Weekly Forecast Update October 16, 2020

Forecast Updates

1. Adjusted CME block and barrel prices higher for October, causing the December Class I milk forecast to increase. Higher prices over the next two to three weeks would impact the NDPSR weekly reports that compile the Class I price.
2. Adjusted NDM prices higher 2022 forward.
3. Modest modifications to whey and other dry products through the end of October.

Fluid Milk Market

As quickly as milk production began to expand globally, output slowed from the top exporting regions in August. The two largest EU milk-producing countries, Germany and France, fell behind last year’s August pace. The gaps were sufficient to offset increases from other nations. Italian milk production is more a question of which is correct as none match.

US milk production continues to push up, but recent reports suggest that output-per-cow phenomenon vs. more cows drive the increases. Depooling and base programs are keeping dairy producers more likely to maintain a holding position for now. Demand for milk remains positive – but there have been some plant disruptions in recent weeks that have shifted supplies. Bottlers are pulling milk away from driers, but day-to-day fluctuations, typical for this time of year, continue to keep balancing plants busy.

Class III milk price forecast through the end of the year remains elevated but somewhat consistent with year-ago levels. That said, many are wondering if and when the other shoe will drop in Chicago, causing Class III prices to retreat.

Cheese Market

Spot cheese markets lifted anew this week, with barrels gaining more ground compared to blocks. Cheddar blocks averaged $2.714/lb., up 6.75¢/lb. compared to the previous week. Barrels averaged $2.173/lb. 16.3¢ higher than last week. Trading volumes were slight and activity stalled by mid-week. Given that November’s monthly prices were set this week, it has many wondering whether there could be more sellers afoot in Chicago next week. While it seems plausible, there are still several pockets of tightness in the market, and orders, for most, remain better than last year.

There is a concerning data point on the cheese horizon. According to the latest ERS report, despite significant government intervention to support dairy markets, which primarily focused on Cheddar cheese, US cheese commercial disappearance is 0.8% less than the same period last year through August. Other cheese fared better with commercial disappearance, 0.2% higher than the comparable period in 2019. The data indicates that should government spending subside, it could lower prices at the start of 2021, given Sec. Perdue’s recent comments about slowing the USDA buying program and allowing the markets to take over – it seems that day may be closer than the markets are currently anticipating.

Butter Market

Spot butter markets continued to lift this week, retracing some recent losses – still, butter markets remain well below the average prices for this time of year over the past five seasons. CME spot butter averaged $1.4825/lb., up 4.05¢/lb. vs. last week. Trading volumes were up a bit, with 21 loads changing hands during the week. Along with improved spot butter markets, futures moved up also. While it is possible and likely, butter markets continue to increase through Thanksgiving – sustaining that run post-Thanksgiving could be challenging due to the uncertainty Covid-19 has cast over the end of year celebrations. Cream demand remains lively with western cream headed East. Most market participants report substantial interest in cream with little, unplanned butter churning happening on the East Coast.

The new crop butter bump is sizeable this year. Each year, the CME limits the butter traded at the spot market. Starting March 1, only butter made on or after December 1 of the proceeding year is eligible for sale at the spot market. That is why butter markets tend to be lower in January and February than March forward – sellers are getting rid of product they won’t be able to trade at the CME. While the product is still viable for commercial sale – it cannot be sold at the CME. All of that said, this year, given the new Michigan cheese plant, buyers and sellers are putting a premium on butter produced after December 1, expecting that there could be less product compared to this year.

NDM/SMP

Spot CME NDM inched higher this week. Prices averaged $1.136/lb. compared to $1.1265/lb. last week – reflecting a 0.95¢/lb. increase. Trading volume increased to 22 loads. While many in the market indicated that nearby demand is positive, there are still some concerns about deferred sales in 2021. That uncertainty is reflected in futures markets that flatten out quickly relative to current spot prices. Still, it does appear CME, EEX, and NZX NDM/SMP futures are starting to put a bit of a 2021 weather premium on markets. Trading would suggest that many buyers would like to see flat markets, but they are wary of potential weather issues in New Zealand and what remains elevated demand from China.

Presently there are reports that globally people are once again restocking depleted pantries. That is helping to lift demand for NDM/SMP higher this fall. Covid-19 supply chain disruptions and outages earlier in the year left a lasting impression on people. This week a report indicated that 52% of Americans plan to restock their pantries – that could lead to stock-outs and more robust dairy product demand, potentially reducing powder production through the end of the year.

While the United States is expected to produce less NDM/SMP next year due to the new St. John’s cheese plant – that does not necessarily mean that the world will have less NDM/SMP. Recent reports suggest that while French milk output was lower, processors significantly increased milk powder production and curbed cheese output. The latest news from Europe indicates that cheese stocks are the highest they have been in years. Covid-19 has added curfews back to cities like Paris – so SMP could be a safe alternative for dairy processors headed into uncertain times.

Whey & Lactose Products

CME spot whey prices eased this week – slightly, but lower just the same. The weekly price averaged 39.0¢/lb., down 0.55¢ vs. a week ago. Many are reporting strong sales – especially for those supplying China. China’s appetite for whey, deproteinized whey, lactose, and the like seems insatiable, and that has provided a solid floor for prices until new supply reaches the markets. Earlier this year, China approved deproteinized whey (or permeate) for food uses. That change caught the eye of European and US suppliers, and many are rushing to fill the new demand. Deproteinized whey can be used as a filler and SMP replacement in specific applications like chocolate. Overall, China’s demand for all things whey seems to be the single largest reason behind the price move higher this fall.

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Ceres Dairy Risk Management LLC

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