Weekly Forecast Update – December 4, 2020

Forecast Updates

  • Reduced Dec-20 Class III milk forecast based on declines last month.
  • Reduced Q1 and Q2 Class III milk forecast expectations of fewer government orders, more milk headed to cheese, and anticipating slowing foodservice demand Q4 20 to Q1 21.
  • Increased Q1 and Q2 Class IV milk forecast – La Niña forecast has increased intensity and duration. Given more robust demand from Asia and the potential for weather disruptions that could cause prices to lift in Q1. That said, Europe and the United States have more milk and the ability to backfill shortfalls from New Zealand – that could limit upside.
  • The adjustments to the Class III and IV forecast adjusted the Class I and II prices also. We expect Class I prices to increase throughout 2021 as commodity prices gain strength.
  • Continue to forecast New Zealand dairy products carrying a substantial premium to E.U. and U.S. prices through 2021.
  • The exchange rate increased by 1.21 – that has impacted Ceres E.U. forecasts, somewhat reducing E.U. prices and providing some increases for U.S. prices.
  • Increased whey price forecast through Q2 2021 due to stronger demand from China.

​​​​​​​Fluid Milk Market

During the Thanksgiving holiday, milk intake picked up to the point of concern for processors throughout the country. There was a lot of distressed milk floating around, with few taking advantage of it because plants were chalked full of milk. Some of that could have been due to the higher Class III prices – rumors suggest cheese plants reduced intake to avoid $23/cwt. in the final days of the month, and those operations returned to normal by Tuesday. Still, milk off the farm is on the rise at the same time expectations for foodservice demand are starting to show signs of slowing as states begin to shutdown more aggressively, and people voluntarily stay home as Covid-19 surges.

Overseas, worries about La Niña weather causing droughts in the Southern Hemisphere is causing grain, oilseed, and now dairy prices to rise. That could impact domestic milk and prices in a few ways. First, higher feed prices and forecasts of lower domestic prices for the first few months of 2021 could cause on-farm margins to compress, and that could keep milk production in check – especially during the second half of the year. Further, milk powder prices are starting to increase, impacting Class I and II prices by lifting them. The impact on Class I could be mitigated by declining Class III prices.

Cheese Market

CME Cheddar blocks continued to ease in post-holiday trading while barrels were stable and managed a modest increase. Cheddar blocks averaged $1.6055/lb., 6.78¢ less than the previous week. Cheddar barrels averaged $1.4105/lb., 0.3¢ more than last week. Futures markets were up and down throughout the week, but prices continue to track lower than the previous five weeks. With new government orders lacking and foodservice poised to decline into the end of the year, production could head to warehouses, and that could put additional pressure on markets. For now, there appears to be adequate buying support to keep prices near current levels for the next few weeks in Chicago.

U.S. total cheese production was 1.13 billion pounds in October – that was 0.6% less than year-ago levels. That level seemed to surprise some analysts, but given the price increase at the end of October and beginning of November and slowing export opportunities, the level output put appears within the realm of expectations. American cheese production was 461.1 million pounds and 3.5% higher than last year. Iowa led the declines with output falling 10.3% vs. the previous year – Atlantic output of American cheese declines also. Cheese production from Vermont slowed. Cheddar cheese output totaled 326.9 million pounds and 5.6% more than the same period last year. While American-style cheese fell in Iowa, Cheddar cheese production jumped up 11.2%, suggesting the change was a shift in the style of cheese rather than less output. Mozzarella production plummeted 4.8% to 366.1 million pounds in October. California, Wisconsin, and Idaho output retreated, with western states falling 8.4% behind year-ago levels, suggesting that export demand fell.

U.S. cheese exports fell 13.9% in October to 54.4 million pounds. It appears the weight of higher-priced markets took a toll on export volumes. Fresh cheese exports, including Mozzarella, increased 4.6% during the month. Cheddar, processed, and grated cheese exports fell vs. the previous year. Mexico accounted for the declines, with shipments falling 46% below last year’s levels. U.S. cheese imports remained less than last year, with imports totaling 28.7 million pounds, down 34% vs. the previous year.

Butter Market

For the first time in weeks, CME butter prices increased as some buyers were in search of butter for 2021 commitments. While butter produced on or after December 1 is eligible for trade after March 2021, given the amount of “old crop” butter still in warehouses, the likelihood of procuring “new crop” butter seems limited. Futures markets responded by moving substantially higher through Q2 2021. Futures markets retreated slightly by the end of the week from the weekly highs, but price expectations are still higher than last week. CME butter averaged $1.4375/lb., 10.83¢ more than the previous week.

Butter production was modestly ahead of year-ago levels with output totaling 164.9 million pounds in October – that was 1.2% more than last year’s levels. California butter production jumped up 11.5%, consistently higher than last year. New York was responsible for production declines, where output fell nearly 39% during the month. In context, that was a 600,000-pound swing – large on a percentage basis, but minimal in absolute pounds. Butter production may have been lower as more cream moved to sour cream, ice cream mix, and hard ice cream compared to last year. Ice cream mix jumped up 22% – one of the largest YoY increases in several years.

U.S. butterfat exports totaled 5.48 million pounds in October – that was 18% more than September but 20% less than last year. While a MoM improvement, October’s volumes were well off the five-year average pace for the month. Annually, the United States exports most of its butterfat to Canada, and those volumes remain stunted this year. Higher shipments to Bahrain offset declines to Canada during the month. U.S. butterfat imports were also less than last year in October. In total, importers brought in 9.6 million pounds of butterfat during the month – that was 28% less than last year. Imports from Ireland were modestly lower than last year – it appears shrinking AMF imports accounted for much of the shortfall. That could provide an opportunity for the domestic production of AMF in early 2021.

NDM/SMP

NDM prices increased throughout the week on a more substantial Global Dairy Trade (GDT) performance and continued buying from China. That, combined with a pessimistic outlook for Southern Hemisphere weather and less milk headed to driers in Michigan at the start of next year, has buyers seeking upside protection. As a result, spot and futures markets moved higher during this week’s trade. CME NDM prices averaged $1.1425/lb., +5.92¢ with 25 loads trading. While futures moved higher, markets do not provide much carry for processors that could keep product headed to the CME. Commercially, interest picked up during the week, with orders reported as brisk.

US NDM/SMP production totaled 195.6 million pounds during the month – that was 8.6% more than year-ago levels. NDM output expanded by 4.3%; SMP by 20.7%. Higher SMP output indicates good interest from overseas; however, the meager NDM figures suggest that domestic demand remains lackluster, which could weigh on markets in early 2021. U.S. manufacturer held NDM stocks increased by 7.8% compared to previous year levels. Stocks totaled nearly 235 million pounds on Oct. 31. The higher output could account for the increase relative to last year. October sales were okay – but the change in stocks reflects higher production and a slowdown in sales.

U.S. NDM/SMP exports totaled 169.2 million pounds – 8% more than last year and the highest on record for November. Shipments to Mexico were lower, but more sales to the Philippines and China offset the declines.

Whey & Lactose Products

CME whey prices increased, with prices pushing well into the mid-40s. In the end, CME whey averaged 44.7¢, up 3.45¢ compared to the prior week. News of higher Chinese whey imports contrasted against lower U.S. whey production likely worked to lift prices throughout the week. Just five loads of whey traded throughout the week. Dairy Market News whey prices also increased with the western mostly reaching the highest level since February.

U.S. whey exports surged in October, reaching the highest volumes in over a decade. In total, exporters shipped over 53 million pounds of whey powder – that was 145% more than last year. Shipments to China, followed by Vietnam, drove the performance. Lactose exports faltered during the month, with U.S. exports totaling 68.1 million pounds, 5% less than the same period last year. U.S. WPC (<80% protein) exports improved to 31.1 million pounds and nearly 20% higher than the previous year.