Weekly Forecast Update November 6, 2020

Forecast Updates

  1. Given the election results and the time needed to change-the-guard, while the Senate and the House appear committed to providing more stimulus money – the transition could slow the rollout of new programs. As a result, there could be a bump in the road at the start of the year, resulting in fewer government purchases resulting in lower prices than in recent months and compared to earlier this year. USDA has not issued a Section 32 bid for dairy since September 1, one of the most extended droughts for those orders since they began in 2019 to mitigate on-going trade disputes. Additionally, the food box program funds are exhausted, which could remove purchases after the first of the year. A sizeable stimulus could bolster retail demand or drive new government orders, but it could take until mid-Q1 for the impact to roll through the markets. Given the recent increase in milk production and expansion of a new cheese plant, those events could collide to push markets to oversupplied temporarily. The US government’s current makeup should put markets at ease, and forecasts of a year-end vaccine may also provide some support.
    1. Lowered the Q1 2021 block and barrel forecast pulling back from last week. The absolute price level will hinge on government purchases as underlying demand, fueled by wanting foodservice demand, could be the swing vote in keeping markets balanced or allowing them to swing to over-supplied for a time.
    2. Expect prices to lift beginning Q2 into the summer as the virus should seasonally abate, allowing more moving around and increased foodservice demand.
  2. We adjusted 2020 CME butter prices lower as well as JAN21 and FEB21. No significant changes from last week other than to reduce the outlook for the first few months of 2020 due to excess butter supplies available to the market and expectations that foodservice will languish during the holiday season.
  3. Curbed NDM markets as EU and NZ prices ease. There is some suggestion that government buying could subside for a time – especially in the Middle East.

Fluid Milk Market

Milk supplies remain better-than-year ago levels throughout much of the country. There are some reports that Class III milk in the Midwest is carrying hefty discounts to move milk. Some milk may be headed to driers vs. cheese vats as processors avoid building inventory as markets are falling – something that could result in sizeable write-downs headed into the end of the year.

Cheese Market

Cheese markets are tumbling this week as sellers returned to Chicago, and buyers vanished. CME blocks averaged $2.597/lb. down 17.75¢ vs. the previous week, but that seems to fail to recognize that markets slid 43.75¢ between Monday and Friday. CME barrels averaged $2.471/lb., down 0.45¢, but again that doesn’t do justice to the 18.75¢ drop. The block-barrel spread closed from last week’s chasm to 2.5¢ by Friday. Barrels were slower to move lower this week, but that could change as pressure continues. Just two blocks traded this week and 14 barrels.

USDA released September US cheese production at  1.09 billion pounds and 1.1% more than a year ago. Most of the new production came from Central states led by South Dakota. But cheese output from the two-top producers, Wisconsin and California, fell back, down 1.4% and 5.4%, respectively vs. last year. California reduced American cheese production while Wisconsin produced 8.3% more than a year ago. That helped push US American cheese output to 432.5 million pounds and 4% more than last year. Cheddar cheese production jumped up 7.7%. Mozzarella production eased 0.6% to 365.8 million pounds. Hard Italian cheese pushed up 10.2% compared to last year’s levels.

Butter Market

CME butter markets spent the better part of the week recovering lost ground again; however, increases slowed as prices reached the mid-140s – a testing point over the past few weeks that could bring more sellers to Chicago. Butter prices averaged $1.428/lb., up 1.7¢ compared to the prior week with 26 loads changing hands. That continues to demonstrate there is still plenty of butter in warehouses heading toward the final weeks before the Thanksgiving holiday and a conclusion of the traditional demand season. Most expect robust demand that could far exceed a typical year; however, foodservice could languish should holiday shopping and the resurgence of Covid-19 keep people at home.

USDA reported that September butter production was well ahead of last year’s pace, with output totaling 152.1 million pounds. That was 5.4% more than year-ago levels. California’s output jumped 9.6% ahead of last year’s levels. At the same time, East Coast butter production retreated, falling 2.7% behind last year’s pace. Cream demand on that side of the country has been strong, leading to higher multipliers and a likely reason for less butter. Central states continued to drive the year-over-year gains, with output up 7.9% compared to last year. That data suggests that there could be considerable backfilling of butter lost to cheese in Michigan next year.

NDM/SMP

Once again, spot NDM prices retreated as Global Dairy Trade reflected a 2% price decline – still, that puts New Zealand SMP prices well beyond current EU and US spot prices. US NDM prices declined 2.05¢ to average $1.075/lb. on 13 trades. While most overseas’ data suggest that demand remained stronger than year-ago levels through September, there are mounting concerns that demand could slow and production increase headed into the end of the year. There is potential for European SMP output to expand as processors look to mitigate slowing cheese demand due to widespread shutdowns and restrictions on restaurants, pubs, and cafes. That has the market in a bit of flux and may be the impetus behind recent US market weakness.

USDA released September combined NDM/SMP production at 196.7 million pounds — 11.4% more than last year – the second-time with monthly double-digits increases this year. Another factor that may account for recent market weakness. NDM production was 124.3 million pounds and 5.5% more than last year. SMP increased by 23.3% to 72.5 million pounds – an indication of export interest.

Despite higher output, US NDM stocks fell to 233.3 million pounds on Sep. 30 – 7% less than last year. While declining stocks contrasted against rising output would tend to be a show of market strength and bullish, it could represent unreported SMP holdings. The comparatively large shift toward SMP may go unreported, causing the swing rather than greater demand.

Whey & Lactose Products

CME spot whey prices lifted this week as markets once again confirmed China’s demand for whey, lactose, and permeate. CME whey averaged 41.9¢/lb, up 2.3¢. Dairy Market News (DMN) whey prices increased this week vs. last week. At the same time, DMN reported slightly lower lactose pricing 48.75¢/lb. down 1¢ from the previous week and 3.25¢ from this year’s high.

US September whey production fell nearly 18% compared to last year. US manufacturers produced 73.6 million pounds of sweet whey powder, although less than last year, it was consistent with 2018 output. WPC (<80% protein) also declined 14% compared to the previous year, with production totaling 13.6 million pounds. WPC (>80% protein) was 5.2% higher than last year and 25.6 million pounds. WPI 90 was also more than 2019, with an output of 10.4 million pounds. The shift away from whey powder may suggest some improvement in the high protein markets.

Whey stocks declined in September to 79.4 million pounds, down 3.8% compared to last year – that could be due to stronger pull from China combined with lower domestic output. WPC (<80%) protein stocks also dropped to 23.4 million pounds and just 2% more than the same period a year ago – that was the lowest year-over-year gap since January. WPC80 and WPI90 were also less than last year. All signs of better-than-expected demand.

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Ceres Dairy Risk Management LLC
PO Box 2440
Sun Valley, ID 83353-2440