Weekly forecast update – July 15, 2022

Forecast updates

• Spot markets tumbled this week with cheese and NDM leading the way.
• Revised the CME forecast to reflect the potential for lower markets, but still an additional price recovery before the end of the year.
  • Dropped CME cheese prices through July, but expect a modest rebound into August.
  • Dropped prices again in October with a modest recover in November before price track lower again – expect the impact of inflation and a potential recession before the end of the year.
  • Reduced the NDM price through August, but forecast a modest recovery into the end of the year due to persistent, constrained supply.
• No significant adjustments to whey or lactose.
• Adjusted WPC34 down to mirror moves in NDM.
• Reduced western buttermilk powder prices.
• These adjustments reduced milk prices.
  • Prices below $19/cwt (now reflected in the forecast) could be problematic should feed prices remain elevated.
  • That could mean a rebound later in 2023 should supply reduce further in response to lower margins.

Milk Market

Several regions of the country are reporting that milk production is rising compared to last year, but that seasonally, heat and humidity are starting to slow things down. Most of this week milk futures markets reacted to bearish grain market news that sent corn futures back below the $6/bushel mark for a time. Corn futures recovered by the end of the week – but some feel they are still prone to moving lower again. AUG Class III milk futures erased all of this year’s gains and returned to levels not experienced since the start of the year. The pessimism gripped 2023 causing milk prices to fall below the $20/cwt mark for the first time in months. Markets that were so optimistic about 2H 22 prices just a few weeks ago, are struggling to find anything to be hopeful about this week. There is an air of “over-sold” to this week’s markets given that most of the news as of late has been relatively positive for dairy products. That said, there is more anxiety about a potential recession that could cause demand to retreat further.

Cheese Market

The dam broke on CME cheese markets this week with blocks ending the week below $2/lb for the first time since February. Barrels hold a premium to blocks – something that appears inconsistent with commercial markets. Anecdotally barrels are widely available off-market with many questioning the current premiums. Blocks averaged $2.0765/lb, down 1.48¢ from the previous week. Barrels averaged $2.1375/lb, down 3.05¢ from the previous week. Block trading was limited suggesting markets moved lower on offers. Barrel trade volumes picked up, reaching 17 loads this week. Markets could be subject to additional weakness; however, these price levels could encourage additional demand that may cause prices to recover.

US domestic cheese commercial disappearance in May at 1.09 billion pounds and 1.3% less than the previous year. While less than last year, it was the second-highest commercial disappearance for that month on record. Retail scan data continues to retreat; however, that may be a return to trend after two strong post-pandemic showings. While retail is expected to normalize and expand, it could step back as people continue to move around with several opportunities to dine outside their households. The current data suggest that foodservice demand has been sizeable and can offset most of the retail declines – despite the higher cost of dining out. Headed into the fall, food service may be a better indicator of whether demand is beginning to falter – a return to pre-pandemic trends. The recent price declines suggest that promotion could return to store shelves given the ability to lock in costs below the current retail levels. Less advertising may negatively impact demand given the overall marketing spending over the last few years.

Butter Market

CME butter followed other dairy markets lower this week – but as has been the case over the past few weeks, Friday prices recovered. CME butter averaged $2.947/lb, down 0.05¢ from the previous week. Despite the somewhat stable spot performance, futures markets tumbled. The forecasted declines became more significant this week with markets expecting prices to retreat to the $260s by September. Still, cream demand remains robust as ice cream and cream cheese production are higher than last year. That has slowed cream to butter churns. As butterfat in milk subsides this summer, that could keep bulk butter churning limited for the rest of the summer. All eyes will be on next week’s GDT event for more price insight.

May 2022 butter commercial disappearance at 159.9 million pounds – 1.4% more than the prior year. While retail sales remain behind last year’s figures – foodservice demand and exports continue to offset those declines. There are signs that US trade could shift as US prices hold a substantial premium to prices from New Zealand and India for AMF. Small shifts in trade could cause more products to become available to US markets.

Restaurant foot traffic dropped again at the end of June, according to Blackbox Intelligence. Casual dining moved to the underperformers category along with QRS.

Interestingly, regions with many retirees are starting to experience declining restaurant performance. Florida, New York, and the Southwest all saw deteriorating performances at the end of June. That may indicate those with fixed incomes may be slowing purchases.

NDM/SMP

CME NDM prices dropped this week as overseas interest dropped off in response to higher prices. CME NDM averaged $1.70/lb, down 4.69¢ compared to the previous week. By Friday, prices were $1.66/lb – the lowest they had been since December 2021. More product is moving overseas. While US consumers have been slow to respond to higher prices, some price-sensitive overseas markets stepped back, causing products to stack up in inventory. To clear markets, prices dropped to the low-to-mid 160s. Futures were more aggressive with prices resetting to the $1.50s during Q4. Again, markets will be watching next week’s GDT for more price indications for later this year. Fonterra announced it would be adding more WMP and SMP to the next event.

May NDM commercial disappearance at 37.7 million pounds – two times higher than last year. Last May, ERS reported domestic commercial disappearance at 12.1 million pounds. While not the lowest over the past decade (October 2016), it was the second-lowest domestic commercial disappearance. This year shows a return toward normal. Despite the recovery compared to last year, this year’s results in May were still well below the 57.4 million pounds five-year average performance for that month. Some alternatives like UF skim, condensed skim, raw milk, and MPC seems to be unseating NDM in formulas. US NDM commercial disappearance could be less than 600MM pounds this year – the lowest over the last decade.

Whey & Lactose Products

CME whey averaged 46.9¢, down 2.35¢ from the previous week. DMN western mostly price was 54¢ unchanged from the previous week. Central prices declined this week to 52.5¢ – unchanged versus the previous week. The lactose price was 45.5¢ this week, unchanged from the previous week. European prices were lower this week. For now, it appears spot and contract whey prices could continue to track lower as European prices fell below the US prices in recent weeks.

US whey production commercial disappearance was 48.5 million pounds in May – more than double last year. While whey is slow to move overseas, there was good trade domestically last spring. WPC had the opposite impact with domestic commercial disappearance dropping over 35% compared to last year.