Weekly forecast update, Dec. 3, 2021

Forecast updates

  • Given faltering global milk supply and consistent to higher demand – increased the 2022 and 2023 forecasts taking Class III and IV milk prices above $20/cwt for a sustained period. In turn, that will lift price expectations for Class I and II milk prices.
    • Australia and New Zealand released the seasonal peak, October milk production at 3% less than last year and the lowest peak since 2016.
    • US milk production continues to remain lackluster in October.
    • EU-27 milk is also stunted.
    • Despite higher prices, various issues – feed quality, costs, environmental limitations, cooperative limitations, etc. that keep milk flat. At the same time, demand for dairy remains elevated.
  • Butter and cream demand remain raised as concerns about availability next year. Additionally, US exports are likely to stay high and imports minimized due to the world and US prices gap. That could result in an anemic build this winter – keeping costs higher and above the $2 mark throughout 2022. That could persist through 2023. Those expectations are reflected in the latest forecast. While the estimates contemplate prices above $2/lb for an extended period, they could be prone to bouts of runs higher. Cream multipliers could be high if limited labor and fuel costs persist at current levels.
  • Cheese demand remains elevated. Given the Michigan cheese plant will no longer be incremental and there is no additional cheese capacity planned for next year – higher prices could be necessary to curb demand. Despite higher US prices as of late, they are still less than world prices, and there is reported interest.
  • Reports suggest that WPI prices reached $8/lb – breaking with the trend and widening the gap to WPC between $4.50 and $5/lb. There is plenty of demand in either case and like cheese, no new capacity is slated, suggesting that demand will have to retreat for prices to decline. For now, that could keep 2022 whey prices above the 60-cent mark for most of the year. That will have a profound impact on Class III other solids values.
  • Declining soil moisture in New Zealand could result in a substantial decline in second-half production. When demand is at current levels and supply falters, it tends to lift world milk powder prices.

Fluid Milk Market

As soon as the holiday passed, bottlers resumed orders. Many are reporting that demand remains positive but that there could have been a few more setbacks than last year. While the retail market is lower than last year, school, institutional, and foodservice uses may account for the increased demand. The USDA program this school year that provides complimentary breakfast and lunch had an impact on the market. Each of those meals includes half-pint milk. Additionally, some school districts continue to provide free gallon jugs to families over the weekend and holidays.

At the same time, milk production remains lower than expected for this time of year. The market may not correctly account for the success of cooperative supply management plans that have spread across the country. Historically, current prices may have encouraged some dairy producers to add cows and increase production. Between the stiff over-based penalties and the cost of constructing new barns – it could take much higher prices to encourage dairy producers to add cows.

New Zealand and Australia announced October milk production down 3% compared to last year. That means this year’s peak production month was not only less than last year, but the smallest peak since 2016. La Niña weather conditions appear to be causing soil moisture to vanish throughout the Southern Hemisphere. In the past, when a strong La Niña coincides with heightened demand – it tends to cause prices to rise sharply for a prolonged period.

Cheese Market

Crickets best describe the CME block market over the past two weeks. There have been no blocks trades since Nov. 18, leaving blocks at $1.8575/lb for the past eight consecutive sessions. There were a few offers, but there was no step to take markets lower; it appears more of a signal that, for now, higher may be met with selling. Barrels recovered above $1.60 this week with a modest amount of trading. This week, cheddar blocks averaged $1.8575/lb unchanged compared to last week. Cheddar barrels averaged $1.588/lb, up 6.8¢ from the previous week. Some traders are reporting good interest in US cheese exports; however, there are some concerns that refrigerated containers are difficult to obtain and that canceled sailings remain an issue. Given the age requirements at delivery, exports are challenging for some.

USDA reported October cheese production at 1.15 billion pounds – 2.1% less than September on a daily average, but 0.9% more than last year. Given the new plant, that was a somewhat bullish report and supported prices. Upper Midwest cheese production slowed, with Iowa, Minnesota, and Wisconsin producing less cheese than last year. American cheese production totaled 457.5 million pounds – 1.3% less than September and 0.6% lower than 2020, with most states reporting lower output. It appears more processors elected to make Italian-style cheese in October – output totaled 489.8 million pounds, 3.48% higher than last year. Parmesan production increased 13% vs. 2020, while Mozzarella was up 1.7% over the same span.

Butter Market

CME butter markets started the week tumbling back to the mid-190s before buyers returned, pushing prices above $2/lb by Friday. Trading remains limited with a single load changing hands this week. CME butter prices averaged $1.985/lb – that was 0.5¢ less than the previous week. Despite the holiday weekend, many reported very little churning activity on the East Coast. While US butter prices are elevated with a few weeks left to the season, higher prices have more to do with concerns about product availability next year. Prices could likely be elevated and prone to periods of rapid price ascent when lackluster supply is met with stronger periods of demand. More milk headed to schools, creamers, and cheese could starve churn. Add to that reports that some cream cheese manufacturers are struggling to keep up with current demand – cream remains tight and is expected to do so until the final week of the year.

US butter production totaled 159.4 million pounds in October – 7.6% more than September on a daily average basis, but 1.6% less than last year. That news likely did very little to put buyers at ease as markets and product availability appears tight headed into 2022. California expanded output slightly, but New York and Pennsylvania incurred double-digit declines more than offsetting western increases. With year-to-date output lower than last year after adjusting for leap day and expectations for a trade reversal – that could mean less product available to the domestic market and likely higher prices for next year.

NDM/SMP

NDM prices continue to trade in a narrow range near the mid-150s. Given world prices, it seems CME and spot NDM prices could remain near current levels – providing a nearby ceiling to US prices. This week CME NDM averaged $1.556/lb – 1.28¢ less than the previous week with 18 trades. News continues to support nearby costs along with mounting concerns that it could take months for dairy producers to respond to higher prices – suggesting that prices could be subject to considerable volatility next year. Reports continue to indicate that China’s buying activities could decline 5-20% next year; however, that may be based on demand from tier 1 cities and underestimating demand coming from growing tier 2 and 3 cities.

US NDM production totaled 124.7 million pounds – 11.7% less than last year. US SMP production totaled 58.3 million pounds – 7.8% lower than 2020. California produces 2.7% less milk powder compared to the previous year. More demand from other products and slowing milk off the farm resulted in less NDM/SMP output this year.

Manufacturer held stocks totaled 221.8 million pounds on Oct. 31 – that was 5.9% less than last year. That was the most significant YoY decline over the past five years and likely supportive to nearby prices.

Whey & Lactose Products

Between 2011 and early 2015 spot, whey prices did not drop below 50¢/lb. Currently, there is plenty of demand for WPC80 and WPI90, and given reports of costs at $4.50-$5.00 and $8/lb, respectively. Processors have an economic incentive to keep whey solids headed to concentrates versus whey powder. With no new production capacity on the horizon, if demand for concentrates continues at the current level, prices could remain elevated through 2024. CME spot whey prices retreated to the 70¢/lb level for a time, but prices started to move higher by the end of the week. CME whey averaged 69¢ – down 1¢ from the previous week. Dairy Market News and NDPSR whey prices are also rising.

US dry whey production totaled 78.2 million pounds in October – up 4% compared to last year. WPC (25-49.9% protein) totaled 16.7 million pounds and 2.25% higher than last year. The production of WPC (50-89.9% protein) was 29.9 million pounds, 21.5% higher than last year. WPI90 output totaled 11 million pounds, 5.3% higher.

US whey stocks as of Oct. 31 were 58.1 million pounds, 15.9% less than 2020. WPC (25-49.9% protein) stocks totaled 23.8 million pounds, 6.4% less than last year. WPC (50-89.9% protein) 42.2 million pounds – 13.7% more than last year. WPI stocks were 11.6 million pounds and 17.9% lower than a year ago levels. Generally, more production met with lower stocks suggests prices could remain high for some time.