Weekly Forecast Update – January 8, 2021

Forecast Updates

• Increased cheese, whey, and NDM prices Q1 2021.
• Reduced 1H 2021 butter forecast.
• The food-box program is supportive to cheese prices through February; however, butter remains under pressure with food-boxes to provide price support, but at lower levels given fundamental data including lofty stocks.
• Increased NDM based on better overseas’ prices – still that is well below the current futures forecast.
• Increased whey prices this week based on stronger demand from China.

Fluid Milk Market

Milk throughout the country is plentiful and continues to rise. Reports suggest there was some dumping during the holiday week and that milk is $5/cwt. discount for those without access to processing. Milk seems to be moving great distances to find available capacity. Still, some processors are unwilling to increase milk intake given lackluster foodservice demand. The new round of the food-boxes should lift bottling needs for a time as a gallon of milk accompanies each box. Still, with several large school districts operating remotely, school milk demand remains 60-70% of normal – so the food-boxes may just help return demand to trend. Additionally, Class III milk’s rapid appreciation and a more modest increase in Class IV will likely lead to more depooling activities this winter.

US and EU milk production will lift seasonally through the spring. Additionally, both regions have increased output. That could mean considerable milk by mid-year. In part, that could offset Oceania’s declining milk due to weather. If overseas and domestic demand remains consistent, that could keep global supply and demand balanced, providing price support for milk. Should demand deteriorate, it could pressure prices lower.

Cheese Market

Block cheese trading was busy at the beginning of the week but slowed as buyers continued to push prices higher. Monday’s USDA announcement of the fifth round of the food-box program caused spot and futures markets to surge. Blocks continued to lift during the second half of the week while the barrel market increases stalled by mid-week. In the end, blocks averaged $1.7790/lb., +14.4¢/lb. compared to the previous week. Barrels averaged $1.5965/lb., 6.34¢/lb. more than the prior week. That is causing the block-barrel spread to widen out.

There were several reports out this week. US cheese production totaled 1.1 billion pounds in November 2020, which was 0.6% more than the previous year. American cheese production was 449.2 million pounds and 3.9% more than in 2019. Cheddar cheese was 320.7 million pounds, up 3.7%. Mozzarella production fell back to 362.8 million pounds, 3.3% less than the previous year. Cheese production from California and Wisconsin fell 7.7% and 1.4%, respectively, behind the pace set in November 2019. California’s Mozzarella production fell more than 12% while Cheddar increased by 5%. At the other end of the spectrum, South Dakota’s cheese production outperformed 2019 by 22.5%. Minnesota’s Italian cheese production soared 61% above the same levels in 2019. The Central Region was the only location to surpass 2019 output.

US cheese exports faded in November 2020 as higher summer prices took a toll on competitiveness overseas. The United States exported 52.8 million of cheese during that month, resulting in a 17.6% shortfall to the previous year. Processed cheese bettered the prior year by 12.5%; Cheddar exports plummeted, falling back nearly 40% compared to the preceding year. Exports to Mexico fell to just 22.5% of the total, and volumes fell 38.7%. The declines from Mexico accounted for most of the losses. Given the nation’s status as the largest US cheese trade partner – higher prices starting in 2021 may not bode well for exports.

Butter Market

After the USDA’s food-box announcement and a stronger-than-expected GDT performance on Tuesday, spot prices picked. Prices turned back around by midweek, with prices falling below the $1.40 level again. While market participants expect butter prices to increase heading into the spring, fundamental data continues to hamper efforts to lift prices. Butter is headed to warehouses; foodservice demand is lackluster, and government order forecasts could barely dent the amount of butter directed to the warehouse through spring. As a result, futures have consistently overestimated the market potential, with futures prices fading into the settlement.

US butter production expanded 4% in November 2020 compared to 2019. In total, the United States produced 168.3 million pounds of product. The output from western states grew by 4.3% compared to the previous year. Central and Atlantic states were close, expanding output by 3.8% and 3.5%, respectively. California was a sizeable driver of new butter output, growing 4.5% – suggesting that the state’s expanding milk supply moved to butter/NDM in November when prices were once again high from a Class III perspective.

Despite a significant price advantage, US butterfat exports continue to languish, with exports falling even lower in November 2020. In total, the United States exported 3.5 million pounds, 35.3% less than the previous year. That was the lowest volume for that month since 2015 when prices were record high. Exports to Canada fell 47% during the month. It is possible since the advent of USMCA, the United States is shipping less product to Canada. Volumes elsewhere were similar to the previous year.

NDM/SMP

This week, GDT prices jumped at the first auction of the year, which helped lift CME prices. While CME NDM prices are still below Europe, the increase this week closed the gap suggesting that further increases could be capped unless EU prices move higher. CME NDM averaged $1.1795/lb., up 3.95¢/lb compared to the prior week. Additionally, futures are no longer providing a return of cost-plus carry – that could send more spot product to the CME. For now, overseas demand remains strong, and can absorb the new product from Europe and the United States. Additionally, there are still concerns about further slowdowns from Oceania producers. That said, most of the USDA data released this week could be considered neutral to bearish.

The United States produced 206.2 million pounds in November 2020, 8.6% more than the previous year. That suggests that Class III processors substantially slowed input to avoid the precipitous decline forecast between November and December. California led the increases with NDM output growing 12.9%. Other western states added 4.8% more NDM compared to the prior year. Central states grew production by 11%.

US NDM stocks totaled 250.3 million pounds, 12.4% higher than the previous year. While November typically reflects the first month of build – the rate of growth was sizeable.

The United States exported 137.1 million pounds of NDM/SMP during November 2020 – that was 10% less than the previous year. Still, US NDM/SMP exports were 18.7% more on a year-to-date basis compared to the same period in 2019.  Exports to Mexico increased by 11.6% as well as Indonesia up 21.6%. But exports to the Philippines, Malaysia, and Vietnam retreated. That stokes concerns about SE Asia’s ability to better 2020 volumes at the start of this year as US and EU milk production continues to increase. That could temper price runs if the United States needs to rely on exports to Mexico to absorb new production.

Whey & Lactose Products

CME Spot whey prices reached 50¢/lb. for the first time since January 2019. Lower output and stronger exports combined to reduce stockpiles, and that likely supported nearby prices. CME prices averaged 48.6¢/lb., up 1.97¢/lb. compared to the prior week. Higher demand from China as its hog herd recovers from African swine fevers continues to support and lift prices.

US whey production was 69.5 million pounds in November 2020 – that was 5.9% less than the previous year. Total WPC output fell 1.9% behind the pace set in 2019. WPI output fell 6.1% compared to November 2019.

Whey stocks were 67.3 million pounds – nearly 15% less than in 2019. WPC and WPI stocks were less than year-ago levels. Lower stocks that continue to decline are likely supportive of prices for a time.