Weekly Forecast Update October 30, 2020

Forecast Updates

1. Ceres increased the CME block and barrel forecast through 2021. Additionally, the estimates now have prices starting the year higher and fading into the second half of the year. While the pandemic surges and the strength of the CME cheese markets over the past twelve months, it seems reasonable to expect that it could take a bit for markets to settle as buyers view “deals” at higher levels.
   1. The US government could continue to inject money into the system – it could vary depending on the outcome of the election. Still, it seems reasonable to expect more money to keep the economy running for the first six months of 2021. That could keep government spending, or retail demand elevated for a time. While the programs have opened up to new cheese styles, most orders could remain mostly Cheddar and Mozzarella.
   2. A modest decline in US cheese prices could keep exports running in 2021, assuming Asia continues to contain Covid-19. That is another source of demand.
   3. The new cheese plant will provide much needed 40# block capacity, but it could take until late Q1 for the plant to be full-capacity. That will likely temper price runs in 2021, but it may not fully offset government buying efforts.
   4. The block-barrel spread could be tighter next year but still wider than history given both products’ demand forecast. Barrels are likely to be more impacted by reduced food service and institutional demand this winter vs. blocks.
   5. Retails have not necessarily passed the higher cost of cheese onto consumers – similar to 2014 and the butter run-up. Most may be waiting to see whether the new cheese plant helps reduce market prices in early 2021. Absent price increases or reduced promotion, it is likely consumers will continue to buy cheese.
   6. Overall that could keep cheese mostly balanced, to surplus next year. But, the government money and recent prolonged higher prices could keep cheese prices higher than average.
2. Adjusted 2020 CME butter prices lower as well as JAN21 and FEB21. With just three weeks to make shelves for the Thanksgiving holiday and warnings against extended family/friend gatherings and travel, the holiday season could be a bit of a disappointment. That doesn’t necessarily mean that demand falls below last year. It just may be unable to offset the foodservice losses expected this winter fully. Butter prices could climb next year – but again, the initial move may be less than the current futures forecast given the stockpiles already in the warehouse.
3. Higher milk production will likely offset some of the milk lost to the new cheese plant in Michigan – that could keep western states producing adequate amounts of NDM. So far, international demand has been positive and able to sop up the new production – but headed into winter, there could be a bit of a seasonal slowdown.

Fluid Milk Market

After last week’s milk production and price updates, this week is quiet, with most data coming from overseas. As is always the case, higher prices have resulted in more milk, and that could keep the year-over-year gaps wide this winter. Several regions are reporting higher output, with most of that milk headed to manufacturing plants. Bottling demand remains optimistic as the latest round of the food box program requires a gallon of milk to accompany each box.

USDA announced a fourth and final round of the food box program. The “final” is based on exhausting current funding suggesting if Congress were to provide additional aid, there could be more opportunities for this giveaway program. The latest $500 million awards were the smallest of all of the rounds. If the box’s average value was $50, the program could remove up to 25 million pounds of cheese before the end of the year. That said, the rules look similar to Round Three with the addition of more cheese styles. Initially, the announced drove Class III milk and cheese futures higher this week, but prices retreated once participants looked closer at the possible impact. Still, that has left cheese prices higher than most expected for this time of the year.

Milk has been moving smoothly throughout the country – surprisingly, that includes milk headed to cheese plants. But, as the calendar rolls to November, cheese processors could be reluctant to buy much spot milk absent need. Futures are forecasting November to be the second-highest value this year should the market hold up. Interestingly, if markets remain at current levels, November and likely December are undervalued. As a result, cheese processors are unlikely to want to be stuck with expensive cheese next month.

Cheese Market

Cheese futures soared this week as markets absorbed the news of another round of the food box program. DEC20 Class III milk futures traded as high as $21/cwt. earlier in the week before easing later in the week. Cheddar blocks were quiet until Friday when prices moved up. Barrels gained 7.5¢ compared to the previous Friday and set a new all-time high on the final day of trading. Sellers are keeping their cheese, and that may be keeping spot volumes limited at the CME. Cheddar blocks averaged $2.7745/lb., up 2.15¢/lb. vs. the previous week. Barrels averaged $2.4755/lb. and 13.15¢/lb. more than the prior week. Most buyers can still source cheese, but orders remain better-than-year-ago levels, and that is keeping cheese tight for now. The new cheese plant continues to expand operations and milk collections – but it could still be a few more weeks before the market notices the new output.

Domestic news was quiet this week as international data rolled in. Asia countries continue to import large quantities of cheese in September, with some pulling more products from the United States while others reduced volumes. That said, the September imports still reflect pricing from Q2 2020, suggesting that Q4 could experience a letdown as US prices were uncompetitive during the second half of this year. Chinese cheese imports shot higher, with the nation importing 19.5 million pounds, the most for a September on record and 68.3% more than last year. Most of the cheese came from New Zealand, which was double last year. Imports from the United States fell while volumes from European countries were higher. South Korea’s cheese imports increased to 12,936MT in September – 33% more than the same period last year. South Korea imported 32% more cheese from the United States. Japan’s cheese imports in September slipped 4.2% behind last year on fewer imports from Oceania – the United States was consistent.

Butter Market

CME butter markets were consistent but unimpressive with just weeks left before Thanksgiving and the most significant demand opportunity this year. After mustering a rally mid-week that helped to recover lost ground, prices retreated again on Friday. In the end, CME butter averaged $1.41/lb, down 5.35¢/lb. compared to last week. Trading volumes remain elevated. Futures continue to project an elusive run higher – at this point is seems challenging to expect a rally given the amount of butter available to the market. Fresh butter has a slight premium because it can be packaged immediately. Frozen butter will begin to run into issues as it can days to temper the product for use. That could turn more product to Chicago as sellers look to let go of butter before the demand season ends. Cream is at the other end of the spectrum, with demand increasing and multipliers remaining elevated. Given lower butter prices – it is easier to pay 1.35 for cream when butter is $1.40 vs. $2.20.

While there could be less butter in the Mideast next year, more milk from western states should keep churns busy this winter and cream headed to the Midwest. Add to that foodservice demand could tumble as the weather becomes colder. As Covid-19 ramps up, several states are once again banning indoor dining – that could be limiting for some restaurants and wind up hampering butter demand. USDA food box orders could provide a limited opportunity for butter displaced by lower foodservice demand. Still, retail could be challenged to offset the losses at foodservice, suggesting stocks could build anew this winter – giving pause when contemplating the latest futures forecast.

NDM/SMP

Spot CME NDM prices recovered lost ground this week – still less than recent highs, but improved from earlier in the week. Data this week as supportive to nearby prices, but domestic markets have still been reluctant to respond to that news all year. Markets seem to be more influenced by higher western milk supplies than better demand from Asia. This week CME NDM averaged $1.091/lb. down 2.4¢/lb. from the previous week. Futures recovered a bit, but again the projections are flat and unable to recover the full-cost of carry. As a result, several processors are availing themselves of the spot markets to move uncommitted stocks.

China imported 78.1 million pounds of SMP in September, that was nearly 30% more than a year ago. There was a big swing with China importing more powder from Australia and New Zealand moving to the second position. China continues to pull more milk powder from Belarus, the United States, and European countries. Data from throughout Asia suggests that buyers need more SMP/NDM headed into the winter, and that should be supportive to prices.

Whey & Lactose Products

CME spot whey prices reached 40¢ for the first time since May. Better demand from China continues to drive nearby price expectations. This week CME NDM averaged 39.6¢, 1.4¢ more than the previous week. Dairy Market News whey prices were less decisive. Central whey prices were unchanged while western prices increased 1¢ over the same time. That could be consistent with markets influenced by international trade. US and Dutch prices are at parity, suggesting moves higher could be more difficult. Some traders are reporting that future whey and lactose commitments are starting to catch a headwind. Lactose prices could be as low as the mid-30s for early 2021 – a significant gap to spot prices at 49.75¢ – that may reflect new capacity coming online later this year.

China imported nearly 122 million pounds of whey in September – that was up 40% vs. the previous year – it was also the highest volume for that month on record.

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