Weekly forecast update – February 5, 2021

Forecast updates
Reduced 1H 2021 CME block and barrel forecasts.
Despite Friday’s uptick, there is more cheese, and demand will seasonally abate after Super Bowl.
Cheese capacity continues to expand.
Reduced 1H 2021 butter forecast.
There is a lot of butter in the warehouses, and demand is seasonally lower.
While there are prospects for demand summer forward – for now, product continues to head into the warehouse.
Export opportunities exist; however, containers could be difficult to obtain.
Adjusted NDM forecast – the container issue could slow exports. Milk production is elevated, and powder production is higher. That could cause prices to moderate further.
Lower whey forecast Q2 forward. Traders are reporting mixed sales and some pushback at current price levels. Additionally, the new Michigan whey plant should be producing products – that could result in more sweet whey powder.

Fluid Milk Market
Dairy producers are hesitant to sell milk below $17/cwt. and that may help explain why prices raced higher on Friday. Given the cost of feed, some dairy producers have increased price targets Q2 forward; still, markets providing an adequate return are far from certain. Less sell-side liquidity could make markets prone to move up with limited friction. While they could shoot higher, the fundamental data may not support prolonged runs higher. For now, more milk, more dairy products, and lackluster demand could keep the pressure on milk prices through the spring.

This week USDA announced the January Class III and IV milk prices at $16.04/cwt. and $13.75/cwt., respectively – that was 32¢/cwt. and 39¢/cwt. higher than December, respectively. While Class III milk prices have been susceptible to increases, Class IV remains remarkably stable – that could keep the Class I milk price lower through the first half of the year.

Cheese Market
CME weekly cheese prices started the week with blocks declining and barrel rising. But Friday, blocks and barrels moved up swiftly. In the end, CME blocks averaged $1.5810/lb., down 0.8¢/lb. Barrels averaged $1.4275/lb., up 3.35¢/lb. That tightened the block-barrel spread to 15.35¢ this week. There was good trading volume. Friday’s spot market surged caused futures markets to follow. Despite anecdotal reports of traders looking for blocks ahead of Friday’s trading session, no USDA announcements or anything else supported the move up short of the Biden stimulus bill making progress through Congress which is a stretch to pushing up spot cheese prices. Some of the market speculations are creative but seems to lack market fundamentals to support a prolonged run-up.

The United States produced 0.5% more cheese in December 2020 vs. 2019 – that puts 2020 cheese output a scant 0.1% higher than the previous year and definitively answers whether cheese was scarce last year – it was given heightened USDA orders. American cheese production expanded 1% YoY with Cheddar cheese up 1.2%. Mozzarella output once again lagged prior-year levels with output down 2.8% – in total, the United States produced nearly 2% less Mozzarella than a year ago. Hard Italian cheese production soared 24.4% above 2019 levels, confirming that hard Italian output was meager during periods of high pricing – that could persist until coffers are refilled.

Butter Market
CME butter markets jumped up on Tuesday following a robust GDT butter and AMF performance. CME butter averaged $1.2680/lb. this week down 1.85¢/lb. vs. last week. Despite market enthusiasm, early in the week, USDA reports eroded confidence sending markets back to the mid-120s. Futures continue to expect prices to rally through the spring months providing tremendous carry opportunities for butter manufacturers.

Butter production in December 2020 was nearly 12% more than in 2019 – that was the second-highest production month last year. That put 2020 output 6.3% more than 2019 after adjusting for leap day and a good reason as to why US butter prices reset this year. California butter production jumped 10.9% YoY. Central states surged 20.7%, while East Coast production slowed compared to the prior year.

NDM/SMP
While a better GDT performance lifted butter, a modestly lower GDT send CME NDM prices careening lower with a record-setting 60 loads traded this week. The markets averaged$1.122/lb. falling 4¢/lb. While GDT prices declined, the correction was modest, and GDT SMP prices remain in the mid-$1.40s – a sizeable price gap to the United States. More so than other products, the disruption due to limited containers is taking a toll on NDM and a likely explanation for the vast price gaps between the United States and Europe/New Zealand. The spot price decline returned carry to markets as futures are still projecting a price increase from this point forward.

US combined NDM/SMP output increased 6.8% in December 2020 vs. 2019. NDM output was up 24.1%, and SMP fell 36.9%. Typically, that sort of change signals slowing overseas demand – which is possible. However, it could also be the result of processors working to process as much milk as possible given the heightened amount of milk headed to powder plants at the end of last year – that does not bode well for the spring. California accounted for most of the product mix change with NDM output up 46% vs. 2019 – implying that SMP flipped negative. Central states processed 50% more NDM in December 2020 vs. 2019, reflecting how much milk is in the country.

Despite the significantly higher NDM output in December, stocks expanded at a slower pace. On December 31, US NDM stocks totaled 283.3 million pounds that was +14.5% compared to the previous year. Still. that was the most on-hand at year-end since 2017.

Whey & Lactose Products
CME whey prices were stable throughout the week, with prices averaging 53.5¢/lb, up 0.75¢/lb. with just a single load changing hands. Dairy Market News Central and Western price series continued to increase with each rising 0.75¢/lb, respectively. Reports suggest there is some price resistance at these levels from overseas markets.

USDA reported US whey production in December 2020 increased 2.2% vs. 2019 – breaking a four-month run of lower YoY output. US WPI90 production jumped 15.7% higher than 2019 in December. That was the largest YoY gap last year. US WPC output remained lower in 2020 vs. 2019, with production easing 3.3%.

Whey stocks remained less than the previous year in December; however, the YoY gap shrunk compared to prior months. On Dec. 31, US whey stocks totaled 65.7 million pounds 8% less than 2019. With few exceptions, 2020 whey stocks were less than 2019. WPC34 stocks totaled 28.4 million pounds and 6.8% more than 2019. WPC80 stocks were 34.4 million pounds and 13.8% less than 2019. Finally, WPI90 stocks were 34.4 million pounds and 13.8% less than the previous year. All data that is supportive to current prices.