Weekly forecast update – Dec. 23, 2022

Forecast updates

Given weaker global news and evidence, spending is starting to slow, adjusted forecasts lower this week. The lower milk prices and weaker demand could result in deteriorating on-farm margins in the Northern Hemisphere, leading to a mid-year slowdown in output. For now, it appears output could collide with weaker demand resulting in a temporary surplus that could weigh no nearby prices. Lackluster demand could mean significant milk price discounts for the next few weeks, further weighing on farm returns. That could eventually result in liquidations, sales, and higher cull rates in 2023.

  • Dropped Q1-Q2 butter prices. US prices stayed too high in December – meaning the market could be due for an overcorrection in early 2023.
    • That could put the market back into a carry structure for a time – suggesting that first-half price drop, but that second-half prices hold near current values.
    • More milk moving to American-style cheese could tighten milk supplies during the second half of the year available to butter churns and driers.
    • Given global butter prices, it could take a drop into the teens to get US butter moving beyond North America, indicating a slowdown in exports in early 2023 vs. 2022.
  • Cheese price adjustments were modest – still expect an end-of-season drop in February and March but a price recovery after that point. USDA could step up CCC buying activity to continue to support prices. Continue to watch as EU-27 market appears unsettled.
  • NDM adjusted lower due to weaker overseas price signals. Europe is moving more milk to SMP away from cheese, indicating further weakness.
    • GDT prices dropped on Dec. 20, signaling NZ is looking to match EU-27 prices.
    • While China relaxed zero-Covid, there are concerns about a significant death toll as the nation has modest vaccine rates that could lead to the spread of the disease.
    • Milk production continues to rise in the United State and Europe – that could weigh on first-half prices; however, if milk slows that could support prices and a price recovery during the second-half of the year.

Milk Market

Bottling demand is low and milk is headed to manufacturing. Widespread and severe storms are adding to pressure to dump some milk as plant operations and transportation delays are taxing the system. That should start to abate toward mid-week. Spot milk discounts range between $3-$5 under class pricing this week – with some expectations those discounts could mount – that will result in more re-blending at the farm level to offset the distressed milk prices.

US milk production totaled 18.25 billion pounds in November, 1.3% higher than last year. Milk from the central part of the country continues to drive output. On a percentage basis, South Dakota and Georgia push output double-digits higher, 16.3% and 13%, respectively. Output per cow was 1,940 pounds, 0.9% more than last year. The US milking herd was 9.42 million head, 0.4% more than last year – 38,000 cows more than last year. Cow numbers were mixed, with several Upper Midwest, Mideast, and Eastern states showing fewer cows than last year.

Cheese Market

CME spot markets picked up ahead of the holidays, with blocks rising to $2.1225/lb on a single trade on Friday. CME blocks averaged $2.025/lb, down 3.8¢ from the previous week. Barrels averaged $1.7125/lb, down 10.1¢ from the previous week. It will be a test to see if the week between Christmas and New Year’s CME spot cheese prices can stay high. Much like butter, there is little news to support cheese prices moving up at the end of the week as reports of slower foodservice demand circulate. Most expect a pullback in demand in early next year, but that has yet to be seen. Further, news from Europe suggests that the market is disrupted, with demand falling off sharply as reports of people without power and abrupt school closures spread. That could mean more competition for cheese exports in 2023.

USDA released Nov. 30 cheese stocks at 1.43 billion pounds – 0.5% more than the same time last year. That was an 18-million-pound month-to-month drawdown – it was less than last year but comparable to most years. American cheese stocks totaled 815.7 million pounds and 2.3% less than a year ago. That may explain the late-week price increase. Still, there are few reports that the market is tight, with most indicating cheese is easy to come by. That said, the month-to-month drawdown from October to November was 16 million pounds, the largest since 2016.

Butter Market

CME butter markets finally turned lower and did so quickly, with prices reaching the $2.30s for the first time since last year. CME butter averaged $2.5625/lb, down 22.35¢ from the previous week. Still, that was an unusually high price given weaker overseas markets since the start of the month. GDT butter prices dropped to $4,602/lb ($2.037/lb on an 80% butterfat eq.) Given spot butter prices may have stayed too high for too long, they could be due for an overcorrection over the next few weeks – even current prices are expensive to head into the warehouse. Additionally, US butterfat exports outside of North America could hit a headwind in early 2023 due to the high prices relative to Europe and New Zealand. All of that could suggest weaker prices – second-half prices may remain supported despite weaker first-half prices.

USDA released Nov. 30 butter stocks at 199.7 million pounds – 5.1% less than last year, but the smallest YoY gap this year. The month-to-month drawdown was 40 million pounds – the lowest over the last five year. That continues to support reports of slower food service and retail demand (for those retailers that did not promote). Increasing retail prices may have consumers further slow purchases in early 2023, which could help stocks rebuild quickly.

NDM/SMP

Spot NDM prices were mainly lower this week – but the declines were modest. CME NDM prices averaged $1.3463/lb, down 0.48¢ compared to the prior week. DMN Central prices dropped 1¢ to average $1.38/lb. Western prices were mostly $1.415, down 1.95¢. The final GDT of the year was weaker, as expected. SMP prices were $2,965/MT, down 4.8% vs. the previous auction ($1.345/lb). WMP fell 4%.  Reports indicate that the European market is unsettled, and milk production continues to increase. As of October, European processors continue to push milk into SMP/butter and away from cheese, indicative of a weaker market tone. With Europe leading prices lower, markets are unlikely to find a bottom until Europe can clear sizeable quantities to the world market. That said, many are reporting that current prices are helping increase interest.

In November 2022, Oceania milk production is still lagging behind last year, but not by as much as in prior months. New Zealand’s milk production was 6.25 billion pounds and 1.7% less than last year – the smallest YoY gap this season. Australia’s milk production was 1.8 billion pounds and 9.7% less than last year. Australia’s dairies have been negatively impacted by widespread flooding this spring.

Whey & Lactose Products

CME whey prices tumbled into the 30s for the first time since September 2020 – which will significantly impact Class III milk prices – especially compared to last year. So far DMN whey prices remain in the mid-40s, but that could change should markets get weaker. Western mostly whey was 46.5¢, down 1.25¢ compared to the previous week. Central mostly whey was 41¢, down 0.5¢ compared to the previous week.

Based on the lower European cheese production in October, whey is also on the decline. That suggests the break in US prices may indicate that demand is weaker on lower output. Higher soybean meal prices could shift Chinese hog processors back to whey as the combination of soybean meal, and lactose is higher than the cost of whey powder in rations.