Weekly forecast update – Oct. 14, 2022

Forecast updates

Bearish sentiment rolled through markets as news that inflation is far from under control. Reports circulated that in September, supermarket food purchases were 13%, and food away from home was up 8.5% more expensive than last year. Dairy was 15.9% more than a year ago. The 20-year historical average is 1.7%. Add to that expectations of further 0.75% rate hikes in November and December, and the high US dollar is starting to create a headwind for US exporters – one that will require a price reset lower for the United States to maintain competitiveness in export markets. Milk and whey powders will likely be impacted most by these shifts due to the significant volumes that move into the export markets and European prices resetting lower. Based on today’s forecast, these declines will impact milk prices through mid-year next year.

• Modestly reduced the cheese outlook – most of the changes were in Q4 2022 and Q1 2023 – expect the block-barrel spread to close but to remain above the 3-cent spread in formulas.
• Reduced the Q4 2022 and Q1 2023 butter forecast. Reports of more AMF imports inbound and cream demand easing could cause prices to decline to encourage more demand ahead of the holidays and avoid more butter heading to cold storage early at higher costs.
• Reduced NDM through June 2023 – European prices are dropping, and with the exchange rate, nearby NDM sales will need to be in the low-to-mid 140s to maintain competitiveness.
• Reduced whey through June 2023 – similar reasons, lower EU-27 whey prices combined with the exchange rate could pressure prices lower for 2023 contracts. Additionally, some reports show that WPC80 and WPI90 could move slightly lower based on recent offers.
• Price could remain above average – as lower prices could cause milk production to slow again – which could support 2H 2023 dairy product prices.

Milk Market

Half of the November Class I price was established this week, which points to a higher price than in October. It is likely due to the skim recovery on the Class III side of the equation and higher butterfat projections. Nationally, milk continues to move to fluid bottling; however, the reports are mixed regarding the strength of that demand. Scan data continues to confirm that demand is drifting lower again this year – after a report that Americans are consuming more dairy than at any point in history; they are eating rather than drinking their dairy. Daily intake reports are mixed, with some reporting figures higher and others suggesting milk off the farm remains flat to lower. Again, some of this may result in lower fluid demand pushing milk to manufacture in some regions. Overall, discounted milk can still be found in vast swaths of the country. As the weather cools, that should help lift output-per-cow.

In Europe, reports indicate that German and French daily intakes are higher –putting pressure on spot prices and causing global dairy to reset lower. Fonterra revised its 2022/23 season milk intake forecast lower this week for the second time in a matter of weeks. The reason is a plodding start to the season.

Cheese Market

CME Cheddar barrel trade was a rocky road this week, with prices seemingly falling off a cliff on Friday. The weekly CME barrel price average of $2.183/lb, down 4.4¢ from the previous week, did not reflect the 9¢ decline on Friday. That seems to set up for lower trade again next week. USDA’s annual bid cycle ends on Tuesday – historically a time when cheese markets seem to take a step back to assess holiday demand. This year demand appears better, but unlikely to support cheese prices in the $2 teens or higher. CME block trading was more subdued, with prices averaging $2.0455/lb, up 3.05¢ compared to the prior week. Trading was somewhat limited for blocks this week offers some explanation for the steadier market path. Should more barrels arrive at the CME, that would indicate that export demand may be slowing.

ERS announced that the August commercial disappearance is near +1.6% compared to last year. That was 1.13 billion pounds of cheese consumed by the domestic market. Year-to-date commercial disappearance is 1% higher than the same period the previous year and consistent with YoY per capita consumption increases reported for last year. Q2 is the lowest period of the year – likely due to decades of high inflation and more costly gas at the pump. September inflation increased by 0.4 percentage points compared to August, despite the forecast of a modest decline – that will undoubtedly reinforce the Federal Reserve’s push to continue to raise rates – it may result in more significant increases in the final months of the year. OPEC’s announcement to reduce production could be problematic as fuel prices increase – higher fuel negatively impacts cheese consumption. At the same time, a higher interest rate could pressure US cheese prices lower to remain competitive in export markets.

Butter Market

CME butter markets slid on Monday and again on Friday, resulting in an average of $3.192/lb – down 3.05¢ from the prior week. News that cream was freeing up, multipliers were declining, and churns were busier combined to turn markets bearish quickly. Overall, demand appears positive at retail, but there could be a slowdown in the food service sector. Some feel that $2.50 butter is just around the corner – a common sentiment throughout this year, yet elusive so far. Still, widespread reports indicate that New Zealand AMF is inbound and expected to arrive at the end of this month and for the remainder of the year. So far, imports have not reflected a sizeable upswing in volumes – it could take until early December and the release of October 2022 trade data. The markets are decidedly less optimistic about price than even a week ago.

ERS announced that August’s domestic butter commercial disappearance was down 7.5% compared to last year – a sharp decline for the month. That may be coming primarily from food service. At 171.6 million pounds – that was a good performance but marginally above the five-year average for that month. IRI August scan data indicates that butter volumes were down 3.1% compared to last year. Unusual for this year, cream/creamers were also lower – volumes down 1.1%. Cultured products like sour cream fared better, down just 0.1%. Cream cheese was also softer, down 1.1%. Slowing purchases as prices climb may account for the sudden switch in cream demand in early October.

NDM/SMP

NDM prices were falling again this week, and futures seemed to leap ahead of the spot markets taking prices back into the $140s. CME spot NDM averaged $1.515/lb, down 2.45¢ compared to last week. Dairy Market News (DMN) western mostly NDM slipped 1.5¢ to $1.5625; the central mostly NDM was $1.5550/lb and unchanged from the previous week. CME appears to reflect the shift in sentiment more than the DMN prices this week – which makes sense. Futures expect markets to be in the upper $1.40s by December – that could be a tall order given fixed pricing, previous month averages, and links to NDPSR prices. But, given spot EU prices, higher stocks, and a strong dollar, US NDM prices need to remain competitive – that may mean selling in the low to mid 140s.

News of a carbon and methane tax on New Zealand dairy producers is spreading through news agencies this week – another cost that could work to slow milk output and the size of the dairy herd in the future. New Zealand’s average dairy farm is 440 cows – the methane tax would add approximately $8,000 annually, with carbon adding another $3000-$4000 per farm. That is a cost of roughly 28 NZ$/cwt in US terms (cow product around 7904 liters per year). One article indicated that this was proposed by DCANZ and another industry group from the beef side to fend off more significant taxes and more restrictions. With today’s milk prices, it is less of an issue but should milk price falter, New Zealand dairies have alternatives like avocados and selling to forestry -things that provide a better return per acre. Long-term bullish NDM/SMP – presently, this is less of an issue on reports that Europe has stockpiles of SMP to move.

Whey & Lactose Products

CME whey prices dropped to 41¢ early in the week before recovering to 44.25¢ and holding into the end of the week. DMN whey and lactose prices were unchanged. Markets are mixed. Better demand from China is encouraging if it holds; however, news of new shutdowns could further weaken the Chinese economy and once again slow demand. Additionally, weaker EU prices and a stronger dollar could cause prices to trend lower over the near term as the region determines the next steps. Higher energy prices are dissuading processors unless they have negotiation cost caps. Higher whey products stocks make sense, given fragile commercial disappearance figures. Based on ERS data, US dry whey commercial disappearance dropped nearly 20% in August. That was as low as 2020 and about 50% less than the five-year average pace for that month. Lactose commercial disappearance was down nearly 18% – following a similar path to whey. WPC commercial disappearance was 41% lower than last year. All indications demand is starting to slow.