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The Butter Market has a Sensational Year

The T.C. Jacoby Weekly Market Report Week Ending December 30, 2022

The butter market began the year at a relatively lofty height, suffered a few spectacular setbacks, and then climbed anew. It spent an unprecedented 57 trading sessions at $3 or above and set a new all-time high of $3.2675 per pound in early October.

In a year full of drama, the butter market was a sensation all its own. It began the year at a relatively lofty height, suffered a few spectacular setbacks, and then climbed anew. It spent an unprecedented 57 trading sessions at $3 or above and set a new all-time high of $3.2675 per pound in early October. Subdued milk output, pricey cream, plant issues, and expensive freight all contributed to lower butter production this year. Decent domestic demand and robust exports whittled stocks to multi-year lows. As of October 31, there were 199.7 million pounds of butter in cold storage warehouses, 5.1% less than a year ago. But high prices are doing their job. While butter stocks have declined seasonally since July, the August, September, and October drawdowns were all lighter than normal. When Americans were asked to pay $4 for butter, they chose to buy less. Slower demand weighed heavily on butter prices in December. CME spot butter closed today at $2.38, down 47.5ȼ over the past two weeks. That’s only 3% lower than where it finished 2021, but it’s down 27% from the peak. The futures forecast that butter will hold in the $2.30s and $2.40s next year, but lower values are possible. USDA expects U.S. butter production will grow 4.5% in 2023.

Cheese output grew relentlessly this year. USDA expects that U.S. cheese production will reach nearly 14 billion pounds in 2022, up 2.1% from last year. The agency forecasts cheese output will increase another 1.2% in 2023, but greater growth is possible as another new plant will start pushing out product soon. Thankfully, exports are keeping pace. U.S. dairy exports through October were record high, up 11.2% from the previous record set last year. USDA has called for even greater cheese exports in 2023. But domestic demand is a little light as the holiday hangover sets in. Nonetheless, cheese prices gained ground in Chicago. CME spot Cheddar blocks finished at $2.135, up 15.75ȼ in the past two weeks and up 8% for the year. Barrels rallied 11.75ȼ over the holidays and closed at $1.8575, up 9% from where they began the year.

The powder markets started strong in 2022, propped up by voracious demand from China and unusually low global milk output. CME spot nonfat dry milk (NDM) spent the first half of the year trading from $1.65 to $1.90, values not seen since 2014. But U.S. and European milk output recovered in the final months of the year, and powder prices dropped. Robust milk output in China and massive stockpiles of whole milk powder(WMP) weighed on Chinese demand for foreign products. U.S. nonfat dry milk (NDM) exports are behind last year’s record-shattering pace, but, with that exception, they are the largest ever. NDM stocks are not burdensome, but they are too large to stave off the weakness from abroad. At this week’s Global Dairy Trade (GDT) auction, WMP values dropped 4% and the average price for skim milk powder (SMP) plummeted 4.8%. In Chicago, spot NDM closed out the year at $1.335, down 1.5ȼ over the past two weeks and down 19% from the final day of 2021.

There was not a lot of Christmas cheer in the whey market. CME spot dry whey spent much of the holidays trading below 40ȼ at two-year lows. It bounced back and closed at 41.5ȼ, still down 4ȼ over the past two weeks. Of all the dairy commodities, whey endured the steepest declinesin 2022. Today’s price is down 45% for the year, and down 52% from the all-time high set in February. It’s hard to predict where whey will go next year. Formidable cheese production suggests whey output will increase, but if China keeps buying U.S. whey, the market will likely recover from today’s cheap valuations.

This was a historic year for the milk markets. Class III posted an all-time high of $25.21 per cwt. in May. Not to be outdone, Class IV reached $25.83 in June and $25.79 in July. Dairy producers deposited massive milk checks throughout the summer and into the fall. Producers whose incomes depend on Class IV fared especially well, partially making up for several years at a painful disadvantage. Class IV milk averaged an astounding $24.48 per cwt. in 2022. Prices will fall well short of this mark in 2023, but they’re still forecast to be on the higher end of the typical trading range. The futures call for Class III milk in the $18s and $19s, with Class IV hovering just below $20.

However, costs are up sharply this year, and they’ll likely remain high in the year to come. Soybean meal is particularly pricey at around $475 per ton. March corn closed today at $6.78 per bushel, up 25ȼ in just two weeks. With feed, fuel, and labor all raising the cost to make milk, there is little incentive to fit more cows in the barn or build new facilities. But American dairy producers will likely continue to expand output by getting more milk per cow. In November, U.S. milk output grew 1.3% to 18.25 billion pounds. Expect more of the same in the year to come. After unusually light growth of just 0.3% in 2022, USDA is calling for U.S. milk output to increase 1.1% next year. Modest growth in the United States and expectations for continued declines in Europe and Oceania suggest that 2023 could be a decent year for dairy producers, as long as high prices don’t push consumers to eat significantly less cheese, butter, and creamy treats as they did this year.

January 2, 2023



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