy, most experts suggest it will be a bumpy road to normalcy due to low uptake of vaccines and boosters and very low natural immunity – implying periodic spread and sickness.
    • That may be contrary to China’s statements that its Lunar new year and spring festival holidays will be major events.
    • But, it could be a transition that eventually brings the Dragon roaring back to markets, helping stabilize demand later in 2023.
    • For those reasons, Ceres reduced milk powder forecasts from last month.
  • Butter prices remain resilient after Thanksgiving, with anecdotal reports that butter supplies are limited for this time of year. At the same time, data indicates that US butterfat imports are rising as more AMF is inbound. While US exports to Canada could continue – the value of New Zealand and European butter is well below US prices – that could create more competition for exports elsewhere. That resulted in a similar outlook for butter prices.
  • Cheese markets are on the rise at the beginning of November. That may be short-lived, but there seems to be little reason for prices to reset substantially to increase interest. Each time futures move toward $1.95 – interest comes back pushing price forecasts up again.
    • The Dumas Cheese plant should begin start-up procedures in May – that will provide new cheese to markets.
    • USDA’s Agricultural Feeding Kids & Families program could provide a floor for cheese prices through 2024.
    • US exports are strong and likely to remain positive next year, which will hinge on Mexico’s demand.
    • Elsewhere, European markets are mixed, with an outlook for cheese prices to head lower. New Zealand exports slowed on lower demand from China.
    • For those reasons, Ceres made modest adjustments to the cheese price outlook. The block-barrel spread remains tight – with barrels holding premiums at times.
    • Foodservice and retail demand is positive, but still expecting a seasonal decline in mid-Q1 2023.

Milk Market

USDA announced the November Class III and IV milk prices this week at $21.01/cwt and $23.30, up $2.98 and $4.51, respectively. Forecasts indicate that milk prices are starting to decline. Margins are starting to slide from +$10/cwt to near $8/cwt – that could be a sizeable adjustment for dairy producers in 2023, and it may eventually impact supplies. In October, DMC-Dairy margins recovered from Q3 lows; however, futures continue to indicate that those lower margins could return in early 2023 as milk prices subside and feed prices hold. October 2022 DMC margins were $10.71, up $2.18/cwt from last year. Based on current futures, November and December could be marginally higher than last year. That suggests changes on the horizon. With one month to go, it appears the Class III milk price will be the second-highest, following 2014; Class IV will set a new record.

Cheese Market

In post-holiday trading, cheese markets appeared to be slowly deflating – but on Thursday, prices roared back and ended the week with no trades on Friday. Cheddar blocks averaged $2.0960/ down 8.73¢ from the previous week; barrels averaged $1.846, up 2.43¢. That closed the block-barrel spread this week. Demand remains positive, and foodservice continues to pull more cheese. However, some reports show demand in some categories, namely export cheese, is starting to slow, sending more spot cheese to Chicago. Cheese demand should remain positive through Superbowl, with some season downturns expected. There could be additional pressure on prices starting Q2 2023 as a new commodity American-style cheese plant is commissioned.

USDA released October 2022 production data this week. Total cheese production was +1.37% higher than last year, totaling 1.17 billion pounds. Western states like Idaho and California fell behind last year’s pace. New Mexico, Upper Midwest states, and New York pushed higher. Several Mideast states fell significantly behind last year’s pace. Cheddar production totaled 334.3 million pounds and 2.9% higher than last year – that was significantly lower output from California, down 9.2% compared to last year. Mozzarella production 386.8 million pounds and 2.2% higher compared to last year. Wisconsin and New York increased output while California, Pennsylvania and New Jersey reduced production.

Butter Market

CME spot butter prices were resilient in post-holiday trading. CME prices averaged $2.9130/lb, 1.28¢ less than last week. Some anecdotal reports indicate that fresh and frozen butter remains tight for this time of year. At the same time, new trade data from New Zealand indicates that more AMF is headed to the United States. Cream demand will likely stay high for the next two weeks, but after that, seasonal demand should decline as more cream headed to butter churns and that butter heads to the warehouse. Futures are still predicting a price decline this month, but less than the forecast a few weeks ago. US prices are the highest in the world -which could encourage more butter imports and create a headwind for exports. Should US butter reset to future levels, it could make US butter more competitive but still expensive compared to European and New Zealand prices. A trade reversal early next year could cause the butter to build quickly.

US butter production totaled 160.97 million pounds in October, 2.02% less than last year. YTD butter output is still 2.2% less than last year, but the YoY declines are starting to diminish. Output from California dropped 3.9% compared to last year, while Pennsylvania increased 6.3%. Other western states experienced a 12.9% decline compared to last year – that may support earlier anecdotal reports that some western processors were tighter than expected.

NDM/SMP

Spot NDM prices are moving lower this week, following cues from Europe and New Zealand. Overseas reports indicate interest is low as buyers are holding out for even lower prices as milk heads to dryers and warehouses at the end of the year. CME NDM averaged $1.3691/lb, down 4.51¢ from the previous week. Despite spot market resets, futures markets held up – that could be because NDPSR prices increased this week and are slow to fall due to the circular pricing references. Still, prices are poised to head lower as demand from China remains lackluster. While milk production lagged last year, recent increases from the United States and Europe and economics encouraging SMP/butter vs. WMP markets turning toward surplus suggest modest price declines are needed to get product moving again. For now, $1.35 appears to be a level of support – meaning there is good buying interest; however, a stronger level of support is at $1.30/lb.

US October NDM production totaled 124.2 million pounds, up 2.88% compared to the previous year. YTD production is still lagging 2021 at 3.4%. SMP output was 56.2 million pounds, 27.7% less than last year. YTD production is down 24.3% compared to last year. Some of this product has moved to MPC output which totaled 18 million pounds, nearly 15% higher than last year. So far, MPC production is running 13.9% more than last year. That may be due to higher demand for that category and a significant plant expansion completed this year.

Manufacturer stocks totaled 247.5 million pounds on Oct. 31, up 12.5% compared to last year. Days of production on hand totaled 62 days – down from the peak in August. Stocks from September to October dropped 26 million pounds – less than last year but still higher than the five-year average pace.

Whey & Lactose Products

US whey prices are steady with little suggesting prices will move substantially one way or the other. CME whey averaged 44.8¢ this week, up 0.8¢ from the previous week. DMN Central whey prices were 43.5¢, 0.5¢ less than the previous week. DMN Western whey prices were 48¢, down 0.5¢ from the previous week. DMN lactose prices 48.5¢, unchanged from the previous week. European prices were stable, with reports from Germany suggesting that demand for whey and whey concentrates was improving, but prices remained modestly lower. That remains the case for whey – the product is trading in a tight range supported by China’s return to whey markets, but with little upward movement as WPC and WPI prices remain unchanged to modestly lower.

US whey stocks totaled 67.9 million pounds, 17% higher than last year. Days on hand totaled 27 days – consistent with previous months. Stocks increased between September and October – a change from the previous three years. WPC (25-49.9% protein) stocks totaled 25.5 million pounds, 12.9% more than the previous year. WPC (50-89.9% protein) stocks totaled 49.7 million pounds, 17% more than the prior year. WPI stocks were 18.2 million pounds and 54.8% higher than last year. WPI days on hand dropped from peaks this summer – but they remain substantial.

US October 2022 dry whey powder production was 77.4 million pounds and 3.3% more than last year, and slightly below the five-year average. WPC (25-49.9%) output was 17.9 million pounds and 6.7% higher than last year. WPC (50-89.9%) output was 29 million pounds and 2.6% less than last year. WPI production totaled 12.7 million pounds and 10.5% higher than last year. More whey products could continue to keep pressure on prices for a time.