Weekly forecast update – January 15, 2021

Forecast updates

Reduced the Q1 block and barrel forecast – closer to the forecast issued at the beginning of the year. While USDA issued several purchases, it seems that there is plenty of cheese and that there may be more than could head to the CME for a time keeping prices in check.
Lowered the Q1 butter forecast for similar reasons. There are more USDA orders – that may not be enough to deplete stockpiles until later in the year. Cream and bulk butter are widely available and expected to expand through the spring.
Increased January NDM -but left other months mostly unchanged. There is still a discrepancy between demand and expectation of demand over the coming weeks.
In turn, these adjustments recalibrated milk prices.

Fluid Milk Market

Milk remains plentiful, and processors are more than busy. Some processors are still reluctant to take heavily discounted milk, and that is making capacity feel snug. Discounts range from $5-7/cwt. There are anecdotal reports that dairy producers are actively adding cows throughout the country – something that could cause the output to rise anew this spring. Presently, farms were reporting substantial output increase due to improved feed and mild conditions last week. The Upper Midwest has a polar vortex forecast this week that could slow milk off the farm for a time.

Feed prices rocketed higher this week as WASDE revised the latest corn and soybean crop lower. In a single day, a Class III milk price decline coupled with the feed price increase cause forecasted Dairy Margin Coverage margins to compress $1.50 – $2.00/cwt. That is unlikely to impact milk output through the spring, but it could cause dairy producers to review operations later in the year.

Cheese Market

CME weekly prices started the week higher but faded by the end of the week. Still, the Cheddar block and barrel averaged better the previous week. Blocks averaged $1.912/lb., up 13.3¢/lb. Barrels averaged $1.606/lb. up 0.95¢/lb. USDA announced a $40 million Section 32 purchase in a pre-solicitation notice on Thursday – while that helped lift futures, spot prices retreated on Friday with blocks losing 7¢ and barrels 0.25¢. Reports indicate that all varieties of cheese are widely available and with some discounts. Many speculate that cheese already in the market could easily fill the food-box orders, and Section 32, USDA will award next week. The market appears to be sensing the imbalance between new capacity and orders in the system, which seems to weigh on sentiment despite CME markets. Seasonally, pizza demand could fall off as the play-off season culminates in Super Bowl – that could put further downward pressure on cheese prices.

USDA’s ERS reported November 2020 cheese commercial disappearance at 1.2% less than 2019. Year-to-date 2002 commercial disappearance through November is running 0.5% less than in 2019. The data points to the significance of USDA orders and how seasonally higher output, new capacity, and slowing demand could tip the market balance this year.

Butter Market

Another new USDA pre-solicitation notice for butter did little to move the needle on spot prices. Futures lifted for a time, but news of plentiful cream, deep discounts, and butter headed to warehouses has done little to create any optimism about the prospects for butter prices in early 2021. CME butter averaged $1.2995/lb, down 11¢/lb. from the previous week. The carry structure in markets continues to provide tremendous opportunities for those looking to hold new crop butter for use later in the year. At the current pace, working capital and cold storage could become limiting factors as the spring approaches.

USDA’s ERS reported November 2020 butter commercial disappearance at 0.1% more than 2019. Year-to-date 2002 commercial disappearance through November is running 1.7% more than in 2019. The news again reflects the strength of retail demand as butter remains net positive demand despite absent food-service demand; however, it comes as little solace given the increased production.

NDM/SMP

Strong overseas demand and rising New Zealand milk powder prices are helping to lift domestic NDM. That said, there is some imbalance in the market between expectations for demand and actual demand. Some reported that Mexico pulled back this week as prices lift. European processors are said to be balanced, and China’s appetite for milk powder remains resilient and somewhat limitless. That was enough to lift CME NDM markets again this week, where prices averaged $1.1915/lb, up 1.2¢/lb. from the previous week. The carry structure remains non-existent as markets are unwilling to lift further given the disparity between forecasts and what appears to be sales that were a bit more sluggish this week. Some are worried that Mexico could step back from the market expecting to acquire less expensive milk powder given the increase in milk production and the seasonal peak just months away.

USDA’s ERS reported November 2020 NDM/SMP commercial disappearance at 4.2% more than 2019. Year-to-date 2002 commercial disappearance through November is running 1.5% more than in 2019. Domestic, commercial disappearance jumped up in November compared to last year.

Whey & Lactose Products

Spot whey prices continue to lift – but that has left some questioning the basis for the increase. Once again, people are pointing to China’s robust demand as it rebuilds its hog herd. Presently Europe is reporting a mostly balanced market, and the new whey plant in Michigan is coming up slower than planned. For a time, that can support the market at current levels. The CME averaged 51¢/lb. up 2.4¢/lb. Dairy Market News prices also lifted with the mid-point of the Central and West range rising 3.4¢ and 2¢, respectively. But as the new plant gets going and if China’s demand slows – that could cause prices to retreat some ground.