Weekly forecast update – Jan. 6, 2023

Forecast updates

Global markets continue to decline as demand slows further and milk production rises. In typical fashion, higher dairy product prices that encourage dairy producers to increase output are the same prices that cause consumers to reduce purchases. Early 2023 appears to be a reset period with prices headed lower – at least through the year’s first half. Europe seems to be the most unsettled market searching for demand for excess dairy products – that is always concerning as they tend to push prices significantly lower to clear commodities. New Zealand and the United States are following Europe lower, causing markets to drop. What may be different this time around, dairy producers may begin culling later this year to reduce milk supplies to stabilize prices. While dairy producers reportedly earned record-setting margins last year, the 2023 forecast could erode those warchest quickly through the year’s first six months. Further, with Europe’s new Farm-to-Fork policy that moves the region down the Path to Paris, nations may be reluctant to support excess production as it is a self-imposed price decline.

• Dropped Q1-Q2 butter prices. US prices stayed too high in December – meaning the market could be due for an overcorrection in early 2023. Further, European and New Zealand prices are lower – it appears New Zealand is prepared to keep a consistent buffer to US prices to make imports more attractive this year.
  • Lower 1H 2023 markets could put markets back into carry should the back half of the year remain near current levels – that would allow processors to store butter and take some sell-side pressure off spot markets.
  • US exports are reportedly running into competition as European, and New Zealand butterfat prices are well below current spot and futures prices – the opposite of 2022.
  • With less domestic AMF production, more butter will be reported making it seem like there is considerably more butter than last year (it is simply reported vs. unreported production).
• Reduced 1H 2023 cheese prices.
  • Some of the current market participants at the CME on the buy-side have limited needs – therefore if exports slow they are unlikely to absorb the volume that could be turned back.
  • If US exports slowed to 90% of last year, nearly 100 million pounds of cheese would need to be absorbed in the domestic market this year. Add to that new capacity that comes online in Q2 that could keep prices in check for a time.
  • European processors are slowing cheese production – that could catch up to markets later in the year, helping to lift prices again.
• NDM adjusted lower due to weaker overseas price signals. In addition, Europe is moving more milk to SMP away from cheese, indicating further weakness and pushing spot prices to the low $1.20s.
  • GDT prices dropped on January 3, signaling NZ is looking to match EU-27 prices.
  • China continues to buy more volume from GDT, but imports are still well below 2021 levels, making the market feel surplus.
  • As the situation improves in China, more demand could return to the market. Additionally, China’s ability to increase output at the double-digit pace last year seems less likely.
• Whey prices could ease, but given the cost of soybean meal, Chinese hog producers are likely to favor whey more this year than last year as it is cost-effective. At the same time, ho-hum protein markets are going to provide a cap.

Milk Market

USDA announced the December 2022 Class III and IV prices this week at $20.50/cwt and $22.12/cwt, respectively. That made 2022 the second-highest Class III price behind 2014 and the highest Class IV price. It was also the highest Class I and Class II milk prices. Interestingly, in 2022 the Class I milk price ranked as the third highest of the four classified prices. However, futures indicate that prices are poised to head lower throughout the early part of the year – that could keep 2023 prices above the five-year average but well below 2022 levels.

An atmospheric river is providing a lot of rain and snowfall to western states – but it may, for some areas that have been flooded too much of a good thing. As much as this storm is now moving east, a more significant storm is forming off the west coast. Since the end of last year, the weather has disrupted the supply chain, resulting in widespread dumped milk – which is expected to continue.

Cheese Market

Unexpected CME spot markets shot higher on Friday. That was unusual as world prices continued to decline. Some anecdotal reports of a few brokers have a temporary need for cheese, but that buying depth may not be significant. CME spot blocks averaged $2.0013/lb, down 15¢ from the prior week. Barrels averaged $1.7263/lb, down 13.25¢ from the previous week. The block barrel spread widened to 27.5¢ this week. Trades were modest. There are still a few weeks left to end the cheese demand season as college and professional football playoffs wind down. In addition, some reports suggest US cheese exporters are starting to run into more competition overseas. Still, 2022 exports were phenomenal.

US November 2022 cheese production was 1.15 billion pounds, 1.6% more than in 2021. For reporting states, output slowed from Idaho, Pennsylvania, and Ohio – increasing in all other reporting states. American cheese production was 319 million pounds and 1.75% more than in 2021. California and Wisconsin helped push output up 10.5% and 1.3% compared to 2021. Mozzarella production was 380.9 million pounds and 1.5% more than in 2021. California, New York, and Pennsylvania slowed output, while Wisconsin pushed production up 3.4% compared to 2021.

US November 2022 cheese imports totaled 40.8 million pounds, 3.7% less than the prior year. However, YTD imports are modestly ahead of the same period in 2021 – up 0.6%. Imports from Italy and France increased by 47% and 22%, respectively. There were sizeable declines from Australia, Ireland, Norway, and Lithuania. US November 2022 cheese exports totaled 83.5 million pounds, 12.5% higher than the prior year. YTD exports are running 11.8% ahead of the same period in 2021. Fresh cheese exports remain behind the 2021 pace – YTD exports are up 0.5%. Cheddar exports were up 50% more than the prior year. YTD exports are up 60%. Exports to Mexico, Australia, and Japan accounted for most of the YoY increases. The most significant declines came from Chile and South Korea.

Butter Market

CME butter markets were stable throughout the week – averaging $2.38/lb on unfilled bids and no trades. However, that did not stop nearby futures from tracking a bit lower during the week. US prices still maintain a premium to European and New Zealand butterfat, which could impact exports this year as it is the complete opposite of last year when US butterfat was the lowest of the three. Global Dairy Trade (GDT) butter and AMF prices declined on January 3, dropping below the $2/lb mark. That seems consistent in that New Zealand follows as US prices adjust lower – something that could make imported AMF more attractive this year since it is more cost-effective. Cream multiplier remains low, but Central multipliers are back above 1.0 this week.

US butterfat exports in November broke the 2013 record, jumping to 20.9 million pounds during the month – despite high domestic prices that exceeded most of the comparable world prices at the time. Exports were 102% more than the previous year – YTD exports were 47.6% higher than in 2021. US butterfat imports were 15.8 million pounds and 23.8% more than the last year.

US November 2022 butter production was 169.9 million pounds and 8.9% more than in 2021. California butter production was 5.9% more than 2021. Pennsylvania was down 6.5%. Other western states expanded output by 23% – likely due to the Darigold Caldwell fire in 2021, resulting in lower figures. Central states pushed output up 6.6%.

NDM/SMP

Spot NDM prices are now below the $1.30/lb mark, with NDPSR and Dairy Market News (DMN) higher than spot but trending lower. The January 3, Global Dairy Trade SMP price dropped 4.3% to $1.287/lb. At issue, Europe has a lot of uncommitted SMP and is struggling to find sales. That has caused the region to drop prices, with some reports indicating EU-27 SMP Q1 2023 offers are now in the low-120s. In addition, China continues to buy more SMP and WMP than last year at the GDT, but imports are well off the 2021 pace. That is causing the market to back up quickly. All of that could mean more price declines over the next few months.

US NDM/SMP exports totaled 158.2 million pounds in November – 1.25% less than the previous year. YTD exports were 7.3% less than in the same period in 2021. However, exports to Mexico soared 44% higher than last year, helping to offset declines elsewhere. Fewer exports throughout SEA and parts of SA and Africa cause the decline.

US November 2022 NDM production totaled 159.5 million pounds – 0.96% less than the same period in 2021. California’s output fell 19.5% compared to last year – Pennsylvania increased by 6.5%. US SMP production was 39.4 million pounds and 33.9% lower than 2021. Despite lower November production and adequate exports – November 30 manufacturer stocks of NDM totaled nearly 256 million pounds – 12.9% more than the same period in 2021. That indicates a substantial domestic slowdown causing powder to back up.

Whey & Lactose Products

CME whey prices recovered a bit from the previous week with prices averging 40.88¢, up 0.15¢.  So far DMN prices were mixed this week. Western mostly whey was 43.5¢, down 0.5¢ compared to the previous week. Central mostly whey was 41¢, up 0.5¢ compared to the previous week.

US November 2022 whey exports totaled 43.97 million pounds, 17% more than the previous year. YTD exports are down 1.3%. Exports to China were 68% more than in November 2021. US WPC <80% protein exports were up 32% compared to the prior year. US WPC >80% protein exports were up 23.9% in Nov. 22 vs. Nov. 21.

US November 2022 whey production totaled 74.6 million pounds and 1.65% less than the prior year. WPC (25-49.9% protein) 15.98 million pounds and 8.3% higher than 2021. WPC (50-89.9% protein) 30.1 million pounds and nearly 5% higher than 2021. WPI production totaled 10.5 million pounds and 5.5% less than 2021.