November Dairy Ingredient Market Update
November dairy prices are mostly reversing to a bearish state as the Globe wrestles with higher production, but some bullish forces remain. Following headlines:
- US Milk production slowing, EU cranking and NZ falling
- Butter prices have rocketed higher
- NFDM prices have reversed significantly
- Cheese prices soft
- Whey futures prices are falling after gathering strength for much of October
- WPC prices still on low end.
- Lactose and Permeate prices steady
Milk Production in the US continued to slow further in September, only going up 0.4% compared in September of 2014 compared to the July increase of 1.3% and August increase of .7%. The trend is in with the US’s biggest producer, California, leading the way with continual weakness- down 3.1%. The other Western states are also showing considerable weakness as the nation’s largest producer, California, is casting a large shadow in an otherwise remarkable bullish period for the Midwest region. There were continued strong milk gains in the Cheese making regions of Wisconsin, Minnesota, Michigan, Iowa and South Dakota. We feel that milk production will now continue to weaken and show contraction year over year by the first quarter of 2016. This is in response to continued weakness in Non Fat Dry Milk, Cheese and Whey products.
Exports continue to paint the bearish story. The US exports represent anywhere from 12-16% of all dairy solids it produces. Year to date, the US continues to lose market share to the export market with NDM down 2.2% YTD, whole milk down 17% and cheese down 15%. Couple this with growing imports of all major commodities and it becomes clear that the US is not out of the woods in terms of low prices.
EU milk production continues to go up in post quota elimination where they are continuing to see surprising gains of over 3.5% on a monthly basis. This level of growth should not be taken lightly given the large base and means that the Global balance is heavily weighted to “Over-Supply” for the foreseeable future. New Zealand’s milk production continues to show weakness with projections down a not insignificant 7+%, but in comparison to EU’s growth the market is not impressed.
Butter continues its trend-breaking volatility which has everyone dealing with unprecedented values as prices hover in the upper $2.00 level, at time when prices would typically be falling. The lack of milk production (and butter production) in the West is exacerbating the situation that seems to be more of a demand curve shift than traditional movement up or down the supply/demand equation. Making a very complicated equation simple- there is just not enough butter in the US and that does not appear to be changing anytime soon.
Cheese prices continue to show signs of weakness but overall, the market seems to like prices at their current levels. With Cheese inventories at historical highs and with a lower than expected draw down of inventories in September, the continued thought is that cheese will have to go down further. This remains, however, a resilient market and like butter, shows to routinely buck historical trends and is highly unpredictable. With cheese premiums starting to erode, we are watching the cheese market closely as this will determine future whey supply and any lowering of cheese production will obviously have an effect on whey volumes and future prices.
Dry whey production increased at a greater rate in September than expected- up 12.5% in September from a year ago. This reflects not only strong cheese production, but also the favorable return vs. WPC and Whey Permeate or lactose. WPC (<49.9% protein) production was in turn down over 21%, reflecting the market dynamics. Buyers of Dry whey are continuing to recognize that prices are at historical lows and prices will be going up in the future, and that much of the excess inventory seems to be cleared. That being said, it is unlikely that prices would go up significantly due to the low prices of WPC. Buyers of WPC are also recognizing the historically low values present in the market and are attempting to lock in for as long as they can. The aggressive buying is tightening inventory levels and future prices for Q1 2016 are showing substantial gains compared to Spot Q4 offers. As previously burdensome inventory is cleared in conjunction with heavy promotional activity from end marketers, these markets could see dynamic moves as we jump off the lows.
Demand for whey permeate and lactose – each coming off historically low prices – is picking up as heavy demand from feed users in China is spurring aggressive buying action. Although, most of production was heavily contracted at lower prices, spot inquiries are noticeably higher. Prices are up 10-20% in October vs. September and with carbohydrate demand picking up steam and less production going on – we expect a further jump in prices by year end if not in November. As one trader said, “You know if Chinese buyers are calling you asking for firm bids and taking them – demand is good!”
Nonfat dry milk (NFDM) saw its prices fall after a rebound in August and September and we are seeing a retracement of those gains to August levels. Prices for NDM/Skim milk powder from the three major exporting regions of Oceania, the EU and US are all lowering to the .85-.90/lb range and the market feels shaky. Only California’s lack of production seems to be the bullish factor in an otherwise anemic market. We saw the US reverse course in September, gaining exports vs. last month’s 14.4% and over last year by almost 50%. That being said, we’ll need a string of months like this and a more serious draw-down on market inventories to be convinced that future strength is on its way.
It is our view today that NFDM prices have leveled in the short term but that CME futures prices will likely fall further so that 1st quarter 2016 numbers are all sub $1.00.