Weekly Forecast Update – Oct. 7, 2022

Forecast Update

  • Modified cheese forecasts
    • Continued to reduce the block-barrel spread in 2023.
    • Increased 2023 Q2 forward forecast, given stronger demand from Mexico and South Korea.
    • Reduced 2024 price prospects given new capacity.
    • Lowered Feb23-Apr23 forecast, expecting worst-of-demand trends to manifest at that point in the year.
    • That is a $2/lb forecast in 2023 compared to $2.05-$2.08 this year.
  • Increased 2022 and 2023 butter forecast.
    • Near-term new reports suggesting consumers buy holiday products early could lead to stockpiling activity that occurs in late October and early November – that could put pressure on the system forcing spot price higher.
    • Still expect imports to arrive in Q4 from India and New Zealand for AMF.
    • Given current futures, exports are feasible in early 2023 as prices are significantly lower than current spot prices.
    • As alternatives to butterfat remain expensive, it seems reasonable to expect that butter prices could be higher.
    • At current demand levels, US carry-out stocks likely end the year lower than last year – that could cause prices to lift by the end of January for the rest of the year.
  • Still expect NDM/SMP prices to rise modestly into 2023, 2024, and 2025.
    • At the October GDT, most regions purchased more SMP than last year and the previous event in September. While prices are lower than the latest auction, prices are higher than a year ago, and more buying is happening.
    • There is still a lot of uncertainty about the amount of SMP that will come from Europe this fall and winter.
  • No significant adjustments to the whey forecast compared to last month.
  • All of the product modifications filtered into milk prices.
    • The forecast if for a lower Class I base prices into 2023 and stable.
    • Given the higher butter price, that is keeping Class IV above Class III by approximately $2/cwt through next year.

Milk Market

USDA released the September Class III and IV prices this week at $19.82/cwt and $24.63/cwt, respectively – down 28¢ and 18¢, respectively. That resulted in a $4.81/cwt Class III-IV spread, with Class IV carrying the premium to Class III. Futures markets expect that relationship to hold through Q3 2023 largely due to stronger butter markets and consistently high NDM prices. That made August the lowest Class III price so far this year and the first month to come in less than $20/cwt. That was unwelcome news for US dairy producers as costs like feed, fertilizer and labor are likely to remain elevated. That continues to explain how higher milk prices have failed to translate into appreciably more milk.

Following New Zealand’s footsteps, Australia announced that August milk production was down 5.9% vs. last year and the lowest for that month in the past 15 years. Like New Zealand, a cold and wet spring inhibited pasture growth. Given the La Niña weather pattern that is expected. The triple dip La Niña could be problematic for Oceania delivering excessive rainfall and insufficient rains for the western United States.

Cheese Market

CME Cheddar barrels rocketed higher this week, only stepping back on Friday. By the end of the week, spot barrels closed on New Zealand Global Dairy Trade (GDT) cheese prices. Blocks improved throughout the week, but the inverted spread remains large, with barrels holding a commanding 21.2¢ this week – still short of the record, but sizeable nonetheless. CME barrels averaged $2.227/lb – up 2.9¢ from the previous week; blocks averaged $2.015/lb, up 2.65¢ vs. the prior week. Cheese futures viewed the weekly performance favorably, resulting in Q1-Q3 2023 cheese prices averaging above $2.08/lb. While US markets are reacting to favorable export news this week and lower output, there is mounting pessimism from European processors facing higher costs, rising spot milk availability, and slowing demand. The United States had unfettered access to export markets this year, driven by sharply higher demand from Mexico, but if European cheese processors are faced with dismal prospects at home, they are likely to become more competitive in the export markets.

US cheese production totaled 1.2 billion pounds in August 2022, up 0.06% more than the previous year – that put year-to-date (YTD) output up 1.9% vs. the same period last year. Output by reporting state was mixed with Idaho, Wisconsin, Illinois, Pennsylvania, and New York fell below last year – while California, New Mexico, Minnesota, Iowa, New Jersey, and Vermont pushed ahead. Cheddar cheese production was 313.7 million pounds and 2% less than the previous year. Other American-style cheese fell at a faster pace during the month vs. last year. Mozzarella output was 386.3 million pounds, 3.2% more than the previous year. Wisconsin shifted milk to Mozzarella away from American-style cheese.

US August cheese exports totaled 84.9 million pounds, up 7.4% vs. last year and 3% higher than July. Shipments to August were 22% more than last year and continue to support exports. Exports to South Korea and Saudi Arabia were also higher. Volumes to Japan and Australia were down sharply, 18% and 53% lower, respectively. It appears Cheddar and pizza cheese (grated cheese) are carrying exports. Fresh cheese is lower. US August cheese imports totaled 39.4 million pounds – 7.3% higher than in 2021 and ahead of the five-year average for that month. Higher imports from Italy accounted for all of the increases.

Butter Market

CME butter market set a new high on Thursday before pulling back on Friday. Data continues to support tighter supplies; add to that popular press reports advocating consumers get their holiday groceries early to avoid outages, and the market is poised for a raucous October. While the supply chain is prepared to fulfill demand through the holiday – stockpiling could deplete store shelves faster than anticipated. Throughout the supply chain – labor remains the single largest constraint. That could result in more shocks to the spot markets over the next few weeks. CME butter averaged $3.2225/lb this week, up 7.4¢ vs. the prior week. At the same time, US butterfat users, namely those buying AMF, have noticed the growing gap between US and NZ prices soaring to over $1/lb – that will likely encourage more imports, could slow cream to AMF processing and turn bulk butter churns back on this fall. At the same time, OCT22 butter futures pulled back, NOV22 to JUL23 settled higher. Should holiday demand remain elevated that could result in lower 2022 carry-out stocks – something the market could react to by taking prices higher.

In August, the United States produced 144.1 million pounds of butter – 2% less than the previous year. YTD butter production was 2.2% less than the previous year. California butter production was 51.7 million pounds and 0.3% less than last year. Pennsylvania’s output was 7.2 million pounds and 0.7% lower. Given August production, days of production on hand in stocks was 61 days – that compares to 76 days last year – a significant shift. Lower stocks, higher consumption, and hefty promotion could keep spot demand elevated for the next 4-6 weeks.

US butterfat imports slipped 2.8% lower than last year in August. Imports totaled 11.8 million pounds. That was behind the five-year average pace for that month. Imports from Ireland were 20% less than last year. Imports from India, New Zealand, and Mexico were up also – indicative of AMF imports and a shift. US butterfat exports totaled 17.5 million pounds and 70.4% more than last year. Despite higher prices, butterfat continues to move – likely the positive impact of fixed price hedging for exporters. Exports to Canada, Bahrain, and Mexico increased. Volumes to China fell.

NDM/SMP

NDM prices were consistent this week after recovering from modest price pressure resulting from the lower Oct. 5 GDT event. SMP and WMP fell at the latest GDT, down 1.6% and 4%, respectively. That said, volumes were higher than the last event and the same event last year. While prices were lower, they are comparable to Q3 settlements and higher than last year. All-in-all it wasn’t a bad performance, and the market seemed to recognize that toward the end of the week. Still, uncertainty about European supply and whether there is an appetite from overseas markets for existing suppliers has the market locked into a tight range that it is unwilling to break from. CME NDM averaged $1.5395/lb, down 2.55¢ from the previous week. Dairy Market News Central mostly was down 2.5¢ at $1.555/lb; western fell 2¢ to $1.5775/lb.

US NDM production in August totaled 133.9 million pounds – 10.1% more than the previous year. Year-to-date production is still 3.2% less than the previous year. California produced 50 million pounds of NDM, a whopping 34.3% more than the previous year. Pennsylvania, the other reporting state, produced 12.6 million pounds and 6.4% less than the previous year. SMP production was 56 million pounds, 22.7% less than the previous year – that would account for some of the increases in NDM output – especially in western states. The consistently lower SMP production reflects weaker international demand this year vs. last year.

US NDM/SMP exports were lower again in August 2022. In August, exporters shipped 142.7 million pounds, 17% less than last year but 0.1% less than the previous month. The performance was consistent and ahead of the five-year average for the month. Exports to Mexico were down 1.4% lower, nothing too concerning. The largest declines were to Indonesia and Vietnam – down 41% and 85%, respectively. Exports to Peru and Panama increased but were insufficient to offset declines.

Whey & Lactose Products

CME whey moved lower this week, averaging 42.6¢, down 1.85¢ from the previous week. While the whey powder data did little to impact markets, bearish WPC and WPI stocks seemed to sway markets and lower prices. DMN central mostly price was 44¢, down 0.25¢ from the last week. Western prices were 50¢ this week, down 1.5¢ from the previous week – a sizeable correction. The lactose price was 46.5¢ this week, up 0.75¢ vs. last week. Reports from Europe are consistent whey is available, but not necessarily headed to a drier. The bigger story is the significant demand shift for WPC and WPI – vastly different from earlier this year. With lower protein returns, whey upside will be limited this fall.

US August whey production was 78.8 million pounds, 4.3% less than last year and 8.1% less than last year. US WPC (25-49.9% protein) output was 14.4 million pounds, 2.2% more than last year. US WPC(50-89.9%) output was 27.7 million pounds, 0.6% more than last year.

US whey stocks as of Aug. 31 were 61.7 million pounds and 6.4% less than last year. US WPC (50-89.9%) stocks totaled 51.6 million pounds; up 29.2% vs. last year. US WPI stocks totaled 20.6 million pounds, up 83% vs. last year – a solid lid on nearby prices.

US whey exports increased 30% in August vs. last year. Higher exports to China and Malaysia accounted for the increases. US WPC (<80% protein) exports totaled 34.8 million pounds and 35% higher than last year. US WPC (>80% protein) exports totaled 10.7 million pounds – 19.6% less than last year.