Weekly forecast update – Feb. 3, 2023

Forecast updates

Spot prices are increasing as news from Europe indicates that processors are more comfortable with stocks and have discontinued distressed product sales. In those same reports, European processors are reporting higher-than-expected milk intake, which undermines the first statement or at least makes it relative. For now, European sellers are pausing to reassess current demand compared to milk intake. That doesn’t mean that sales won’t increase again, but more for now, older stockpiles of dairy products may have cleared.

US brokers and traders interpreted that news positively and encouraged buyers to seek coverage before prices increase. That is certainly true, CME futures projections of US dairy product prices are more favorable relative to last year, but calling the bottom of this market may be too soon. There are signs that markets are looking better than economists expected at the end of last year as hiring news was positive, unemployment is the lowest in 50 years, and inflation is abating – but demand resurging at this point in the market seems less likely. News abounded this week with reports that Whole Foods, Kroger, Walmart, and other retailers were seeking price concessions from suppliers to relieve consumers grappling with food costs that are 11% more than last year. Additionally, food service data for November and December were lackluster, with those months posting the lowest same-store sales figures since August. While data suggests markets and demand could look better yet this year, it seems too early for that call, and a lack of demand sent markets plunging last month.

At the same time, the milk spigot opened up. Milk flows less than in previous record-setting price years, but milk is expanding. Modest expansion at the end of last year, combined with retreating demand, caused prices to collapse. While futures predict prices that could create considerable pressure for dairy producers – switching from expansion to contraction always takes longer than markets expect. Many US and European dairy producers are well capitalized after last year and can make do with a few months of lower price projections. Add to that that heifer stocks set a new low, and some dairy producers may be looking to retain cows. This is the market phase where everyone looks to outlast the weaker players, which means months of milk despite prices that would suggest otherwise. Just like it took months for dairy producers to respond to higher prices, the converse is also true.

Short-term domestic supply disruptions exist as cheese processors have quality and production issues. That has resulted in dumped milk and may have temporarily tightened up the supply. That may explain some short-term price increases. That said, reports indicate that export bookings in March and April are lower than expected, which will be an opportunity to recover.

Rising domestic butter prices are puzzling. Data doesn’t appear to support higher prices as butter is one of the products that performed poorly during the second half of last year as consumers purchased fewer butterfat products due to higher retail prices. At the same time, trade data indicates that US AMF imports are rising, as is production. That data seems to paint a bearish picture for the near term making the recent price increases stand out.

Milk Market

USDA released the January classified milk prices this week. Class III was $19.43/cwt – down $1.07/cwt from December 2022 and $0.95/cwt less than last year. Class IV was $20.01/cwt, $2.11 less than December 2022 and $3.06 lower than last year. Futures markets indicate that milk prices will fall further this winter before prices stabilize. That said, better overseas news helped lift price expectations this week, up from the lows coming out of the Dairy Forum. This week there was widespread dumped milk due to weather and unplanned downtime. Discounts in Kansas and Texas remain reported between $5-$10/cwt under classified prices. The region is building milk supply ahead of new capacity, but it currently running in excess.

Uncharacteristically, China’s January 2023 milk price dropped compared to December. That is unusual headed into the lunar new year and spring festival holidays as demand tends to lift. January milk prices were 4.11 yuan/kg, down 0.01 yuan compared to December, but 0.16 yuan less than last year. That was the lowest start for January since 2020 – the pandemic year. While most expect the lunar new year holiday to lead to better demand, over the last year, the Chinese government worked to expand milk production resulting in 2022 output that was 6.8% higher than in 2021. At the same time, demand declined, causing excessive milk that moved to driers to balance the market. That news may be a wet towel on this week’s enthusiasm.

Cheese Market

CME blocks trended lower this week as barrel prices increased. There have been anecdotal reports that the barrel market is tighter than expected due to sizeable downgrades from one manufacturer and unplanned downtime elsewhere. Some reports that the plant is experiencing downtime had more than one prolonged event this week. CME blocks averaged $1.877/lb, down 8.6¢ from the previous week. Barrels averaged $1.5945/lb, down 1.55 cents, with rising prices toward the end of the week. At the same time, reports surfaced that US export commitments may have slowed in March and April as they were crowded out by less expensive alternatives from New Zealand and Europe. Fewer exports could help the barrel market rebuild quickly – it may mean the market has less of a surplus than expected a few weeks ago. Prolonged quality and downtime issues could cause the market to move toward tight later this spring.

USDA released December 2022 cheese production this week at 1.2 billion pounds, 2.2% more than in 2021 and annually 1.8% higher than the prior year. Since cold storage figures were modestly higher than in 2021, domestic or export consumption absorbed the new output. A few cheese-producing states like Idaho, New Mexico, Illinois, and Ohio slowed output compared to 2021 – all other reporting states were positive. December 2022 Cheddar production totaled 338.5 million pounds and was 1.45% higher than in 2021. YTD output was 0.8% lower. California and Wisconsin produced more cheese in December 2022 compared to 2021 but less Cheddar. Instead, those states opted for more Mozzarella production. Nationally, Mozzarella production was 404.9 million pounds and 4.1% in December 2022 vs. 2021. YTD production increased by 3.8% – a reflection of the strength of export demand.

Butter Market

CME butter spot butter trading increased this week as buyers and sellers pushed prices back and forth at the week’s end, with prices trending higher. CME butter averaged $2.3445/.b, up 7.3¢. While reports suggested that European butter price discounts subsided this week, and prices, given a modestly higher euro, returned to the $2.20s on an equivalent 80% butterfat basis. Those reports may have stopped further declines in CME butter, but they did not appear to support higher prices. Additionally, New Zealand reported butterfat exports to the United States 680% higher in December 2022 vs. in 2021. That confirms that imports are rising. Next week will help determine how well US exports ended the year; however, building stocks, higher production, trade reversal looming, and domestic demand falling doesn’t seem to make a compelling bullish market perspective.

USDA reported December 2022 butter production at 187 million pounds and 3.9% higher than in 2021. On a full-year basis, 2022 was 0.7% less than 2021. That was a consistent YoY production gap in December but a sizeable correction to December 2021 when butter output plummeted by 54 million pounds compared to 2020. By year-end, US butter production made sizeable inroads into the deficits created in Q1 last year.

NDM/SMP

In a surprising move, CME spot NDM prices surged higher this week. While earlier spot moves appeared excessive, given reported booking values, this week’s price move is equally curious. NDM average $1.192, up 2.8¢ compared to the prior week. Futures jumped in reaction to the news. Again, reports from Europe surfaced indicating that distressed sales were lessening and prices were increasing. While that may have helped lift spot prices, the futures move appears a bit overdone – similar to last week’s sell-off. The only certainty is that prices will remain volatile. News from China is positive for the long term, but nearby milk prices, production, and demand figures remain concerning. Additionally, New Zealand reported WMP exports to China down 40% in December, suggesting that the nation has not fully recovered and that demand could be up and down through the year’s first half.

US December 2022 NDM production totaled 179.04 million pounds, 6.7% more than the prior year. Annually, the United States produced 1.97 billion pounds of NDM – 2.5% less than 2021 volumes. In part, that was due to more milk moving to MPC, and in some cases, cheese pulled milk away from driers in early 2022. December 2022 SMP production was 48.9 million pounds and 0.7% more than last year – YTD SMP output fell 23.3% behind 2021 levels. 2022 MPC production totaled 220 million pounds and was 11.4% higher compared to 2021.

Manufacturer stocks of NDM totaled nearly 264 million pounds on Dec. 31 – 4.5% higher than 2021 carry-out stocks. The MtM increase between November and December was the lowest since 2018. Stocks reflected a modest 46 days of production on hand.

Whey & Lactose Products

Like milk powders, CME whey powder prices jumped this week, with whey averaging 36.2¢ and 3.79¢ more than the previous week. Dairy Market News (DMN) prices were mixed. The central mostly price was unchanged at 36¢; western mostly prices were down 2¢ to 38.5¢ this week. NDPSR whey prices remain higher but trending lower. Overall, there was little news to suggest a price recovery for whey, especially as WPC80 prices continue to decline. That has some whey processors looking to produce more whey powder to 1) keep WPC80 stocks balanced and 2) provide a market-to-clear product.

USDA reported US whey production at nearly 76 million pounds in December 2022, fractionally lower than in 2021. 2022 whey production increased by 1.5% compared to 2021. WPC (25-49.9% protein) production was 15.8 million pounds and 4% lower than in December 2021. 2022 output was 4.6% more than 2021. WPC (50-89.9% protein) production was 27.5 million pounds and 9.8% lower than in December 2021. 2022 output was 1.8% more than 2021. WPI production was 9.6 million pounds and 19.2% lower than in December 2021. 2022 output was 8.3% more than 2021.

US 2022 carry-out whey stocks totaled 78.6 million pounds – reflecting 32 days of production on hand. That was 37.7% more than in 2021. WPC (25-49.9% protein) Dec. 31, 2022 stocks total 28.2 million pounds and 13.1% more than in 2021. WPC (50-89.9% protein) Dec. 31, 2022 stocks total 52.3 million pounds, 59 days of production on hand, and 15.1% more than in 2021. WPI stocks totaled 21.9 million pounds at the end of December 2022 – 59% more than in 2021. Slowing production against mounting stocks indicates a significant demand slowdown.