As reported last week, the Agriculture Department raised its milk production estimates in the latest World Agricultural Supply and Demand Estimates report, as “stronger growth in milk per cow more than offsets a slower expected recovery in the cow inventory.”
Cheese and nonfat dry milk price forecasts for both 2019 and 2020 were raised from last month on strength in demand. Butter and whey prices for 2019 and 2020 were lowered on current price weakness which is expected to carry into 2020.
The 2019 Class III and Class IV price forecasts were raised as the higher cheese price more than offsets the lower expected whey price. The 2019 Class III average is now projected at around $17.00 per hundredweight, up a nickel from last month’s projection and compares to $14.61 in 2018 and $16.17 in 2017. The 2020 average is now put at $17.50, up 30 cents from last month’s estimate.
The 2019 Class IV price was raised as the higher NDM price more than offsets a weaker butter price, but for 2020, the lower butter price outweighs the higher NDM price and the Class IV price was reduced.
Look for the Class IV to average $16.30, up a dime from a month ago and compares to the 2018 average at $14.23 and $15.16 in 2017. The 2020 Class IV average is expected at $15.95, down 15 cents from last month’s projection.
A lot of the experts are trying to explain the roller coaster cheese prices. FC Stone’s Director of Dairy Market Insight, Nate Donnay, admits “It’s hard to put our finger on the exact drivers behind the rally. The single most supportive hard data point I can see is the sharp drop in Cheddar production in September which came in 7 million pounds lower than forecast and down 3.1% from last year.
“Only fresh Cheddar, aged between 4 and 30 days, trades on the CME spot market, so the Cheddar fundamentals have an outsized impact on cheese prices. But it doesn’t look like any one thing is driving this market, it’s a mix of supply and demand issues,” Donnay concludes.
Dairy broker Dave Kurzawski echoed some of Donnay’s remarks in the Nov. 18 Dairy Radio Now broadcast, adding that the block market is No. 1 so the barrel market ends up being kind of a “whipping post,” due to various occurrences in the market such as the increase in mozzarella output, a large shipment of cheese to Mexico, and production issues at various cheese plants in the country. He said that all meant the pipeline was not full enough for end users and just enough to tighten the market and send prices above $2. He expects the inversion to correct, as the industry moves forward, but he looks for prices to remain in the $1.90-$2.20 price range “longer than people expect.”
Some Midwest cheesemakers reported slower sales this week, according to Dairy Market News. Market prices have started to feel pressure but remain above the comfort zone for buyers. Some manufacturers continue to report that buyers remain motivated during the holiday demand season. Spot milk trading was quiet the first half of the week but prices were falling within the previous week’s range. Cheese production has been busier in November, with some plants producing six to seven days per week.
The western market seems to be weakening. While buyers are making sure they have enough stocks to satisfy holiday needs, sellers are using any strategy possible to maximize their sale volumes. Barrel prices are well above blocks due to tighter inventories but stocks are balanced with the needs of the market. Cheese output is seasonally solid with continuous good flows of milk to the vats.
The Chicago Mercantile Exchange announced that it will launch block cheese futures and options in January 2020, pending regulatory review. Tim Andriesen, Managing Director of Agricultural Products stated: “Our clients continue to look for tools to manage their price exposure in physical cheese markets, including food manufacturers and processors of cheese. The addition of block cheese futures and options to our existing suite of cash-settled dairy products provides clients with another solution for managing and hedging risk.”
The new contracts will be cash-settled to the monthly average price for 40 pound block Cheddar as reported by the USDA’s National Dairy Products Sales Report with each contract representing the equivalent of 20,000 pounds.
FC Stone’s Nov. 12 Early Morning Update says the big issue on powder is the global demand “stemming principally from China.” “Even though our food crisis here in the states stems around real milk versus fake milk, real meat versus fake meat, etc., the Chinese have a much more troubling dilemma. What’s worse than fake pork is no pork. Although the rise in global nonfat dry milk and skim milk powder prices seems rather orderly right now, we believe the situation in China is beginning to have reverberating impacts on the world of dairy.”
U.S. cheese disappearance marked the strongest September on record and was spurred higher by both higher domestic and export demand, according to HighGround Dairy. “Domestic disappearance has performed better versus the prior year for six of the nine months this year to date.”
Nonfat dry milk domestic disappearance fell in half versus August, down 51.1%, says HGD, and over the past five years, September domestic demand had grown on average 7.7% versus August, “pushing this September well opposite of trend.”
Meanwhile, U.S. fluid milk sales were down in September after slipping in August. The USDA’s latest data shows 3.76 billion pounds of packaged fluid sales, down 0.8% from September 2018.
Conventional product sales totaled 3.5 billion pounds, down 1.3% from a year ago. Organic products, at 220 million pounds, were up 6.9% and represented 5.9% of total sales for the month.
Whole milk sales totaled 1.2 billion pounds, up 0.2% from a year ago and made up 31.7% of total fluid sales in the month. Sales for the nine month period totaled 11.2 billion pounds, up 1.0% from a year ago. Skim milk sales, at 265 million pounds, were down 9.7% and made up 7.1% of total milk sales for the month.
Total packaged fluid milk sales, January through September totaled 34.2 billion pounds, down 1.7% from a year ago.
Conventional products year-to-date totaled 32.3 billion pounds, down 1.7%. Organic products, at 1.9 billion pounds, were down 2.6% and represented about 5.5% of total fluid milk sales for the period.
The figures represent consumption of fluid milk products in Federal milk order marketing areas and California, which account for approximately 92% of total fluid milk sales in the U.S.
HighGround Dairy points out that “Fluid sales continue to be weak overall as the alternative market experiences gains with sales up 5% year over year through September, driven by almond drinks and oat drink sales in a big way” but they add that soy, coconut and cashew drinks are reporting strong losses in 2019.
Dallas-based Dean Foods announced this week that it has filed for Chapter 11 bankruptcy, blaming the continuing drop in fluid milk consumption as consumers switch to sodas, juices and plant-based beverages. The company is in negotiation with Dairy Farmers of America about a potential sale.
As to what it means for the rest of the industry, that remains to be seen but FC Stone stated: “It appears that milk will keep flowing to Class I for bottling as the restructure proceeds. In terms of consumer sentiment, it’s a black eye for the industry. Perhaps more importantly, it’s an all-hands-on-deck call for more innovation as the dairy industry faces fierce competition from alternatives, many of which appear inferior in terms of consumer cost and overall nutrition.”
Milk production across the U.S. is generally steady to higher, according to DMN. Intakes in some regions are pushing manufacturing capacity.
DMN reports that Australia’s September milk output was down 4.5% from a year ago, according to Dairy Australia. July to September output was down 6.0%. New Zealand’s September production was down 0.7%, although its milk solids were up 0.7%. New Zealand’s seasonal milk output typically peaks in October.