Weekly forecast update – Sept. 9, 2022

Forecast updates

• Increased prices for cheese and reduced the block-barrel spread moving forward.
  • At current levels, spot cheese prices could return to $2/lb level by the end of the month.
  • Expect prices could run higher through November.
  • Given the retail slowdown and lower export volumes when cheese reached above $2.20/lb expect that prices will remain below those levels ahead of the holidays.
  • Still, expect cheese prices to retreat after Super Bowl for a time.
• Sudden uncertainty about EU SMP output this fall and slowing milk from New Zealand increased concerns about product availability, causing prices to rise this week.
  • Revised US NDM prices higher – that will be predicated on whether China and SE Asia continue to buy powder at current levels..
  • US production increased in July, but current concerns appear to offset that somewhat bearish news.
  • Japan still has considerable amounts of product to potentially temper runs higher initially.
• US butter prices set a new record high this week with prices continuing to move higher – that could create some issues for demand this fall.
  • Internationally, butterfat prices are supported; however, expectations are for NZ prices to remain below US and EU values, albeit higher than in recent months.
  • US exports throughout North America could keep butter a bit tighter than before.
• Whey prices could remain supported. Raised the whey forecast by a few cents through the end of the year.
  • Adjusted buttermilk higher through November due to higher butter prices.

Milk Market

Fall has arrived throughout the country, and heat is abating throughout the west. Still, anecdotal reports suggest the oppressive heat out west may have impacted production and components this week. Across the nation, school is back in session and that supply line is restocked for the fall. This year, it appears the slowdown in milk consumption may account for reports of milk that remained widely available to cheese and powder plants despite flat national output.

Overseas, New Zealand’s largest cooperative Fonterra revised its milk collection forecast down 10% for the 2022/23 season. Fonterra accounts for about 80% of New Zealand’s milk collections. There are reports that labor, higher feed costs, higher beef prices and potential carbon taxes for dairies are putting pressure on farms and creating an issue for output. Less milk from New Zealand and Europe are likely to support international prices providing an outlet for US exporters and more competition domestically for dairy products headed into the end of the year.

Cheese Market

After weeks of sell-side pressure, CME spot block and barrel markets shot higher this week. Blocks averaged $1.8444/lb – up 10.64¢ compared to the previous week. Barrels rose 6.53¢ to an average $1.9188/lb last week. That upward movement caused futures to leap higher for most months, pushing prices back above the $2/lb level for OCT22. Futures expect cheese prices to remain above $2/lb through most of 2023. The Global Dairy Trade (GDT) auction on Sept. 6 saw Cheddar cheese prices increase 1% compared to the previous event to an average $2.29/lb. Domestically, demand remains positive for foodservice, and IRI data indicates that cheese sales at retail are 1% less than last year for the 52 weeks ended Aug. 7 – a bit of an improvement from Q2 data. While most news is positive, there are concerns that higher energy costs and rate hikes in Europe could slow the region’s economy and dairy consumption – something that could release cheese into the international market.

This week USDA released the July 2022 Dairy Products report. US July 2022 cheese production totaled 1.158 billion pounds, 1.1% more than the previous year. Year-to-date production is 2.25%. This was the slowest YoY growth since 2019. Output from Wisconsin fell sharply, down 5.1% compared to last year. American cheese production was 467.9 million pounds, 0.14% more than the previous year. Cheddar cheese output was 331.6 million pounds – 2% more than the previous year indicating a slowdown in other American cheese categories. Mozzarella cheese output was 393.3 million pounds – 5% more than the previous year. All reporting states, except New York, reported more Mozzarella output. Hard Italian cheese (Parmesan) fell 9.6% vs. last year likely due to higher milk costs.

US July 2022 cheese exports totaled 82.5 million pounds, 3.2% more than the previous year. That was a modest slowdown compared to June but left YTD exports 14.7% more than the last year. US fresh cheese exports slowed by 16% in July; that was offset by higher Cheddar exports, up 36.3%. Exports to Mexico increased 17.3% vs. the last year. Exports to South Korea were flat; Japan dropped. Exports to Canada and Australia increased 35% and 80%, respectively.

US July 2022 cheese imports totaled 31.3 million pounds, 16.8% less than last year – the largest YOY decline this year. That left YTD exports near unchanged. Fewer imports from Lithuania accounted for half of the declines. The remaining declines were from European countries, led by Germany and followed by Italy.

Butter Market

CME spot butter prices established a new all-time high this week with expectations that could continue. In post-holiday trading, CME spot butter markets continue to lift on concerns that there could be less than needed butter for the holidays. In most years, the United States produces 800 million pounds of butter between August and December.  Over the same span, the United States consumes approximately 970 million pounds of butter. That leads to a nearly 200 million shortfall. Given the 314 million pounds on hand at the end of July and current exports, that may keep butter rather tight. Within that storage total are working inventories – suggesting at current rates of consumption and exports, butter is tighter than normal, resulting in higher prices. This week CME spot butter averaged $3.1463/lb – up 7.03¢ from the previous week. Much like in recent weeks, CME futures are erasing sizeable month-to-month discounts through the end of the year. GDT butter and AMF increased at the September 6 event. Despite the higher AMF prices, there is still a price advantage for users to import products compared to buying domestically produced AMF.

US July butterfat imports totaled 17.4 million pounds – 32.9% more than last year and well above the five-year average for that month. Year-to-date exports totaled 14.3% more than last year. Imports from Ireland surged 90% above the previous year. Volumes from New Zealand fell 37.5% compared to last year.

US July butterfat exports totaled 16.6 million pounds – 63.8% more than the previous year. And the second highest over the last decade, surpassed by 2013. Given the sizeable price gaps, this was an impressive volume. Exports to Canada continue to sail past the previous year in July with expectations that could continue through year-end. Exports to Mexico were significantly higher again. Exports to Bahrain edged out Mexico as the second-largest destination.

NDM/SMP

The possibility of less SMP from Europe pervaded the market subconscious this week as buyers sought to own NDM prices at current levels to avoid further price appreciation. That sent spot and futures markets higher. CME NDM averaged $1.5519/lb – up 0.69¢. Add to that prospects of lower milk from New Zealand that seemed to cause the GDT prices to lurch higher also. GDT SMP prices averaged $3,575/MT ($1.62/lb) – 1.5% more than the prior event. That news pushed NDM futures to $1.60/lb through May. While there is merit for concern, reports this week indicate that Japan may have surfaced as an SMP seller – the nation is currently holding an additional 100-120,000MT (220 million pounds of SMP) that it intends to clear to markets at some point. That could temper some of the concerns about Europe.

US NDM/SMP exports in July totaled 142.8 million pounds – 9.7% less than the prior year. The largest declines were in Mexico, falling sharply, down 14% compared to the previous year, and likely a reason for the late July sell-off. Exports also fell to China, the Netherlands, Vietnam, and Egypt. Those declines were offset by higher volumes in the Philippines and Indonesia. Overall, July’s performance provides context for the July-August NDM price sell-off.

Overseas, China’s July SMP stocks totaled 30,810MT (67.9MM pounds) 63% less than a year ago. WMP stocks were 194,400MT (428.5MM pounds) 16% less than last year. YTD, China has produced 50,000MT more WMP than last year, explaining fewer imports over the same span.

Whey & Lactose Products

CME whey averaged 44.94¢, down 2.56¢ from the previous week. Prices fell on post-holiday trading and were slow to recover until the end of the week. DMN central mostly price was 46¢ up 0.75¢ from the last week. Western prices were 51.5¢ this week, down 2¢ from the previous week in an unexpected rebound. The lactose price was 45.5¢ this week, unchanged from the previous week. European prices were steady this week. Futures increased at the end of the week. More than SMP, it seems that whey, permeate, and lactose may not get dried in Europe this fall if natural gas becomes scarce. Given the value of whey and lactose relative to SMP – it may be something that goes to livestock feed first.

US whey exports totaled 43.8 million pounds – 12.7% more than the previous year. Fewer exports to China were offset by exports to Canada and Indonesia. China continues to buy more whey permeate. US permeate exports were 45.9 million pounds – up 25% vs. last year. US WPC/WPI exports were 12.9 million pounds and 5.7% less than last year. US WPC<80% exports were 32.4 million pounds and 9.2% higher than last year. That may explain recent comments on prices easing to secure additional export volumes.