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!
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Transcript:
(0:14) Alyssa Badger:
Hello everyone and thank you so much for tuning in to Let’s Chat Dairy, your favorite weekly market podcast powered by HighGround Dairy. Today’s Friday, September 27th, and you’re hearing from Alyssa Badger and Cara Murphy, back from some well-deserved vacation. At the end of the month, we’ve seen some wild moves here. European dairy prices continue to soar, while the US took a step back this week. China announced new stimulus, and Fonterra announced their final milk price for the 23-24 fiscal year. We’ll get into the details in a minute, but first we’ll start with the CME Spot market recap of the week. Cara?
(0:52) Cara Murphy:
Butter is the talk of the town this week. Holding above $3.05 per pound since the start of July, the price started to drop rapidly last week, closing at $2.97 per pound last Friday, then marking another $0.24 decline over this week to close at $2.7325 today, the lowest price since mid-February of this year. We hypothesize that buyers may have front-loaded their purchasing to avoid the substantial price spike we saw at this time last year and in 2022. The August Cold Storage Report, which we will dive into shortly, also highlighted healthy butter inventories, while butter output has been strong this year as well, so it appears that buyers have finally decided there might be enough butter to go around. Even so, these lower price points remain enticing given the seasonal boost from holiday demand that is right around the corner, so trading remained active overall this week, with 38 butter trades in total, 18 of those occurred today.
Cheese prices have also come off their highs, block cheddar fell every day this week, closing at $2.11 today with 8 trades in total, while barrels declined nearly $0.12 on Tuesday and another $0.10 today to settle at $2.29 and $3.25. Not a single barrel trade was made this week. The dry whey market is quiet once again, hovering between $0.59 and $0.60 per pound with 7 trades in total, as well as the non-fat dry milk market, which settled today relatively unchanged from the prior week at $1.35 and $0.75 with 35 trades in total.
(2:21) Alyssa:
Thanks, Cara. You mentioned the August Cold Storage Report for butter there. Our initial take was neutral against expectations for both butter and cheese but can you extrapolate on that?
(2:30) Cara:
Absolutely. For butter, 323 million pounds of product sat in inventory at the end of August, 11% ahead of last year, and the gains are growing. From July to August, stocks followed the seasonal drawdown, falling nearly 30 million pounds, which was in line with the 5-year average. Dairy Market News reports that butter churns are turning away cream, an indicator of strong production, so with healthy inventories and good output, the price decline on the CME spot market is reasonable. Also interesting, butter consumption in the US has been relatively robust this year, despite the elevated prices. However, the USDA Weekly Dairy Retail Report through the latest week ending September 21 noted that the all-US retail butter price average for one pound butter marked $4.92 per pound, the highest price on record with data back to 2016. While butter demand typically picks up around this time of year, as consumers make more fall cooking and baking recipes, they might baulk at this high price and turn to cheaper alternatives, which could keep butter prices lower.
Cheese inventories were also neutral to expectations in the August Cold Storage Report, at a total of 1.4 billion pounds. This was the smallest total for August since 2020, and down 95 million pounds from August 2023. The month-to-month decline of 3 million pounds was smaller than the 5-year average of 14 million pounds. American cheese stocks rose as high prices curbed demand, allowing inventories to replenish to 800 million pounds, up 8.5 million pounds from July to August. Meanwhile, other cheese stocks fell year-over-year and month-on-month as demand for other-than-American cheese varieties persists.
(4:12) Alyssa:
And then, I think we covered this a little bit last week, but that US Milk Production Report that came out late last Friday had some very interesting results. Even as bird flu spreads in California, milk output in this state rose in August counter-seasonally month-to-month. That was pretty interesting, but took a fall in states that have not recently seen the same impacts of the disease.
(4:34) Cara:
Yeah, let’s get into that. Total US Milk Production was down 0.1% compared to last year, and after June’s significant revisions, this month saw very few. You’re right, though. The story of this month’s report was very much Midwest versus Western production. Production rose in the Central Plains, where new cheese capacity is coming online. Texas milk output was up 7.8% year-over-year, while Kansas was up 6.6%. However, more northward, Wisconsin, the No. 2 milk-producing state, milk output declined 2.3% year-over-year, with milk output marketing the smallest volume for August since 2020. Sources in the area tell us that early summer forages were of poor quality due to rain, and those may have been fed in August, impacting milk throughput. Minnesota milk production also fell 2.8% year-over-year.
(5:26)
Now in the West, it was a different story. As of today, the USDA reports 41 herds in California are confirmed with bird flu, but the impacts of the disease, to an extent that milk production is materially affected, may be lagged. Of course, we continue to closely monitor the situation, but from the data we have, California milk production in August rose by a whopping 2% year-over-year, driven by stronger milk-per-cow, up 2.3%, a counter-seasonal July to August increase. As the top milk-producing state in the nation, accounting for just under 20% of total US milk production, this increase helped to lift national totals. Still, it’s a bit perplexing given the bird flu situation in the state.
Well, that about covers the domestic market for this week, but there is plenty to talk about on the international side. Alyssa, do you mind starting with Europe? My jaw dropped when I saw $4.31 per pound German butter this week. What’s going on?
(6:20) Alyssa:
Yes, European butter prices are as astounding as ever. That $4.31 per pound price is at $1.58 per pound premium to the US CME Spot market and $1.36 per pound premium to New Zealand as of last week’s Global Dairy Trade Auction. Wow. At these levels, European buyers are certainly looking to international markets for product. Cheese prices also continue to rise in the country, and with the step back in cheddar prices on the US CME spot market, it’s likely European buyers are looking to the US and New Zealand for cheaper cheese as well.
(6:54)
So, what’s driving these astronomical prices? Well, holiday demand and strong consumption have their roles to play, but the much larger one comes from the supply side of things. Milk production in Europe this time of year has added seasonal troughs, so there isn’t much milk to make cheese or butter with. Additionally, cream prices are lucrative, enticing manufacturers to skim the cream and forget the rest. But an outbreak of blue tongue, a disease impacting sheep, goats, and cattle, is spreading rampantly across the largest milk-producing countries in the EU. Currently, Germany appears to be the most affected by the disease, driving weekly milk collection figures to the lowest level since 2019. But the disease is also confirmed in France, Denmark, the Netherlands, Belgium, and Luxembourg. In the UK, the government has extended the temporary restriction zone across the whole of southeast England to prevent the disease spreading further. In good news, though, blue tongue is spread via biting insects, and the oncoming cooler weather should help to kill some of those bugs off. That said, it could be a few months until milk production returns, and with cheese and butter inventories depleted, prices could remain above historic levels going into 2025.
(8:06) Cara:
This is fascinating. Okay, so if I’m a buyer in the EU, I’m looking at the US and New Zealand for cheaper product, and certainly interested in what this next Global Dairy Trade Auction holds. We also just got data on August Exports from New Zealand and their Milk Production. What do these reports tell me?
(8:24) Alyssa:
Yeah, it was a very eventful week for Oceania, with New Zealand’s August Exports dropping nearly 12% from prior year, similar to volumes exported in 2020, and we all know what was going on that year. Exports to China dropped around 20% from prior year, which was the key driver of the decline, and whole milk powder exports also fell around 20%, with lower shipments to Bangladesh, China, and Singapore. And really, it would probably be faster to talk about what didn’t fall below prior year, as only cheese, lactose, and infant formula were up against a year ago. What’s more is that Milk Production data for the month of August skyrocketed, which we also touched on last week, but it’s worth talking about again, with August up 10% from prior year on a milk solids basis. New Zealand’s September milk production is likely to carry on with that momentum from August’s strong start, with weather during the first half of the month being very favorable. However, spring returned mid-month, with a spell of cold and wet weather reminding farmers that Mother Nature is still in control. Wet and muddy conditions were reported, but the abundant feed levels prior to this weather hiccup helped to support farmers through conditions, with the outlook currently looking much better into the months ahead. Adding to these weather conditions, Fonterra increased their milk price forecast for the current season, providing an economic signal for farmers to further ramp up production. This might result in both a higher peak and wider shoulder to the season ahead. This move is enough for the HighGround Dairy New Zealand milk production forecast to be adjusted yet again. For a look at our full analysis, head to the dashboard though to read up on our forecasts and other expectations in the region.
(10:09)
Sticking with New Zealand, we also put out our Pre-Global Dairy Trade Analysis Report, and Fonterra’s whole milk powder offer volumes are 2.2% larger than at the same event last year, and 5.2% larger than at the previous auction. 22,233 metric tons of product is on offer, with volumes more front-loaded than at the previous event. Interestingly, the C1 offer volumes have been significantly lighter for the July-September period this year compared to the prior four years, with C2 offer volumes also restricted. With that, SGX traders are looking for more upside. SGX skim milk powder traders are currently building in further upside for GDT as well, with 2,800/MT in the sights of traders currently. However, a flat Global Dairy Trade Pulse result this week when compared to the main GDT event does not suggest much upside from that mark. And after what has been an incredible run, the milk fat market is facing a turning point. For the Oceania market, the prolonged high prices are seemingly burning demand in certain markets, with the recent export data highlighting that New Zealand milk fat exports to developing nations are slowing. With the increase in offer volumes for butter and AMF at next week’s auction, abundant milk supply in New Zealand, and US butter prices moving lower, it would be remiss to think that buyers will be willing to keep Oceania where it’s at.
(11:41) Cara:
We’re looking forward to digging into that data next week to see what peak milk in Oceania means to the global marketplace, that’s for sure. What else was out this week?
(11:50) Alyssa:
There were a lot of headlines out of China, and I don’t even know where to start. Just a few days ago, we were talking about how publicly traded dairy companies in China saw plummeting stock prices that dropped to multi-year lows, and milk prices were crashing. But if there’s one thing we’ve learned about China over more than a decade, it’s that their government will always step in to ensure that their farmers and food supply systems are taken care of. Well, that’s exactly what we saw happen here. Overnight, shares of leading dairy companies surged, and we saw some of the biggest intraday gains since 2018 for companies such as Mengniu. First, there was an announcement from the Chinese government that they were rolling out the strongest stimulus measures since the pandemic, including cash handouts, which Xi is known to disdain, as he believes it breeds laziness. In addition to an attention-grabbing stimulus package, China’s Ag Ministry has also introduced policies to stabilize beef and dairy production by reducing feed costs for farming households and providing loan extensions and credit insurance to farmers facing temporary financial difficulties.
(12:59)
These initiatives are seemingly part of a broader strategy to boost the domestic dairy industry while trying to limit imports from overseas. This push for economic stimulus is also tied to the broader goal of meeting China’s GDP growth target for the year. As the government approaches the National Day holiday, the pressure is on to boost economic activity and public sentiment. We just published a blog post with more details, so be sure to head to the website and check that out. Additionally, our August Chinese Dairy Import Analysis is now live on the dashboard, which painted a rather grim picture for Chinese demand, but with everything we’ve absorbed this week, it’s hard to make heads or tails of where Chinese demand is heading.
Well, that’s all from the HighGround Chicago office this week. Thanks again for tuning in and be sure to subscribe to the podcast and join us next week for another discussion on dairy fundamentals. We appreciate your support. Cheers.
