Weekly forecast update, Oct. 15, 2021

Forecast updates

  • The Darigold – Caldwell fire this week caused NDM prices to increase as brokers bid markets higher. Butter moved up for a few days.
    • The forecast is higher due to reduced production capacity for an extended period as well as diminishing global stockpiles of products.
    • Several issues could become more substantial in Q1 2022 – higher energy, food, rent, etc., could begin to impact global consumers. For example, China is reporting an energy crisis resulting in rolling blackouts and a 20% increase in consumer energy costs.
      • That has spread to Europe and the United States.
      • 70% of China’s energy production comes from coal – between policy to reduce carbon emissions as extremely low stockpiles of coal are causing rolling blackouts impacting manufacturing companies.
    • Increased the whey forecast. It seems that cost increases are moving against Chinese hog processors – which could have longer-term implications. But, for now, demand remains robust, and WPC/WPI doesn’t appear to be slowing.
    • Reduced the 1H 2022 block-barrel spread by lifting barrel prices.

Fluid Milk Market

The Southeast remains woefully lacking milk necessary to fulfill current levels of demand. Falling output in the region coupled with challenges finding transportation to move milk into the area keeps the market scrambling. That is keeping “balancing” operations with a lot less milk for processing. Similarly, other parts of the country are experiencing higher pull from bottling and competition with milk powder plants. That is keeping class plus pricing for cheese plants. Slow to recover milk production appears the culprit. Unfortunately, wild weather across this country forecast over the next week is unlikely to provide substantial improvements.

This winter, the National Oceanic and Atmospheric Administration (NOAA) is forecasting a moderate La Niña event. That is likely to increase rainfall through the Pacific Northwest, drawing rain from the Southwest. That could reduce rain and snowfall for the Sierra Nevadas – potentially worsening the current droughts in California, Arizona, and New Mexico. In addition, several alfalfa growers in southern California are contracting to fallow land to leave more water in Lake Mead – currently one-third capacity. That could reduce alfalfa acreage and yields in 2022 – alfalfa prices are firm to higher in western winter contracting. That could negatively impact output-per-cow – a figure most will be watching next year. For those reasons, USDA reduced its forecast for 2022 milk output and modestly raised the Class III and IV milk prices.

Class III and IV milk futures prices increased again this week. Through the first half of 2022, both milk price futures curves are above $18/cwt – which will likely encourage more dairy producer risk management activity. Still, for Class I and II processors, futures are suggesting milk prices closer to $19/cwt for most of next year. Given the Class III and IV prices are close – the 70¢/cwt increase will be noticed more this year than in 2020 or 2021.

Cheese Market

On Friday, CME barrels settled higher than blocks causing the spread to reverse for the first time this month. In the end, CME blocks averaged $1.785/lb, down 2.15¢ vs. the previous week on nine trades. CME barrels averaged $1.768/lb, 1.75¢ vs. the prior week on eight trades. Given trading so far this month, October could be the highest monthly average price since April. Despite spot block markets easing on Friday, CME cash-settled futures still expect a higher move between now and mid-November. For now, futures do not anticipate cheese prices retreating below $1.80 until 2022. Currently, demand and exports are supportive to markets, and supply is somewhat constrained, with some reports that barrels are “tight.” Still, milk production should begin to increase with more milk expected to head to manufacturing seasonally. However, until the milk in the Southeast recovers, that could keep a premium to Class III some commodity cheese processors may be unwilling to pay.

For the first time since 2008, US per capita cheese consumption fell behind the prior year’s pace. In 2020, per capita, cheese consumption totaled 38.2 pounds per person, down 0.1 pounds from 2019. American style cheese consumption increased to 15.6 pounds in 2020, up 0.1 pounds; other than American fell to 22.6 pounds, down 0.2 pounds. That was the most American-style cheese consumed in nearly 50 years.

Ceres estimates August US cheese commercial disappearance up 3.8% vs. last year – the highest consumption for that month on record. That puts demand for the year 4.25% above year-ago levels. That is a good performance given the slowdown in government purchases this year. Moreover, it suggests that foodservice demand recovered throughout the year.

Butter Market

This week the Darigold – Caldwell butter facility was shut down due to a fire at the location. While the fire marshal still has to determine a cause, anecdotal reports suggest the butter plant is mainly intact. The cream is being diverted to other Darigold facilities and other processors in Idaho, Utah, and the Midwest. The damage to the building was extensive, so the shutdown and rebuild could be months, if not a full year until the plant returns to full operations. There is sufficient capacity to handle the cream; however, short term, there could be some disruptions related to the consumer packaged product coming from the facility – that may need to be backfilled. Overall, the impact on US butter stocks is minimal. Immediately following the news, traders bid the market higher; however, the Darigold fire did little to change the bulk butter in warehouses available to the CME. As bidders pushed the market up, sellers took the opportunity to offload some bulk butter. CME butter averaged $1.779/lb – up 8¢/lb from the previous week on 30 trades.

CME spot butter prices erased September increases during the first full week of October spot trading. Butter averaged $1.699/lb, down 5.45¢ from the previous week on 31 trades. While butter demand remains elevated and production has slowed, the market perceives sufficient products to meet holiday demand over the next 45-60 days. The current decline appears consistent with last year’s decline. Markets are somewhat flat – but futures still forecast further declines headed into the end of the year. Anecdotal reports suggest that Class II butterfat demand remains high –keeping cream away from butter churns and lifting cream multipliers above the last two years for the current market.

Cream multipliers are rising, and cream is nearly impossible to find on the East Coast – that has many wondering where the cream has gone as it seems to have vanished overnight. More milk headed to bottling should produce cream at this time of year, but based on several reports, it seems all of that cream is accounted for through the holiday season. Consumption of higher butterfat items like ice cream, cream cheese, eggnog, creamers, and whole milk contributes to the shortfall. Cheese processing could also be accounting for some of the decreases. The shift in the East seems to have taken place in a limited amount of time. That is raising multipliers. There are several reports of retailers being shorted and store shelves sitting empty because bottlers cannot supply creamers, heavy whipping cream, and the like.

NDM/SMP

The Darigold fire helped push CME NDM price higher this week, with spot price reaching their highest levels since fall 2014. While there will be some fire and smoke damage, and there are reports that western processors are well committed, there are no reports of dumped milk as other Darigold plants should be able to absorb the milk from Caldwell. Still, that could limit products headed to CME, allowing prices to increase. In the end, CME NDM averaged $1.4940/lb – 6.4¢ higher than the previous week on 13 trades.

Overseas’ reports suggest that European processors are well committed through year-end, and many are bullish NDM/SMP prices through Q1 2022. In addition, next week’s Global Dairy Trade (GDT) auction will have similar levels of WMP and SMP on offer. Overall, markets are still positive given demand from China and improving demand from Southeast Asia. That has some domestic buyers concerned prices could move higher through Q1 2022. Still, a few macroeconomic issues on the horizon could provide a headwind to 2022 demand, including consumer price index (CPI) increases negatively impacting demand.

US NDM commercial disappearance totaled 35.5 million pounds in August – 63.4 % less than last year and the lowest for August since 2010. Year-to-date US NDM commercial disappearance is running 21.8% behind last year’s levels. With most of US NDM/SMP headed overseas, reports indicate that domestic buyers are working with limited stocks and seeking products – that is something that could lift prices for a short time.

Whey & Lactose Products

This week, CME spot whey prices increased, averaging 60.05¢, up 0.9¢ compared to the previous week on seven trades. CME dry whey futures are higher but unwilling to rise above 60¢/lb. Still, most futures months through early 2022 are mid-to-upper-50s. It was also the primary driver behind the higher Class III trade this week. Thus, most news remains largely positive for whey.

In years where exports exceed 500 million – whey prices tend to remain above 50-cents. 2021 is tracking to end above 500 million; however, Chinese whey imports are slowing.

China is replacing some whey imports with lactose and whey permeate – that could begin to wear on export volumes in 2022.