Weekly forecast update – June 4, 2021

Forecast updates

Reduced the Class I milk forecast for Q3 2021 vs. last month due to modestly lower cheese outlook and recent decline in spot CME cheese prices that will lower the July Class I advanced milk price. Other months are relatively similar; however, Class I Q4 2022 did drop for similar reasons – lowered commodity prices for later in 2022.
Ceres lowered the Class III milk price forecast for Q3 2021. Higher spot prices in May triggered the forecast increase last month; this price level is more consistent with recent performance but still reflects expectations for more robust demand (have not yet factored in the new USDA buying program released on June 4).
We increased the Q3 2021 Class IV milk price on expectations of higher SMP prices. Given the strength in world demand and slowing output, the United States should remain competitive in the export market. Current data suggests that demand from China should continue into the second half of this year – the relative strength will depend on progress Asia makes toward reopening and resumption of business and leisure international travel later this year.
Overall, Ceres still expects better 2H 2021 prices that could continue into Q2 2022. As economies reopen, post-pandemic consumers are showing a willingness to spend and consume at levels that could support higher prices for a time. That said, inflation remains a concern, as is labor shortages as employers look to fill open positions.
Retail sales will continue to ease as people resume dining out of home and travel; however, expectations are for sales to remain better than 2019 levels.
Presently, milk supply is keeping pace with demand; however, if supply begins to exceed demand or demand eases, prices lower yet this year.

Fluid Milk Market

Post-holiday spot milk prices were a discount to class prices, and some processors reported that keeping up with incoming milk was challenging. In some parts of the country, processors dumped limited amounts of milk due to truck driver shortages. Manufacturing plants are feeling the back-up of milk as bottlers’ demand falls as schools are winding down throughout the country, and people are starting to get out of their homes resulting in less fluid milk consumption vs. last year. Add to that pretty good weather across most of the country for dairy cows, and that has seasonally pushed a lot more milk to manufacturing. That should subside as hot weather spread across the country – a factor that is currently stressing row crops and may curb milk flows soon enough.

USDA announced the May 2021 Class III and IV prices this week at $18.96/cwt. and $16.16, respectively, that was up $1.29 and 74¢, respectively, compared to April.

Cheese

CME spot cheese markets diverged this week, with blocks finding support once prices declined and barrel buyers lifted prices above the prior week. In the end, the CME block averaged $1.505/lb., which was 3.8¢/lb. less than the previous week. CME barrels averaged $1.5931, down just 1.24¢ from the prior week. That resulted in an 8.81¢ spread with barrels premium to blocks. Given the Class III, milk price assumes a 3-cent positive spread between blocks and barrels – it is likely the June cheese price will be higher than blocks or barrels. The markets are sending mixed signals. Presently, JUN21 futures are carrying a sizeable premium to spot markets, suggesting that spot prices need to increase over the next week or so or that futures need to drop for markets to converge. At the same time, buyers may be sensing a bottom and are finding some value in owning more cheese.

On Friday, USDA announced a new buying program that would direct up to $1 billion in funds to “support and expand emergency food network so food banks and local organizations can reliably serve communities.” Additionally, in the coming months, USDA will invest in the “Build Back Better” program – all suggesting USDA food procurement programs could continue to be sizeable moving forward.

In April 2021, the United States produced 1.14 billion pounds of cheese –nearly unchanged to March, on a daily average basis, but 8% higher than year-ago levels. Consider the base and processor looking to slow cheese output rapidly one year ago, and this year includes the new Michigan cheese plant – easily accounting for the differences. American-style cheese production totaled 473.4 million pounds of cheese and 6% more than last year. Mozzarella cheese output totaled 376.4 million pounds and 6.6% higher than 2020 levels.

Butter

CME butter market enthusiasm continued to slump this week, with prices dropping further by the end of the week. In the end, CME spot butter averaged $1.79/lb, which was 1.9¢ lower than the previous week. Spot trades were similar, with 17 loads changing hands. Reviews for the holiday cream market were mixed – some reported few spot loads headed to butter churns while others noticed a decline in multipliers and more challenges moving cream. That said, Midwest and eastern cream multipliers were lower than last year at this time but still higher than 2019 and the five-year average for the comparable week. Presently, market opinions diverge – some feel butter prices could move lower from this point forward, while others feel like markets could make a second-half run. The CME seems to reflect this confusion, with markets staying put until more is known.

USDA released April’s butter production at 185.2 million pounds – that was 3.8% less than March on a daily average basis and 18.5% lower than year-ago levels. Again, consider the base of comparison – a year ago, an additional 55 million pounds of butter was made as cheese processors waived off milk that wound up at butter and powder facilities instead. That was not an unexpected result. Using 2019 as a baseline – production is higher, but consistent for this time of year.

NDM/SMP

CME NDM suffered a good-sized dropped on Thursday with pricing holding on Friday. In the end, CME NDM averaged $1.2775/lb, down 1.35¢ lower than last week. Trades were less also. On Tuesday, the first Global Dairy Trade (GDT) of June experienced modestly lower SMP and WMP prices, but results were well within expectations. Participants have had a negative outlook for a few weeks – but given the peak production and more milk headed to manufacturing with a modest easing of overseas’ shipments – the decline is expected.

USDA announced April NDM production at 194.6 million pounds – that was 0.95 more than March on a daily average basis, but 3.96% lower than last year. Given last year’s spike, that is a sizeable increase compared to the 2019 run rate. At current levels of international demand, that is less concerning, but it may explain the gap between US and world NDM prices. SMP production was 41.6 million pounds, up 8.5% vs. March, but 19.4% less than year-ago levels. While output is higher, manufacturer holdings of stocks remained consistent. USDA reported manufacturer NDM stocks at 302 million pounds on April 30 –23% lower than year-ago levels – suggesting the product is moving at a swift pace.

Whey & Lactose Products

CME whey prices continued to track lower this week. Prices averaged 60.2¢, down 3.76¢ compared to last week. Just a couple of loads traded this week. Reports suggest that Chinese demand is cleaning up markets, but domestic buyers are still pushing back, given current price levels.

USDA release April 2020 whey powder production at 73.3 million pounds, 3.5% less than March and nearly 1% lower than a year ago. Whey powder stocks dropped faster in April, suggesting demand, especially from overseas, is still supportive of these price levels. Stocks totaled 60.5 million pounds – 21.5% less than year-ago levels. WPC (25.5%-49.9%) output was 13.1 million pounds and 7.8% lower than last year. Similarly, stocks totaled 23.1 million pounds on April 30 – 10.2% less than the same period in 2020. WPC (50%-89.9%) jumped to 26.6 million pounds – that was 15.2% more than last year on the addition of the Michigan whey plant capacity. Although, the higher output stocks were 37.4 million pounds, nearly unchanged to the previous year. All of that data remains supportive to whey prices and, in turn, Class III milk prices later this year.