Weekly forecast update – Oct. 21, 2022

Forecast updates

Bearish US September milk production did little to change market sentiment this week. While markets could be due for a correction, a level step lower into 2023 could be difficult as milk supply prospects remain precarious globally. That said, milk supply contraction never happens immediately, and given current milk prices, it may take into Q2/Q3 2023 before a significant contraction begins. That may suggest that consumer demand, or lack of it, plays a significant role in price direction through Q1 23, but lower milk production and the prospects of improving demand could drive price discovery Q2 23 forward. While the forecast expects prices less than 2022, 2023 would be the second-highest average price year following closely behind this year.

  • Ceres assumes that if milk prices were to drop below $18/cwt USDA would step in to support prices. That policy has been in place since the US/China trade war. Before the recent bout of inflation, that price was $16/cwt. Given tight margins, that number is likely higher.
  • At the same time, milk prices above $23/cwt could result in fewer exports given the strength of the US dollar. That said, less milk and improving demand could support higher milk prices later in the year.
  • The risk to the forecast is the challenge with Class IV milk remaining above the Class III milk price for an extended period.
  • Additionally, the impact of higher energy prices this winter is somewhat considered in the forecast resulting in lower Q1 dairy product prices. That said, the forecast assumes prices are capable of recovering but that could be the delay of the higher costs negatively impacting sentiment or inflation continuing to rise into Q1 2023.
  • There were not significant changes to cheese and whey price outlooks.
    • Reduced the 2022/23 NDM price outlook through Q2 2023.
    • Increased the 2022/23 whey price outlook through mid-year.

Milk Market

USDA released the November advanced Class I milk price at $24.09/cwt – $1.37 more than last month. While the advanced Class I butterfat price increased, it was the $1.03 boost in the skim price that led to the price recovery. The Class II skim price was comparable at $13.31 – 6-cents less than in October. The weather is cooling across the country. Milk demand remains steady, but discounts persist.

The biggest announcement this week was USDA, September 2022 milk production at 17.9 billion pounds – 0.75% less than in August but 1.47% higher than last year. Milk production is slowing on the West Coast, New Mexico, Florida, and Mideast states. On a percentage basis, South Dakota and Georgia were the fastest-growing states, while Florida and New Mexico experienced the most significant declines. The US dairy herd was 9.41 million head, 0.02% less than in August but 0.06% more than last year. That was a 6,000-head YoY difference. There are fewer cows from Wisconsin to Vermont compared to last year. Output-per-cow in September was 1,943 pounds – up 1.41% vs. last year and the growth driver. Most stated increased output per cow, with Florida the only state to reflect YoY declines.

Cheese Market

CME Cheddar barrels increased into mid-week, recovering the previous week’s losses. But by Thursday, spot barrels began to decline, with prices dropping 5.5¢ on Friday. By the end of the week, barrels averaged $2.162/lb, down 2.1¢ from the previous week. Blocks were stable, with prices increasing modestly at the end of the week. CME blocks averaged $2.053/lb, up 0.75¢. That shift in price caused the weekly block-barrel spread to close to 10.9¢.

Anecdotal reports suggest that demand remains positive, but some suggest that quick-serve restaurant (QSR) demand could slow. This week the Today show picked up a storyline about the higher cost of QSR menu items and how consumers may reduce demand in response. The story highlighted how deals and promotions were fewer, and menu prices were substantially higher. QSRs have performed well since the pandemic’s start – something that could be negatively impacted as consumers look to conserve spending. Additionally, limited staffing and slower service continue to create negative customer experiences that result in fewer visits. That seems to be creating a headwind for cheese demand as the end of the year approaches.

Overseas, EU-27 August cheese production was 1.69 billion pounds – 2.2% more than July on a daily average basis, but 3.1% less than the previous year. More cheese from Europe and waning demand could be problematic. That has unsettled markets resulting in lower prices, and news processors may return to the export market.

Butter Market

CME spot butter markets were higher and unchanged throughout the week. Prices averaged $3.1935/lb, up 0.15¢/lb. As of Friday, there have been eight (8) trading sessions without any trades. Market data continues to conflict. Butter demand and shipments ahead of the holidays remains elevated, but news of imports and slowing domestic AMF demand appears to be making cream, at lower multipliers, available to churns. Add to that cream cheese, and other high-fat uses are leveling. With cold weather spreading across the country, ice cream demand is past its peak and contracting – which will make more cream available to the market – more production of holiday products like eggnog will absorb some of that. In the end, the mass balance suggests more cream floating around each week. Present demand appears capable of absorbing that product; however, should demand seasonally slow, that could cause the butter market to downshift –likely in the next few weeks between Halloween and Thanksgiving this year.

After this week’s sizeable decline for butter and AMF, down 2.6% and 2.7%, respectively, New Zealand is pointing to inflation as a primary driver behind slowing bakery demand – a sector that consumes a significant amount of butterfat – especially in China. While butterfat may be expensive overseas, compared to the spot CME value, New Zealand butterfat is offering sizeable value for buyers. The +$1.40/lb difference, on an 80% equivalent, will be hard to pass up. That would return processed cheese to favorable levels, also. Prices were lower in 2020, but again, that was pandemic driven – current prices are consistent with those over the past five years.

EU-27 August butter production was 369.6 billion pounds – 1.1% less than July on a daily average basis, but 3.6% more than the previous year. YTD production is nearly 2.8% behind the pace set last year. Belgium, German, and Poland increased output. Losses from other countries were modest.

NDM/SMP

NDM price declines accelerated after the lower Global Dairy Trade (GDT) performance on Tuesday. GDT SMP fell $3,250/MT ($1.474/lb). That, along with reports of higher US milk supply and reports that German and French milk is on the rise, contrasted against lower demand from China and other regions. Markets could not shake the negative sentiment, and prices turned lower again. CME NDM averaged $1.448/lb, down 6.7¢ from the previous week and the lowest weekly average since October 2021. Given the strong dollar and weaker overseas demand, it makes sense that US prices have to move to the lower $1.40s to maintain competitiveness. Dairy Market News (DMN) central mostly dropped 3¢ to $1.52/lb and western prices were mostly $1.52, down 4.25¢.

EU-27 SMP output in August was 262.6 million pounds – 13.3% less than July on a daily average basis but 1.8% more than last year. YTD output remains 1.7% ahead of the same period last year. France slowed output by 6.4% compared to last year. Belgium, Germany, and Spain combined increased output, offsetting sizeable declines elsewhere. The Netherlands dropped output by 40.3%. That same month, EU-27 August milk production totaled 26.6 billion pounds and was 0.8% less than the prior year. YTD through August EU-27, milk production was 0.75% less than last year. Combined with Oceania, US and AR/BR milk put global output 0.9% less than last year in August – despite gains from the United States. Poland increased output sufficient to offset all losses from Spain, which were sizeable. Similarly, increases from Belgium offset declines from Germany.

Whey & Lactose Products

CME whey prices increased to 43.9¢, up 1.5¢ from the previous week. DMN western mostly whey prices were 50.5¢, up 0.5¢ from the prior week; central prices were unchanged at 44¢. Lactose prices were increased to 48.5¢, up 2¢ and the highest price June 2020. Markets news remains mixed. Demand from China is positive and lactose prices are on the rise. At the same time, some reports suggest that EU-27 processors are selling whey solids to avoid processing. While that could depress nearby prices – it is something that could eventually raise prices. Lower cheese production will continue to limit European whey on the market.