Weekly forecast update – Jan. 21, 2022

Forecast updates

• This week, adjusted 2022 prices for spot markets but maintained high price targets through 2022. No changes to 2023 or 2024 this week.
• Increased 1H 2022 prices for whey and NDM.
• Adjusted Q1 2022 butter higher.

Fluid Milk Market

Milk new remains consistent – bottlers continue to demand more milk than expected and milk off the farm is seasonally higher but unchanged to the previous year. While there are signs that dairy producers are looking to expand here in the United States, record-high milk price forecasts for Europe and New Zealand have done little to move the needle. This week, AMS announced the February Class I base at $21.64/cwt – $1.93 more than January and the highest Class I base price since December 2014.

EU-27 could exceed 50 euro cents per liter this year – to encourage more milk production; however, labor shortages, higher input costs, and new environmental regulations encouraging conversion to organic so far stifled interest. EU-27 November 2021 milk production totaled 23.7 billion pounds – 0.6% less than 2020. Lower milk production from Germany was offset by higher output from Italy. Italy remains the lone country that continues to grow production, exceeding 2020 by sizeable amounts.

Forecasts indicate New Zealand’s milk price could reach $9/kilogram of milk solids this season – a record level and based on the latest Global Dairy Trade results. Higher demand against a backdrop of slowing milk production is causing New Zealand’s milk price to climb. In December 2021, New Zealand reported a milk output of 2.6 million metric tons – 5% less than the previous year. The slowdown that started in August caused calendar year 2021 to exceed 2020 by just 0.4%.

While US prices are rising at a slower pace, overseas’ demand and faltering milk production should support above-average prices this year – especially Class IV milk. This week USDA released December 2021 slaughter figures 2% less than 2020 – evidence dairy producers are retaining dairy cows to take advantage of higher prices. Most expect milk output to begin to gap 2021; however, that could still be a few months away. Additionally, there are reports that cooperatives are moderating base plans to permit more production this year.

Cheese Market

CME blocks and barrels retreated this week. That caused the block-barrel spread to close. With spot markets falling, futures followed with 2022 averaged dropping from the low $2/lb range to the mid-190s by Friday. In the end, CME blocks averaged $1.844/lb – down 15.81¢ from the previous week. Barrels averaged $1.8725, down 1.8¢ over the same period. That left the weekly average barrels premium to blocks. Reports continue to indicate that sales have been good, but that cheese can be had off-market with a few calls. Additionally, the build for Super Bowl should be complete next week – that will herald the end of the cheese demand season and should help to rebuild stocks over the next few weeks and could put some additional pressure on price. That said, carry returned to markets and US cheese prices hold a commanding discount to global counterparts. Buyers looking for some relief have found it – should the annual average trend toward the upper 180s that could spark buying interest that has been dormant for a few weeks.

The biggest news this week came from Europe. EU-27 November 2021 cheese production totaled 166 million pounds – 4% more than the same period in 2020. Despite lower milk, Germany produced more cheese (+1.7%); France led the output gains, up 8% – that was followed by Poland +6%.

During November 2021 EU-27 cheese exports totaled 93,892MT (207 million pounds) – 22% below the same period in 2020. Fewer exports from Italy were a primary driver of the lower performance. Add to that, several larger milk producers like Germany, the Netherlands, and France had lower milk intake and difficulty supplying internal regional needs. The most significant export declines were to the United Kingdom – down 70% compared to the same period in 2020.

Butter Market

After a short respite last week that sent more cream to churns, CME spot butter markets moved higher this week. CME butter averaged $2.8781/lb, 8.51¢ more than the previous week. Trade volumes picked up this week with 23 loads changing hands compared to eight loads the week prior. Prices are sitting very close to the $3/lb mark – a level that could surely curb export interest and domestic demand. Further, with the stark difference between spot markets at $2.95 and FEB22 futures at $2.665/lb – processors are unlikely to stockpile butter given no ability to protect against price declines. While most expect more butterfat in farm milk over the coming months, today things remain scarce. Absent consensus, it could take retail price hikes and consumer response, coupled with more butterfat to slow down markets. Although $3/lb seemed likely in 2022 – January may be a bit earlier than most expected.

EU-27 butter production totaled 347 million pounds in November 2021, 5.6% less than 2020. Germany had significant declines, with output falling 11.7% compared to the prior year. Ireland partially offset the German losses, but the increases were small by comparison. The Netherland and Poland also produced less butter in November 2021 vs. 2020. All other countries hovered near unchanged.

EU-27 exported 38.5 million pounds of butter in November 2021, which was 25.7% less than the same period in 2020. Although EU-27 made headway with exports to the United States, Morocco, and South Korea; those gains were more than offset by losses throughout MENA and the United Kingdom.

NDM/SMP

After touching $1.85/lb, CME NDM prices retreated this week. CME NDM prices averaged $1.8313/lb, 6.78¢ more than the previous week. A stronger January 18 GDT result is supporting international prices and NDM/SMP demand this winter. Additionally, European processors diverting milk to cheese vats versus driers and less milk from New Zealand could keep prices elevated for some time. This week ONIL, the Algerian government buying group reportedly purchases 10,000 MT of SMP and 10,000 MT of WMP around the $1.88/lb level – that continues to provide price support as governmental buying groups like ONIL are not known for paying premiums. Additionally, reports suggest Mexico is currently in the market – that will provide outlets for US powder.

The EU-27 produced 185 million pounds of SMP in November 2021, 12% less than the same period in 2020. Again, Germany led the declines – less milk meant much less butter and SMP (-28% vs. last year). That was followed by French SMP output declining nearly 10% over that time. Belgium was the only nation with a substantial production increase.

EU-27 November 2021 SMP exports totaled nearly 73 million pounds of SMP in November 2021, 27% less than the same period in 2020. These declines are likely driven by less product available to markets due to falling output versus declining demand. The most significant decreases were to Nigeria – nearly half of the drops with Egypt, the other half All other reductions were moderate.

Whey & Lactose Products

CME spot whey prices reached 80¢ per pound this week resulting in a weekly average of 79¢ per pound and 2.55¢ more than the previous week. Currently, CME whey is the highest global price. Although Dairy Market News prices are trending higher, most are in the mid-70s this week.      There are some reports that the higher WPC and WPI prices are becoming problematic for buyers and some are looking to their R&D teams to formulate away from these products. That activity can take months; however, it may signal a shift from WPC/WPI to MPC/MPI – something that could permanently shift demand to a different dairy product category. That said the ratio of casein and whey could limit the reformulation in some uses. Over the near term, this change may have little impact on markets; however, over the long term, it could reduce demand and have a greater impact when new capacity arrives in a few years.