Weekly forecast update – Sept. 30, 2022

Forecast updates

  • Provided Sept 2022 CME product price averages.
  • Updated Oct-2022 based on spot markets
    • Reduced CME blocks – lifted CME barrels
    • Reversed Q4 block-barrel spread – barrels premium to blocks
    • Expect spread to remain minimal in Q1 23, but block premium should exports slow due to more competition.
  • Increased OCT and NOV 2022 butter price based on higher spot markets.
  • Increased 1H 2023 CME butter average.
  • Slight adjustments to NDM – consistent with last week.
  • No significant adjustments to whey products.

Milk Market

USDA will release September 2022 Class III and IV milk prices next week. If the Sept. 30 futures close is accurate, Class III and IV milk prices will be less than in August. Class III is likely to be the lowest price so far this year. This week milk in Florida and the Southeast was disrupted due to Hurricane Ian. The storm initially caused more bottling activity, as hurricanes typically do, but in the aftermath of the storm, processors looked to absorb the milk in other parts of the country. School milk remains lackluster, with anecdotal reports suggesting demand is down 10-30% in various parts of the country – the response may be directly attributable to the cost and the losses of the free school meal program that was in place since the onset of the pandemic. That could shift more milk back to processing this fall and winter.

Internationally, New Zealand’s August 2022 milk production was 1.33 million metric tons – 4.9% less than the previous year. That was the lowest for August since 2017 – a sizeable output reset. Weather in major dairying areas, including Canterbury and Waikato, was wet and difficult, causing the output to decline. A wet spring is good for soil moisture, but can be problematic for milk production as dairy producers cannot put cows on pasture without damage. As a result, they have to rely on smaller paddocks and feed at the start of the season. Forecasts coming from New Zealand expect September output to again be down 3-4% based on receipts so far this month. That could continue to support 2023 milk price expectations.

Cheese Market

CME Cheddar traded in opposition this week with blocks declining and barrels rising. Blocks fell back under the $2/lb mark this week. Barrels reached as high as $2.245/lb before pulling back on Friday. In the end, blocks averaged $1.9885/lb and 3.1¢ less than the previous week. Barrels averaged $2.198/lb – 3.35¢ more than last week. Block trading volumes were light; barrels were similar to the previous week. While spot markets helped OCT22 lift, NOV22 and DEC22 pulled back. Cash-settled cheese contracts settled lower through Q3 2023 last week.  While 2023 cheese markets could remain well above average, prices are showing signs that upward momentum may be slowing for a time – especially as the mood in Europe soured this week on nearly all dairy products.

While pizza sales slowed this year compared to last year, overall, the largest chains are still gaining, with independent processors feeling the brunt of the declines. Globally, pizza sales are expected to exceed $141.4 billion, with US sales down to $45.6 billion – about a 1.5% drop. Still, that is good news for cheese globally, with most new growth coming from Eastern Europe and South America. That may help explain US cheese exports in the coming years. At retail, deli pizza is experiencing double-digit growth. Currently, there are reports that Mozzarella demand is strong and keeping barrel production at bay. That is common this time of year, but with stronger exports it may be more pronounced this fall.

Butter Market

CME butter markets modestly higher this week as the market averaged $3.1485/lb, up 1.4¢ compared to the previous week. On Tuesday, trading picked up with 23 lots changing hands. A stronger spot performance helped to lift OCT22 butter futures. Still, markets are forecasting steep declines into November and December. Anecdotally butter demand remains elevated as consumers respond to promotions. That, combined with recovering foodservice and more exports, could reduce 2022 carry-out stocks. Markets expect a sizeable step back in US exports and increasing imports. When considering North America butterfat supplies, it is possible that year-end stocks could be low, and that could cause 2023 prices to lift.

New Zealand forecasts do not expect the gaps between US/EU butterfat and NZ to abate soon. New Zealand appears to have produced more SMP for a superior price to WMP, resulting in a “glut” of AMF. That weakened prices during the off-season, creating sizeable gaps. New Zealand continue to report strong butterfat demand from China and MENA. Some are expected North American butterfat to be tight by year-end – that appears reasonable given the current US velocity of demand given higher promotion in recent months. Further considering Canada and Mexico – the region will remain a net butterfat importer for the foreseeable future.

NDM/SMP

NDM prices dipped midweek – keeping prices consistent. CME NDM averaged $1.565/lb, up 0.1¢ compared to the previous week. Dairy Market News western mostly increased slightly, up 0.25¢, $1.5975/lb. Central mostly NDM was unchanged at $1.58/lb. Overall news for NDM remains unchanged – lower production supports price, but moderating demand continues to cap prices. Futures ended Friday up, similar to last week’s levels, but less than early September. Reports from Europe indicate that processors are not drying SMP unless there is an order to avoid higher costs related to natural gas. That has put pressure on condensed skim pricing in the region – unusual for this time of year. While most agree production is lackluster, demand has edged down, resulting in an unchanged situation.

One of the spoilers in the international market is Japan. While Europe and New Zealand could make less SMP this fall, Japan continues to sit on large stockpiles of product. Recent exports suggest Japan is starting to market the product. For the second consecutive month, Japan exported over 1500 metric tons in August- significantly higher than in previous periods. That would indicate that Japan and processors are looking to reduce the reported 100,000MT of SMP on hand. At the current pace, it would take Japan years to deplete current stockpiles, assuming no accumulation. Exports are headed to SEA countries – that will compete with US exports.

Whey & Lactose Products

CME whey edged lower this week, averaging 44.45¢, down 0.55¢ from the previous week. Much like NDM, news on whey powder remains somewhat supportive to price, but lower WPC/WPI prices appear to create a hard cap for prices into the winter. DMN central mostly price was 44.25¢, down 0.25¢ from the last week. Western prices were 51.5¢ this week, down 2.75¢ from the previous week – a sizeable correction. The lactose price was 45.75¢ this week, unchanged vs. last week. Reports from Europe indicate whey concentrate is widely available as processors look to minimize drying – especially at current prices compared to significantly higher natural gas costs. Less whey dried this fall and winter could impact prices into 2023 should the market become tighter. For now, less output could keep prices level as US processors shift from WPC/WPI production to whey powder.