Weekly forecast update – Oct. 28, 2022

Forecast updates

Markets appear to be easing ahead of the holidays – some faster than others. While this forecaster does not believe that will result in significantly lower prices from last week, it indicates that prices could be less than this year, but well above the five-year average.

• 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.
• Reports indicate that US cheese exports are well committed through year-end but that higher prices reduced export commitments in Q1 2023 – which could negatively impact prices as domestic demand seasonally declines.
  • However, lower prices into the end of this year and Q1 2023 could set-up for risk management opportunities and increased promotion and exports in Q2 forward.
  • New capacity will not arrive until the end of next year, and even the cheese quality could take into early 2024 before it is market ready. That could result in higher prices during 2H 2023 – that is in the forecast.
  • Unknowns remain economic conditions in China and overseas and the potential for a recession that slows demand for months.
  • For those reasons, the cheese forecast rises throughout 2023 with prices expected to pull back in 2024 when more cheese is available to the market (that may shift depending on the impact to EU-27 milk supplies caused by the implementation of Europe’s Green Deal and CAP starting in January 2023).
• Reduced NDM/SMP price forecasts. While the prices remain well above the five-year average, higher interest rates and inflation could reduce buying from nations overseas. At the same time, China’s economy is slowing, causing demand to fall faster than supply.
  • For a time, US and EU milk supply could continue to expand, responding to higher prices this year. That will likely slow b Q2 2023, and milk could contract again.
  • China is still adding a lot of cows and new dairies. Although the output is lower on these farms than those from Europe, the United States, or Oceania, the sheer number of animal units could keep output up. That, combined with unsettled markets, could slow imports.
• Butter is lower, but remained above average. Except carry-out stocks to remain low. Trade slowdown could and more imports could help rebuild stockpiles. Butter price trajectory will depend on demand this holiday season.

Milk Market

Reports indicate that US and European milk intake continues to increase. That appears to be coming when demand drops, given the higher consumer costs. Over the last week, milk prices have started to ease, and futures markets are retracting. Class III milk futures are leading the way lower, with prices returning to the $19/cwt levels. Class IV milk is also dropping, but futures forecast prices above $20/cwt primarily due to higher butterfat values. Lower milk prices combined with higher input costs could cause margins to decline, eventually decreasing milk production. For now, prices remain high enough to provide a return, which will likely keep the milk flowing into the beginning of next year.

Cheese Market

Cheddar blocks and barrels fell below the $2/lb mark this week, and barrels are once again below blocks. Cheddar barrels averaged $1.9790/lb, 18.3¢ less than the prior week. Blocks averaged $2.0035/lb, and 4.95¢ less than the previous week. That caused the block barrel spread to swing back to blocks premium to barrels by 2.45¢ for the weekly average. Reports indicate that demand remains positive and better than earlier in the year. But some signs that export demand, especially in 2023, could be slowing at current price levels. Like other dairy products, US prices may have to adjust lower to maintain competitiveness given the stronger dollar. At the same time, with little new capacity on the horizon and positive demand, a reset could spur new demand.

US September 30 cheese stocks totaled 1.47 billion pounds – 0.8% more than last year, a sizeable decline compared to the YoY gaps earlier in the year – that could help support prices and keep them from plummeting as it suggests good demand. The MTM drawdown was down 12 million pounds – better than the five-year average. American cheese stocks were 843 million pounds, 0.14% less than last year. Again, a sizeable decline.

China increased September cheese imports to 22.8 million pounds – up 6.6% vs. last year, but 24% less than August on a daily average basis. That was the first positive YoY result since May. YTD, China’s cheese imports are still 18% lower than last year. Continued crackdowns and lockdowns to control Covid-19 have hampered China’s economy and growth. That seems to result in fewer dining out occasions – a driver for cheese consumption. Imports from New Zealand were up 107% versus last year, accounting for most of the YoY growth. Volumes from Australia, the United States, and EU27 were lower.

Butter Market

Like other US dairy products, CME butter markets are starting to ease. Prices averaged $3.1555/lb this week, down 3.8¢ compared to the prior week. The Cold Storage report supports prices through the holidays as more cream moves to higher fat uses ahead of Thanksgiving, just a few weeks away. At the same time, recent reports of New Zealand exports to the United States confirmed that the US butterfat trade balance is shifting. Less butterfat headed to AMF processing domestically and more inbound from New Zealand could mean extra cream available for churns. That seems to be enough to cause prices to retreat. Futures expect a sizeable decline by the end of next month. Whether that materializes will depend on the strength of holiday butterfat demand this season.

US butter stocks totaled 267.3 million pounds on Sept. 30 – down 17.6% vs. last year. That remains a large YoY gap – the most over the past five years. That said, the August to September drawdown was modest – down nearly 11 million pounds – well below the last two years at 28 and 38 million pounds each year.

China’s September 2022 imports totaled 20.6 million pounds, up 61% compared to last year. Despite New Zealand’s contention that China’s wilting demand is driving lower AMF/Butter prices – the imports appear to reflect a different story. YTD, China’s butterfat imports are 1.5% more than last year. Most of the increases were from New Zealand, up 80.3% compared to the previous year.

NDM/SMP

NDM prices stabilized this week and even turned higher on Friday. Prices averaged $1.4220/lb, down 2.6¢ compared to the previous week. Dairy Market News central NDM prices fell 1.5¢ from the prior week to average $1.505 – western prices dropped 3¢ and averaged $1.49/lb. Some news shows demand is picking up in the mid-140s and low-150s. For now, demand has adjusted lower, led by China (see below). While milk production has been lackluster, lower demand in this category has kept prices under pressure. That said, US prices appear to have recalibrated to current levels helping to stabilize prices for now.

China WMP imports were 66.4 million pounds in September – 3.8% more than August but 16.8% less than the prior year. YTD imports are down 15.8% vs. the same period last year. Imports from New Zealand fell 2% – but those from Uruguay and the Netherlands collapsed, down 45% and 75%, respectively. China SMP imports were 55.3million pounds in September – 21% less than in August and 18% less than the prior year. YTD imports are down 24.1% vs. the same period last year. Imports from Germany, Ireland, and the United States were less than last year. Imports from Australia and New Zealand increased, up 78% and 18.5%, respectively.

Whey & Lactose Products

CME whey prices fell this week, down 0.5¢ to 43.4¢ from the previous week. DMN western mostly whey prices were 49.5¢, down¢ from the prior week; central prices were unchanged at 44¢. Lactose prices were increased to 48.5¢, unchanged from the previous week. Market news suggests European whey prices have slipped into the upper 30s, which could eventually pressure US prices lower. Still, China’s Sept. 2022 whey imports totaled 138 million pounds and 11.25% more than last year. That reduced the YTD YoY gaps to 26% less than last year. Imports from the United States increased by 38% vs. 2021.