Weekly forecast update – Nov. 11, 2022

Forecast updates

• Adjusted Q4 2022 and Q1 2023 cheese prices higher due to this week’s USDA announcement (see Milk Market for explanation);
• Adjusted NOV 2022 for spot market adjustments;
• Reduced 2024-2025 NDM forecasts.
• Adjusted 2023 Central and Western mostly modestly lower than last week’s forecast.

Milk Market

USDA announced that it would begin pre-qualifying vendors for its Agriculture Feeds Kids and Families program announced in September. That was sufficient to cause cheese markets to recover. The $2 billion with $1.5 billion dedicated to food acquisition is spread over the next two fiscal years (October 2022 to September 2024) with a focus on protein. That may explain why cheese and Class III prices recovered while butter had little reaction. Additionally, NDM prices lifted. Given expectations of limited production gains over this period, markets believe milk will move to cheese vats and away from driers. If the former USDA programs are a guide, USDA could allocate up to one-third of its spending to dairy, which includes milk and cheese. That would be an additional $500 million in spending through 2024. That closed Class III and IV price gaps.

Internationally, European fall weather conditions are reportedly ideal for milk production, which is lifting daily intake. Markets responding to higher Northern Hemisphere milk by dropping prices. Some dry spots are surfacing in New Zealand – too early to call drought, but areas are currently monitored for dry conditions. China’s milk production, driven by investment, continues to reduce imports and zero-Covid policies continue to thwart demand.

Cheese Market

CME blocks rose to $2.20/lb this week, with barrels following. The USDA’s Tuesday press release, see above, spot markets strengthened on news of forthcoming bids. Add to that robust demand fueled by foodservice, and cheese prices rebounded quickly after the latest downturn. That doesn’t mean prices won’t decline after the cheese-buying season; they could. But, given the USDA’s program, it is likely price declines could be limited to the $1.90s until markets well understand the extent of the program. For now, traders may be overestimating potential spending. CME blocks averaged $2.091/lb, up 10.75¢ compared to last week. Cheddar barrels averaged $2.0165/lb, up 5.2¢.

ERS released September 2022 commercial disappearance at 1.1 billion pounds of cheese and 3.5% more than last year. That supports anecdotal reports indicating that foodservice demand continues to expand and retail is doing well… That was the most consumption over the last ten years for September. Typically, Q4 demand is higher than in September, which is a positive sign and could support prices. Combining higher domestic and international demand could support higher price forecasts next year as there is no additional capacity expected in the commodity Cheddar.

Butter Market

CME butter trading this week was a rollercoaster with prices rising and falling a few times. In the end spot butter averaged $2.8765/lb this week – up 13.75¢ from the prior week. Butter did not receive the bump provided by USDA’s announcement this week. There remains mixed reports – some suggesting processors are short of needs and orders over the next few weeks are heady. Others indicate that plenty of cream at reasonable multipliers are headed to churns this week. Regardless, promotions are strong with a pound of butter ranging from $2 to $5 per pound this week. This is the final push ahead of the Thanksgiving holiday and many are looking to promote butter to entice consumers to perform the bulk of their shopping at the retail outlet. Still, that puts butter markets within weeks of historical periods of decline as production shifts back to bulk and heads to warehouses – similar to the current futures market forecast.

ERS announced September 2022 butter commercial disappearance at 151.3 million pounds and 18.4% lower than the previous year – a significant drop and the largest YoY deficit this year. YTD butter commercial disappearance is running 5.3% behind the same pace set last year. Higher exports and lower production are keeping prices elevated. That said, there are signs that higher prices are taking a toll on demand this year and that modest trade balance shifts or higher output could pressure prices lower.

September 2022 restaurant performance was strong – but guests and traffic continued to ease. In September, restaurant sales were +5.2%, down 0.1% from August, but still a very good performance. Compared to last year, Covid-19 and the delta/omicron variants were spreading and slowing people’s movements – that was not the case this year, and consumers were dining out. Moderation in gas prices and inflation reduced spending pressure, and people were primed to spend more in other sectors of the economy. Traffic slowed by 1.9% vs. August and was down 3.6% compared to last year. That was still better than the lows in June and July when inflation and gas prices were at their worst. Fine dining performed the worst; Italian dining was the best. along with upscale casual.

NDM/SMP

NDM price declines slowed this week as spot prices recovered. The USDA announcement did help lift sentiment as markets anticipated more fluid milk and cheese, resulting in less milk potentially headed to dryers next year. Overseas, ONIL, Algeria, the world’s second-largest WMP importer behind China, will be conducting a tender this week that will likely attract interest from Europe, New Zealand, and the United States. While that may have helped establish a nearby floor, all eyes remain on China as imports remain lacking. Earlier in the week, a report suggested that China’s lunar new year and spring festival holidays could drive more demand. That said, China’s milk production remains elevated so which could limit imports and keep markets tipped toward surplus. This week CME NDM averaged $1.397/lb, up 0.3¢ compared to the previous week. Dairy Market News (DMN) mostly prices dropped – Central down 1.5¢ to $1.445/lb and West down 3.1¢ at $1.44/lb.

ERS released September NDM commercial disappearance at 76.2 million pounds, down 15.2% compared to last year. YTD, the YoY deficit is 15.2%, likely contributing to price softness headed into the end of the year. The availability of MPC, UF, and condensed skim continues to put pressure on demand. Additionally, Class IV skim values are higher than Class III, eliminating the protein arbitrage for cheesemakers.

Whey & Lactose Products

CME whey prices decreased to 44.48¢, down 1.15¢ from the previous week. DMN western mostly whey prices were 48¢, down 0.6¢ from the prior week; central prices were unchanged at 44¢. Lactose prices were unchanged at 48.5¢. Currently, higher soybean meal and lactose prices favor whey in a hog ration – which could keep demand buoyant from China. At the same time, reports of WPC/WPI demand remain consistent, suggesting that is a hard cap on whey prices for now. That could keep prices within a range through early 2023.