Dairy Market Outlook Q4 2020

Summary: Global milk production grew 1.3% vs. year ago in August – a slow-down from July given lower output in several European countries due to hot weather.    

The growth rate of US milk production returned to pre-COVID levels in September, increasing 2.3% vs. last year, the largest increase since March. Over half of the growth came from 3 states – CA (+3.2%), TX (+6.5%), and ID (+2.9%) – with the largest % increase coming from SD (+12.3%). Milk per cow posted a solid 2.0% increase and the number of cows grew by 5,000 head from August. Milk production could exceed 1.5% growth in Q4, and is forecasted to maintain that momentum into 2021. However, several factors could limit gains including higher feed prices, the reimposition of milk supply controls, and a drop in margins by next spring. For the full year of 2021, using current futures prices, the projected DMC milk-feed margin is slightly above the 5-year average, which should support near average growth in milk supplies. The main watch-out is grain/feed prices with potential for higher prices given strong Chinese demand and weather concerns in South America from La Nina. Milk prices will be profitable for most farms over the next few months given very high class 3 prices. However, farm pay prices could slip to $13-15/cwt in the first half, a level that would curtail milk growth by mid-year.

European milk production growth slowed in August as hot weather hit several key dairy regions. Total output was up only 0.3% vs. a strong comparable last August. Losses were seen in Germany, France, and the Netherlands, but were offset by gains in Ireland and Poland along with Sweden and Greece, two countries not normally mentioned in discussions about milk production. Oceania milk production continues to see positive growth vs. last season, although La Nina conditions bear watching. September production in NZ was up 1.7% vs. last year with 3.5% growth in Australia for August. The latest forecast from NIWA in NZ noted the La Nina event this summer will bring higher humidity and temperatures. Rainfall predictions are mixed with wetter conditions expected for northern and eastern areas of the country, but drier in the south and west. Weather in NZ will remain a watch-out over the next several months.

Summary: While prices in Europe and New Zealand remain stable, US cheese prices continue to surprise with a strong rally in CME blocks in recent weeks topping out near $2.80 only to be in free-fall to start November.    

In the past month, CME block cheese prices climbed further into the $2.70’s with larger gains made by barrels, making new high. The rally was driven by a shortage of 4-30-day old Cheddar cheese to trade at the CME due to an unexpected fourth round of USDA purchases and strong retail demand. Price strength was also attributed to companies buying off the prior month average. With a $2.71 CME block average for October being used for November purchases, buyers likely loaded up on $2.33 cheese (September average) during October. As November 1 hit, buyers have backed off with prices falling sharply. This pricing dynamic has been a factor in cheese market volatility over the last few months.

The latest data from USDA support higher cheese prices, albeit not at record highs. September 30 stocks of total cheese were down 1% vs. last year, the first year-over-year decline since March, with both American and other natural cheese stocks below last year. The drawdown in stocks during September was more than average, not surprising given reports of solid demand. Cheese exports were 63MM lbs. in September, down 8% from August, but up 4% vs. last year. After a 2.6% drop in August, September cheese production rose 1.1% vs. last year. Cheddar output saw the biggest growth (+7.7%) while Mozzarella remains weak (-2.6%). The new plant in Michigan began production in October and is ramping up through next spring. So, cheese production growth will post larger numbers in the coming months.

Summary: US butter prices find themselves in an unusual spot trading at a sizeable discount to European and New Zealand prices, but the outlook is bearish given high stocks and weak demand.

With over 25% of butter sold for holiday demand, there is usually some strength in butter prices in October and November, but not this year. Butter stocks fell a little more than average during September, but end of month stocks still stood 18% above last year. Year-end stocks are projected to be above 200MM lbs., and with a normal build, will approach 400MM lbs. next spring, above this year’s peak of 375MM lbs. Butter production continues to run well ahead of last year with a 5.4% increase in September. This included a nearly 10% gain in California and an 8% increase in the Central states. With weaker demand for some high-fat products, cheap cream will keep heading to the butter churn.

Summary: Milk powder prices have retreated from 8-month highs.

After trading at a large discount to European prices, US NFDM prices closed the gap last month, but then fell back as demand eased while production is strong. September milk powder production was 11.4% above last year with growth in both NFDM (+5.5%) and SMP (+23.3%). At 72.5MM lbs., that was the highest monthly total since the USDA started tracking SMP production in January 2005. While exports in September were down 6% vs. last year and were 16MM lbs. (-11%) lower than August, the large production figure for September indicates stronger exports for October. This fits with anecdotal reports over the last month of strong demand. However, despite relatively low US prices, exports have been falling each month since May. Shipments to Mexico were down 33% vs. last year while stronger demand from SE Asia helped offset the loss of sales to Mexico. NFDM stocks dropped 14% during September and ended the month 7% below last year, in part due to solid domestic demand (e.g. cheese plants).

Global SMP prices have been firm with strong demand from China. In September, Chinese WMP imports were up 7% vs. last year and SMP imports were up nearly 29%. Recent strength in the Chinese currency, the yuan, increases the buying power of Chinese importers, which is bullish for continued Chinese demand of dairy products. A bearish watch-out is a new export subsidy in India that started November 1. For 6 months, the state of Gujarat will offer a US$680/MT subsidy for SMP exports. Amul has plans to export 50,000 MT (110MM lbs.), up from 12,000 MT last year. Excess stocks are reportedly 90,000 MT or nearly 200MM lbs. This has the potential to push prices lower in the first half of 2021.

New Zealand SMP prices on GDT jumped 8% on September 15, but have given back most of those gains by early November, settling at $2,722/MT (average) on November 3. The weakness in the GDT prices caused a slight downtick in European prices along with a more noticeable drop in US prices. Both NZX and EEX futures prices for SMP have a flat structure into Q2, so the market is not paying to store product nor is concerned about supply problems over the next 6 months or so. As milk supplies from the major exporting regions grow, milk powder prices could slump from current levels, but the downside is limited.

Summary: Sweet whey powder prices have moved higher in recent weeks while high protein products continue to struggle with weak demand.     

The sweet whey and whey permeate market continues to be about China. In September, China imported 122MM lbs. of sweet whey powder, 39% more than last year. For the first 9 months of the year, Chinese whey imports were 35% above prior year due to a recovery in demand for pig feed as the country rebuilds their hog herd. The new farms being built are modern, commercial-scale operations where large amounts of prepared feeds will be needed. This is expected to continue, which is supportive to sweet whey and whey permeate prices into 2021.

The sweet whey powder market is firm with the CME and USDA AOM prices at the highest point since early 2019. While the NDPSR price is lagging, it is up 17% in 2 months to over $0.36, closing the gap to prices in Europe and New Zealand. September production of sweet whey powder in the US was 17% below last year and the lowest since March 2019. Exports have recovered in recent months with September shipments up 52% from last year, but down 11% from August. Sales to China represented nearly half the total, but fell 21% from August’s large volume. Stocks dropped 8% during September, finishing the month 3.8% below last year. The price outlook is dependent on Chinese demand. Global prices have likely peaked for now and are forecasted to trade in the mid-upper $0.30’s.

Information contained within is not guaranteed, is the opinion of the McCully group, llc, and is intended for informational purposes only. Commodities trading involves risk and is not suitable for everyone. The McCully group, llc is not a licensed commodity broker nor trades in commodity futures markets.