Weekly forecast update – Feb. 25, 2022

Forecast updates

  • Adjusted NDM and buttermilk prices higher.
  • Maintained forecast for butter and cheese.
    • Absent carry, it seems likely, for now, butter manufacturers could sell spot butter at the CME to slow price increases. That could change in the week ahead of Easter if cream competition increases.
    • Cheese demand remains strong, but production is starting to increase. Similar to butter, it seems reasonable that spot cheese markets could receive excess for the next few months.
  • Maintained whey forecast.
    • Prices should remain high, but they appear poised to ease modestly into the year.
  • Markets are tentative given Russia’s invasion of Ukraine.
    • Mounting sanctions caused the ruble to plummet – which will likely take Russia out of the import market making some products available to the market.
  • Ahead of the first GDT of March – Fonterra removed product from the auction for the rest of the year – which could cause prices to lift for a time.

Fluid Milk Market

This week USDA confirmed what markets suspect for months – US milk production remains below the previous year’s levels. USDA announced January 2022 milk production at 19.05 billion pounds, 1.4% more than December 2021, but 1.6% less than the previous year. USDA revised December milk production lower also dropping YoY output down nearly 1%. A few, mostly cheese-producing states, are still producing more milk – Texas, South Dakota, Iowa, Wisconsin, and Idaho. Georgia is the lone exception to the rule. All other states experienced output declines relative to last year. Milk was expanding last year and that may explain the YoY gap. While dairy producers are seeking additional cows, fewer heifers and higher costs could stymie expansion efforts. That kept the herd at 9.368 million head  – 82,000 fewer cows compared to last year. Output per cow was 2,034 pounds, down 0.8% compared to last year. With milk production as an indication, it is likely butter and milk powder output slow in January while cheese continues to expand.

Cheese Market

CME spot cheese markets dropped after blocks reached $2.0175/lb. Price remains elevated with a small block-barrel spread. All things that could suggest that prices remain elevated for most of the year. Recently, outside money flowing into commodity markets may have caused some of the price appreciation as of late. Cheddar blocks averaged $1.9856/lb – 1.31¢ more than the previous week. Cheddar barrels averaged $1.935/lb – 0.30¢ less than the previous week. Still, there are sizeable gaps between the spot markets and MAR22 futures $2.0010/lb suggests more reconciliation over the next few weeks.

USDA announced January 31 cheese stocks at 1.45 billion pounds – 2.65% more than the previous year and 0.27% higher than December. Stocks grew month-to-month; however, the 4 million pounds was well below the last three years.

USDA commissioned dairy cost of production study was released last week – there were many surprises including that NDM had the largest per pound increase vs. cheese, butter, and whey. NDM average came in with 29.33 cents – with little explanation surrounding balancing impact. The butter average came in at 14.11 cents – given packaging and labor cost increases since the study, this seems likely to be understated. The cheese survey was 24.76 cents – again a bit high but with the realm of expectation. Additionally, there is little discussion for under-utilization or balancing activities resulting in higher costs. Whey was 26.5 cents – a reasonable increase – and a product less likely to be influenced by “balancing” or under-utilization suggesting there could be issues with other data.

Butter Market

CME spot butter prices declined into Friday. CME butter averaged $2.635/lb – down 13¢ compared to the previous week. February is ending modestly above where it began – but that included another price spike to $2.86/lb mid-month. Butter stocks are depleted and supportive of nearby prices. It seems reasonable to expect, based on the January milk production map that butter and milk powder production moderated compared to last year. That could continue through mid-year putting additional pressure on butter markets later this year. After racing higher throughout the week, butter futures eased on Friday with markets poised to return to the $2.50 mark again.

USDA announced January 31 butter stocks at 221.33 million pounds – that was 11.2% more than December 2021, but 33.3% less than the previous year. That drop was due to stronger institutional, and food service uses and retail slowed compared to 2021.

MoM stock growth was positive, but less than the last five years. That reflected the largest YoY gap for January and only the second time in the last six years where stocks did not build headed into January. That helps to explain why butter prices started to charge higher by the end of the year.

NDM/SMP

Spot NDM prices were stable throughout the week as news provided information that supported prices at or above current levels including slowing global milk production, more demand from the Middle East and Southeast Asia. While demand remains elevated the recent prices appear to relate to a supply-side shortfall that could last for months to come. Going forward, European and New Zealand environmental policy will limit those two regions’ ability to ramp up milk production as it has over the past two decades. That could result in skim-solids that return to price averages experienced between 2010 and 2014. CME NDM averaged $1.8613/lb 2.08¢ less than the previous week.

Russia invaded Ukraine this week and markets responded by moving higher. Initially, currency and equity markets moved lower, but equities turned higher by the end of the week. Typically, war and uncertainty would send markets lower, but given Ukraine is the grain supplier for Europe the initial invasion had the opposite impact sending wheat and corn up – in turn, that lifted other commodities like dairy.

New Zealand announced is milk production for January was down 6% compared to the previous year. Poor weather conditions into January caused pasture conditions to deteriorate. Milk solids were down also. That will likely slow New Zealand milk headed to milk powders as the cooperatives continue to develop their cheese exports. Fonterra announced it would remove additional WMP and SMP for the year – which is causing NZX futures to rise ahead of the first March GDT. The weather improved and summer rains returned in February – but as New Zealand said – it may be a little too late and too much. There are reports that February rains may have led to widespread flooding – that would be disruptive to pasture use and could hamper output.

Whey & Lactose Products

CME whey markets stumbled this week with prices averaging 79.5¢, down 2.2¢ compared to the previous week. Since the beginning of the year, spot whey trading activity remains consistent with 76 loads changing hands over that time. There were some rumblings that WPC prices have declined 25-50 cents over the last week – given higher spot whey prices that would compress margins creating an incentive for processors to shift whey streams from WPC to whey powder. This could continue until markets find a level that encourages additional demand. Reports indicate that Chinese buyers have sufficient stockpiles of whey for feed – that could moderate imports over the coming months putting some additional pressure on price.