Let’s Chat Markets is a weekly podcast, hosted by HighGround Dairy’s top analysts. At the end of every week, they sit down to recap the week in dairy markets and summarize recent reports and relevant news. The podcast can be found here on our dashboard, or wherever you listen to your podcasts. Subscribe so that you never miss an episode!
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Transcript:
[00:09] Eric: Happy Friday! Welcome to HighGround Dairy’s Let’s Chat Markets! I’m your fill-in host today, Eric Meyer. Today is Friday, February 2nd, and in the states known as “Groundhog Day,” where a groundhog that lives in Pennsylvania predicts whether or not there will be an early Spring warmup or if cold temperatures will prevail for the next six weeks, just by seeing his shadow or not seeing it. A tradition that has been in place for nearly 150 years! And let’s hope he’s right, because Punxotony Phil, the big rodent, did not see his shadow this year.
[00:42] In the first full week since the dairy industry gathered in Phoenix, Arizona for the International Dairy Foods Association 2024 Dairy Forum, the near-term momentum of the US markets, regardless of commodity, has taken a bullish tone, even though that was not necessarily the consensus chatter at the conference, though that’s typical for the CME spot and futures markets to fade conference chatter. Buyers of many commodities remain in a hand-to-mouth state due to both demand uncertainty but also how expensive it is to buy and hold products. But conferences tend to be times when buyers listen, then take action, and that was reflective of what happened in the markets this week.
[01:19] Specific to the CME Spot markets, Dry Whey was the main story of the week, as it surpassed the $0.5000/lb. market on Thursday, its highest price since June 2022! Last Friday, CME spot dry whey settled at $0.4425/lb. and this Friday, it closed at $0.5075/lb., a 6.5 cent move or nearly 15% boost! Industry chatter suggests that market participants were caught short physical earlier in the week as manufacturers have switched production from the low protein spec of dry whey to more value-add whey protein concentrates, like WPC 80 and whey protein isolate. With a recent Japanese whey tender just concluding, there may be a short-term scramble to acquire product. And with a move above $0.5000 in the spot market, futures had largely gone no offer until Friday, where buyers are finding liquidity through Q2 in the low 50s. While support in the high protein markets remains supportive of dry whey in general, this move appears to be a little overdone given the longer-term demand outlook for exporting sweet whey powder is not so bright.
[02:27] In other markets, butter, which had taken off at the tail end of last week due to the surprise ending stock data in December via the Cold Storage report, $2.8025/lb. was the high and prices backed off to $2.7450/lb. on Thursday and Friday. On this coming Monday, the Dairy Products report will provide more context as to what caused butter inventories to drop in December when they typically increase at the end of the calendar year. That said, the weekly average on butter increased nearly 15 cents to $2.7720/lb., an extraordinarily high price during the first couple of months of any calendar year.
[03:07] Spot cheese markets continued finding support this week which led to further strength in the Class III and cheese futures markets during the majority of the trading sessions. Block Cheddar traded as high as $1.6850/lb. on Friday before rolling back to settle at $1.6500/lb. Barrels closed the week at $1.5500/lb. but made a weekly high of $1.5600/lb. during Friday’s session. Because of the combined cheese and whey rally, Class III futures have been through a very strong correction. March Class III milk futures traded as low as $15.80/cwt on Thursday, Jan 25 and as high as $17.78 this Friday, nearly a $2.00/cwt rally in 6 trading days and just a few cents off the 200-day moving average, a key indicator of a major trend change. However, without follow-through on CME Spot cheese making new highs, futures have rolled back considerably, a test and fail of the potential for a breakout. HighGround believes that cheese prices are fair in the $1.60s for block, but further upside in the next month or two will be difficult to achieve.
[04:13] Last is CME Spot Nonfat, and that was fairly ho-hum with prices remaining elevated, but quiet with just a half-penny trading range all week. CME Spot rallied over $1.20/lb. and futures also found support post-IDFA conference but has been grinding lower again during the final two days of the week as incremental demand remains very difficult to sustain. CME spot finished the week at $1.2300/lb. and the $1.2280 weekly average was up 2.7% from the prior week.
[04:43] While this week’s domestic report landscape specific to dairy was light, the USDA did publish a highly anticipated Semi-Annual Cattle Inventory Report on Wednesday, and heifers for milk cow replacements as of Jan 1 totaled 4.074 million head, down 0.4% from 2023’s tally. However, major revisions were made to last year’s number, as USDA dropped its original print of 4.337 million heifers by 263,600 head, lowering the number by 6.5%! This year’s replacement heifer tally was the smallest since 2004. Heifer prices have been rising and will likely continue to move higher on these shrinking inventories. Dairy heifers expected to calve (a subset of the heifer replacement number) summed to 2.593 million head, the lowest value in the data set back to 2002. The herd was smaller in 2002 as well, meaning there was a greater ratio of heifers to cows at that time—also known as the restock rate. 2022, 2023, and 2024’s restock rates are the three smallest in this series that began back in 2022, highlighting the weakness of heifer inventories and that this problem has been ongoing.
[06:00] Finally, a quick review of the Weekly Dairy Cow Slaughter Data and Class III Spot Basis Levels in the Upper Midwest, which are drastically different than a year ago. Slaughter rates are languishing, down 24% year-to-date compared to the first three weeks of 2023. For the week ending January 20, a total of 51,100 dairy cows were shipped to packing plants, tanking 28% versus prior year. This was the lowest total for the week since 2007. With a smaller milking herd and tighter heifer inventories, this trend is expected to continue in 2024. Be sure to check out our website for a comprehensive review of this Cattle Inventory report written by HighGround’s Betty Berning.
[06:41] Upper Midwest Spot basis popped for the week ending Feb 3, 2024, climbing $0.50/cwt. from the previous week, and posting a range of flat to $1/cwt. over Class III pricing. There are fewer cows in the Upper Midwest than in January 2023, and this may be causing less availability, propelling Spot milk prices higher. Ag prices report was also issued this week and US cows increased their fat test to 4.35% in December 2023—an all-time high—and up 1.9% year-over-year. US dairy cows produced 796 million pounds of butterfat in December 2023, 2.5% more than in December 2022.
That’s all for the domestic side. Stu, what’s happening in dairy around the globe?
[07:26] Stu: Well, let’s start on the supply side with Oceania Milk Production. New Zealand surprised to the upside, printing 2.6% growth in milk solids in December. This leap pulls the season-to-date production data to 1.1% higher than last season, which is very impressive considering the risks that were expected with the forecasted El Nino. January’s milk production is also set to be better than expected, with farmers reporting green grass and adequate feed for this time of the year. As the calendar has rolled into February, summer conditions are well underway, with warm summer conditions putting pressure on pastures in the North Island. Growth rates are reported to be slowing down, as expected, but remain significantly above what would be expected in a drought year. Milk production continues to be reported as good. The hard part about forecasting milk production for February this year is that last year’s summer was very, very wet, providing lots of lush, high qualtiy pasture. This year, there is good quantity of grass but significantly less quality. Adding to the feed dynamics, temperatures in the North Island have tracked above last year, around 1.2C higher than average, which will definitely have an impact on cow comfortability, which depresses milk production. For reference, Holstein Frisian cows start to feel heat stress around 22C, while a New Zealand Jersey cow will feel heat stress at 25C. Even so, summer temperatures in New Zealand have regularly exceeded these levels and undoubtedly, pressure on milk production.
[08:56] Looking across the Tasman, Australian milk production popped 2.2% higher in December, with New South Wales recording 8.8% growth, while Victoria (the biggest production state in Australia) grew output by 1.2%. This increase pushes the national season-to-date figure to 2.1% ahead of last season. Like New Zealand, Australian farmers have been dealt a good amount of rainfall across the last few months. Some might say too much, with flooding reported continuously throughout parts of the country, including Victoria. As a result of the extra and really good rainfall, extra silage has been made, crops are reported as bumper currently, and water availability continues to increase with the ongoing rainfall. Interestingly enough, water prices are also reportedly increasing, but from a very low base. From the current perspective, it would seem that Australian milk production will remain somewhat intact for the months ahead.
[09:50] Looking into next week, we have the first GDT event of February, which is hotly anticipated after the longer-than-usual three-week interim. The SGX Dairy Derivatives market remains bullish on next week’s auction, but in the last two futures trading sessions, Whole Milk Powder futures have given up some premium priced into the forward curve, slightly flattening out the contango forward curve we’ve had in place for the last few months. The February 2024 Whole Milk Powder contract traded at $3,285/Ton at the end of this week’s trading session. It is assumed that this removal of the premium over the forward curve is a result of better-than-expected milk production during the summer months. Milk fats are also expected to be supported at next week’s auction, with butter knocking on the door of $6,000/Ton. However, I would expect that AMF prices might get a bunch of support than butter, considering it is the much cheaper milk fat option for buyers that have the ability to switch and the basis between the two is quite large.
[10:46] While we’re talking about the SGX market, it would be remiss to not mention the big slide the September 2025 milk price future took this week during trading, falling down to $8.52/kgMS in Friday’s session. That’s from a high of $8.85/kgMS a week ago, a 33 cent slide, or 3.7%—pretty dramatic. However, this slide has also resulted in a sharp increase in open interest. We would expect to see open interest in this contract to continue growing over the coming months, as the Kiwi dairy industry starts to focus squarely on the new season.
[11:19] Sticking with the New Zealand market updates, New Zealand exports for December dropped this week. New Zealand exports falling 5.5% in December’s data, marking the lowest volume of exports since 2013. However, key to note: November’s exports actually rose 20% higher—a bit of a move. December’s data also finishes the 2023 dataset, with the highlight reel for 2023 including Whole Milk Powder exports lifting 3.6%, Skim Milk Powder exports up 27%, AMF and Butter exports grew 4.2% and 5.1% respectively, while cheese exports grew 10.4%. Exports to China actually managed to grow in 2023 surprisingly, squeaking in a gain of 0.9% ahead of the year prior. For more, go to the website and read our comprehensive New Zealand Export and Milk Production Report for all of the little details.
[12:12] In further New Zealand news, I’m back in New Zealand next week! If you want to get in touch and learn more about how HighGround can help your business, please don’t hesitate to get in touch! I look forward to catching up. Back to you Eric.
Eric: Thanks, Stu! Well, that does it for the week. We will be super glad that Alyssa, Becca, Cara, and Betty will be back full steam next week after they’ve taken some time off. Of course, we’re sorry to see Stu head back to New Zealand but we know he has a lot of work ahead of him there and will be working closely with our industry partners in New Zealand, along with continuing Kiwi farmer education on managing volatile price risk. Thanks for tuning in and have a great weekend, everyone!
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