Let’s Chat Dairy – 15 November 2024

Let’s Chat Dairy 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!

Listen on Spotify | Listen on Apple Podcasts | Listen on Amazon Music

Transcript:

(0:16) Alyssa Badger:
Hello, everyone. Thank you so much for tuning in to Let’s Chat Dairy, your favorite weekly market podcast powered by HighGround Dairy. Today’s Friday, November 15th, and you’re hearing from Alyssa Badger and Cara Murphy. The first winds of winter have set into Chicago as we approach the end of 2024. Wow, this year’s gone fast. It’s almost hard to believe it’s the middle of November. But this week, the HighGround Dairy team has been hard at work preparing our monthly Global Dairy Commodity Price Forecast, which will be released at any minute. We’ll provide a teaser into some of those topics in this podcast episode. But if you’re a subscriber and want the full scoop, head on over to the HighGround website. And if you’re not yet subscribed, you can request a free trial today and get access right away. And don’t forget, the HighGround team will be hosting a live webinar on Monday, November 18th, diving into the forecast topics and our take on these current markets. Now, before we hop to it, let’s kick it off, as always, with the CME Spot Market Recap of the week, Cara.

(1:20) Cara Murphy:
Markets are up, and some are moving down. Dry Whey reached $0.6550 per pound yesterday, the highest price since March 31st, 2022. It closed unchanged today, with 7 trades on the week. Nonfat Dry Milk is also climbing, up to $1.40 per pound, the highest price since November 2022 as well. It settled today at $1.40 per pound, with 39 trades in total for the week. The same strength is not to be said for the cheese market. Block Cheddar sank to $1.65 per pound yesterday and rose today to close at $1.6925 per pound, with 13 trades in all, while Barrel Cheddar dropped to $1.67 per pound yesterday, also rebounding today to settle at $1.6825 per pound, with 5 trades on the week. Butter is in the same boat as Cheese, closing today at $2.63, with 15 trades in all.

(2:10) Alyssa:
Thanks, Cara. As we mentioned, the HighGround Dairy Global Dairy Commodity Price Forecast will be released later today. Now, you and Betty typically cover domestic markets. What are the top 5 things on the radar this month?

(2:24) Cara:
Absolutely. To begin, we kick off with a dive into consumer sentiment and spending. The New York Federal Reserve Bank released their Household Debt and Credit Report for Q3 2024 this week, and things look a little rough. Total household debt reached $17.94 trillion, with 3.5% of outstanding debt in some type of delinquency. Credit card balances rose by $24 billion to $1.17 trillion. Serious credit card delinquency is now at 11%—the highest since Q2 of 2012—suggesting Americans are still under financial pressure, even as consumer spending continues to rise. In our forecast, we took a deeper dive into consumer spending and sentiment as it impacts purchasing decisions broken out by income level. From there, we were able to see that spending and sentiment diverge greatly between low, middle, and high-income earners. Typically, high-income earners are not as impacted by inflation as necessities make up a smaller portion of their overall budgets, and these households have also had the available liquidity to take advantage of the recent gains in money markets, as opposed to low and middle-income households. However, while higher-earning households have more to spend, and certainly are, they make up a smaller portion of the overall population compared to middle and low-income earners. This becomes important when we look at markets who rely on large number of low and middle-income earners to purchase a relatively inexpensive product such as fast food.

(3:52)
In our second topic, I took a look into the latest quarterly financial statements across the food service industry and found some interesting outcomes. Many quick service chains announced meal deals this summer to stimulate additional foot traffic, and while this has worked, their quarterly earnings suggest these meal deals are doing more to abate a loss rather than drive significant growth. However, some casual dining and fast casual brands like Texas Roadhouse, Chili’s, and Chipotle are doing quite well. After multiple years of persistent inflation, low-income earners appear to have been priced out of fast food, requiring meal deal promotions to get them through the door. However, middle-income earners are still willing to spend when dining out, but value is at the forefront of their mind. The most successful casual dining chains have targeted this demographic, highlighting their value compared to quick service, better quality at a similar price, and have clearly benefited from it. The switch in value perception between QSR and fast casual and casual dining is quite interesting and continues to show us how the American consumer is evolving when deciding how and where to eat.

(5:57) Alyssa:
This is really fascinating, Cara, and I could certainly see how this may impact the dairy industry from a demand perspective. The US seems to have plenty of cheese and butter, and prices have been moving lower. Do you discuss these topics in the forecast?

(5:11) Cara:
We have to, of course. CME Spot butter averaged $2.95 per pound between week 1 and week 39 of 2024, then dropped in October counter to the price spikes we saw in 2022 and 2023 at the same time. On November 12, CME Spot butter marked $2.5975 per pound, the lowest price since January of 2024. Domestic butter consumption, which accounts for about 97% of the total US butter use, has been strong this year, up 3.9% year-to-date versus 2023 through September. But there is just a lot of butter to go around. The US milk fat test has marked new highs each month in 2024 as cows continue to produce more components in their milk. This has contributed to improved butter making, with whopping double-digit growth in August and September. With production and outpacing demand, stockpiles have climbed. But something else is adding to the butter glut. Americans’ taste for 82% butter fat is on the rise, as butter imports printed record highs for the month of May, June, July, and August this year, with September marking the highest volume ever. Now, some of this can be attributed to importers pushing shipments ahead to avoid the dockworker strike in September, but nonetheless, greater imports have delivered 85.1 million pounds of butter to the US in the six-month time frame, 41% more than the same time last year. With that much butter to go around, it’s not surprising prices have fallen.

(6:35)
On the cheese side, high prices have cured high prices. CME spot barrel cheddar plummeted from an all-time high in mid-September by $0.95 per pound to $1.6725 as of yesterday’s settlement price, a 35% decrease as demand dried up rapidly. Blocks have also decreased, although their 2024 high of $2.31 per pound was not as high as the barrel price. Cheese production in September was flat to the prior year, while cheddar volumes continued to slide versus 2023, and mozzarella output grows. It’s a bit of a tale of two markets for US cheese. Domestic demand is not overly strong, supported mostly by other-than-American cheese consumption, which could indicate pizza demand may have been off at the onset of football season. On the flip side, cheese exports, particularly for fresh and grated cheese, remain strong. While higher cheese prices in September could have curbed exports at the time, currently US cheese is the cheapest on the global market compared to Europe and New Zealand, which may spur additional export opportunities. Don’t get too excited, though. New cheese capacity is coming online in 2025. The additional supply may help to offset potential export gains.

(7:41) Alyssa:
Thanks, Cara. And you know I gotta ask the question. The USDA released the Final Decision of adjustments to the Federal Milk Marketing Order Pricing Formulas. Did we cover those in the forecast report?

(7:52) Cara:
I know you gotta ask, and you know my answer 100%. Of course they are. Alex Gambonini, our resident expert, will be joining us for our webinar on Monday, November 18th, to cover the changes made between the recommended decision and the final decision, as well as next steps in the referendum process. Well, that just about covers the domestic markets. What’s shaken on the international side of things?

(8:13) Alyssa:
You know, Cara, it wasn’t easy to pick just five this month, but here’s where our focus was. China recently announced a 10 trillion yuan stimulus package to refinance local government debts, including hidden debts tied to infrastructure projects. While that move aims to stabilize the economy, markets have responded with disappointment due to the package’s lack of direct measures to boost domestic demand or really address the struggling property sector. Analysts suggest that additional targeted intervention may be required to ignite the real growth that we need to see here and rebuild investor confidence. And then Southeast Asia remains a bright spot in the global dairy landscape, with robust economic growth, expanding populations and rising disposable incomes fueling steady demand. Indonesia and the Philippines are really leading players in this region, each with distinct but optimistic trajectories for dairy consumption growth in the years ahead. And then turning to Latin America, milk supply remains tight this year, with notable production challenges in Argentina and Uruguay throughout 2024. Brazil’s heightened demand has further absorbed valuable supply, while market chatter suggests Mexico is also facing constrained availability. These dynamics are straining regional supply chains and underscore the challenge of balancing limited production with increasing consumption needs. So, all that to say, we really get into some of the weeds on what’s really going on in Latin America.  And then after a challenging 2023 and a tough beginning to this year, global farm gate margins are beginning to show signs of recovery. However, regional disparities persist with diverse factors influencing outlooks across America, Europe and Asia.  And then finally, the strength of the US dollar is a big one and really adding pressure to global dairy markets. A strong dollar, of course, increases costs for international buyers, requiring more of their local currency to purchase the same goods. This dynamic is particularly challenging for regions with Uyghur currencies, potentially dampening purchasing power and, you know, having the ability to reduce global dairy demand into 2025.

(10:27) Cara:
Yeah, that whole milk powder squeeze on the GDT has been so interesting, especially as it helped propel milk prices in New Zealand. What are our expectations for the next GDT event next week?

(10:37) Alyssa:
Yeah, I’m glad you brought that up, Cara, because we cover a lot of why that squeeze is happening in our forecast. So let’s talk about expectations into next week as well. Fonterra didn’t make any changes to their 12-month forecast offer volumes, but of course, there’s plenty to talk about. So basically, China has been caught very short whole milk powder in warehouses, along with reports that local whole milk powder production in China has basically stopped or slowed dramatically, while consumption levels remained rather sluggish, but of course, steady enough for this requirement to be met with urgency. In New Zealand, milk supply is running red hot, but Fonterra has been adamant and transparent about producing less whole milk powder this season, while also carrying less inventories over the winter period, with both of those factors resulting in less whole milk powder available in the short term. Given all that, we are expecting more strength into next week, and we’ll probably see at least another 1% rise on whole milk powder.

(11:37)
The skim milk powder market has also caught the bullish momentum, with SGX traders pricing in strong movement there as well. Fats are interesting as always, but the path of least resistance is to the upside, like the rest of the complex. And then lastly, cheese. It’s going to be hard to follow last event’s strong print and get too bullish here, considering US product is now a very attractive option. As a result, a flat result would be an impressive feat, though we expect prices to weaken slightly, but not by much.

Well, that’s all from HighGround Chicago office for this week, but remember, the dairy market never sleeps. While the podcast wraps up what’s been happening this week, there’s always more to learn, so be sure to stay connected with us on our website for the latest updates and insights. Thanks for tuning in, and don’t forget to subscribe so you won’t miss next week’s discussion on dairy fundamentals. We appreciate your support. Cheers!