Weekly forecast update – Jan. 21, 2023

Forecast updates

Reduced most product prices this week with a focus on powder prices as those markets are showing more weakness than other markets. Presently, there is sufficient milk supply to meet and surpass current demand. Reports suggest that European prices are starting to drop at a faster rate, which is weighing on international demand.

  • Reduced the CME block and barrel prices – blocks more than barrels. There are rumors of substantially lower European cheese prices – that could slow exports and put more nearby pressure on spot markets.
  • Modest changes to the butter prices – dropped Q2 price expectations – no changes to the year’s second half.
  • Decreased NDM, but not as much as recent spot declines. NDPSR tends to drop slower than CME as there is are fewer sales based on CME pricing.
  • Dropped whey prices through the end of the year – EU prices are reported in the low to mid-30s – given new capacity in Q2 that could further weigh on prices this year. That impacted the Class III and I prices.
  • Adjusted WPC and CBM lower – they will trend with NDM prices.
  • Reduced lactose – more capacity and lower whey prices could cause prices to trend lower this year.

Milk Market

USDA released the February 2023 advanced prices this week. The Class I base is $20.78/cwt – $1.63 less than January and $0.86 less than last year. That will relieve bottlers and likely consumers as prices retreat from last year’s highs. The current forecast and futures markets suggest more declines on the horizon as Class III and IV milk prices trend toward the low $18/cwt for the first time in months. Overall, milk and dairy product prices are tumbling as more milk struggles to find interested buyers. While there were concerns about California after the storms in January, markets cooled when reports indicated that the storms were worse in the north Central Valley and that the Fresno area was experiencing higher components as cows responded favorably to the cool and moderate temperatures. There was some infrastructure damage and power outages caused by unusually high wind and tornado activity – but those reports were limited.

European milk production is still rising – but there are reports that spot milk prices are 27-30 euro cents/liter from contracted values in the upper 50 euro cents/liter. EU-27 November 2022 milk production continues to sail past 2021 levels, with Spain, Bulgaria, and Malta yet to report. Output for the reporting countries totaled 23.3 billion pounds – 2.4% more than in 2021. It took the German milk supply some time to respond to higher prices, but by November, output was 3.9% more than the prior year and the clear leader in output gains. Belgium, France, Ireland, and Poland added as much milk as Germany – but the pace was more moderate – all suggesting milk could take months to slow down.

Cheese Market

CME blocks and barrels succumbed to sell-side pressure this week. There are reports that European cheese is plentiful and trading between $1.50 and $1.60/lb in global markets – that will put pressure on US exporters as current spot and futures markets are well above those levels. CME blocks averaged $1.9569/lb, down 17.31¢ from the previous week. CME barrels averaged $1.6581/lb, down 11.34¢. Despite the adjustments, the block-barrel spread remains wide.

Domestically, demand remains positive heading into the NFL playoffs, culminating in Super Bowl in three weeks. That marks the end of the regular demand season – that could temporarily slow demand while production continues to rise – a pivotal point that could cause prices to weaken. It will be interesting to see the level of retail promotion given the step back in cheese prices – that could be a bellwether for demand this year as reports indicate consumers are looking for value. Foodservice demand could be interesting also as pizza demand ramps up over the next few weeks.

EU-27 cheese production totaled 1.64 billion pounds, with Bulgaria, Spain, and Ireland yet to report. For those nations that have said, production is up 1.27% compared to the previous year. Germany increased production by 1.7% in November 2022 compared to 2021. Denmark’s output increases rivaled Germany – which drove the nation’s production up 13.1%. The Netherlands had similar gains, up 4.1% compared to the previous year. France, the region’s second-largest cheese producer, dropped output by 1.3% compared to last year. Reports suggest regional demand is lower, stocks are building, and European exporters are struggling to find buyers – which is sending prices much lower than in recent weeks.

Butter Market

CME butter prices moved lower this week, but prices still hold a sizeable premium to New Zealand and European butterfat values. CME butter averaged $2.3581/lb, down 6.89¢ compared to the previous week. Still, EU and NZ prices were closer to $2.05 and $2.07, respectively, at the equivalent of 80% butterfat. That substantial gap could reduce interest in US butterfat exports this winter. At the same time, domestic demand for butter and higher butterfat products was lower according to IRI 2022 scan data – with most citing that higher prices and reduced promotion caused consumers to reduce purchases. While 2022 butter sales were up 35.1%, units were down 2.6%. That was similar for unit sales for cream/creamers (-1%) and cream cheese (-4.4%).

This year there is more butter as SMP/butter provided a better return than WMP. EU-27 November butter production was 355.3 million pounds, with Bulgaria and Spain yet to report. That was 5.1% more than in 2021 for the reporting nations. Germany, Belgium, the Netherlands, and Poland added considerably more butter production late last year than the previous year. French butter production was 2.8% less than the previous year. Most other nations added butter production in the fall. More butter is relaxing prices and could keep more US butterfat at home this year as sufficient supplies are available from Europe and Oceania. That could also make more butter available to the US as the price gaps could encourage more imports.

NDM/SMP

Pessimism abounded this week as CME spot NDM prices tumbled. CME NDM averaged $1.2019/lb – down 7.76¢. At the same time, the Global Dairy Trade performance on January 17th was better than expected, with WMP increasing 0.1% and SMP down just 0.3% compared to the previous event. China was the largest buyer during the event. But, like other products, reports are circulating that European product is heavily offered and prices are declining. As a result, some anecdotal reports suggested buyers postponed purchases this week as prices are aggressively offered lower. This week’s price resets profoundly impacted Class IV prices, pulling prices to $18/cwt for the first time in a while. Most years, NDM/SMP prices bottom in Q1, with prices lifting in Q2 as Oceania production heads into the off-season. The big test for NDM/SMP/WMP will be the lunar new year holiday that kicks off on January 22. The lunar new year is the world’s largest mass migration, and the Wall St. Journal reports millions of people are already on the move. In the first ten days of January, China reported retail sales up 8.7% compared to the prior month. Improving economic conditions and higher demand could help get dairy demand on track.

EU-27 October 2022 WMP exports totaled 39.2 million pounds, 17.3% less than the previous year. The EU-27 YTD YoY gap was 16.4% less than in 2021. Exports to Oman and Kuwait were higher. Gains were more than offset by declines in Nigeria and Algeria. EU-27 October 2022 SMP exports totaled 139.7 million pounds, 7.1% more than the previous year. EU-27 revised 2022 figures higher, reducing the YTD YoY gap to 10.5%. Algeria drove the higher results, with exports 156% higher than in the same period in 2021. Morocco, Kenya, and Yemen also helped to lift the performance. That more than offset declines in Indonesia, which was 71% behind the 2021 pace.

Whey & Lactose Products

CME whey prices trended lower again this week, averaging 33¢/lb, down 2.7¢ compared to the prior week. Reports indicate that, like other products, European prices are dropping. Central whey prices average 37.25¢ this week, down 3¢ compared to the preceding week; western mostly whey prices averaged 41.5¢, down 2¢ compared to the prior week. Reports indicate that whey is available and that some processors may be switching to reduce whey headed to WPC and WPI to manage growing stockpiles of products. European prices are also tumbling, putting more pressure on US prices.