Let’s Chat Dairy – 5 July 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!

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(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, July 5th and you’re hearing from Alyssa Badger. We hope many of you had an enjoyable 4th of July if you’re here in the US surrounded by your favorite people hovering over a piping hot grill or a smoker. I for one just chased my 15-month-old around, so if you’re in that season of life as well, try to find some time to rest this weekend, will ya? Okay, it’s on me to do the CME Spot Market Recap, but we do have a special guest back on this week to help me break down what happened in markets around the world. Stu Davison will be joining me here to give a breakdown of what exactly happened at this week’s Global Dairy Trade Auction.

But first things first, let’s talk about the quiet activity at the CME. The Cheddar Cheese Block market opened up Monday losing $0.01 and maintained $1.90 per pound every day that followed and on lighter trading volume with only 5 loads trading hands. Barrels were a little more volatile, dropping on Monday’s session by $2.75 per pound to settle at $1.8250. It was back to the upside for the rest of the week though with Barrels settling at a quarter-cent premium to Barrels at $1.9025 on 14 trades. Nonfat Dry Milk wasn’t much different than Blocks as it opened the week at $1.18 per pound and closed the week there as well, losing $0.01 on Tuesday that was quickly recaptured the next day. Butter seesawed a little back and forth but ultimately closed out the week on small gains, settling Friday at $3.1325. Last but not least, Dry Whey traded at $0.4900 per pound every day except today where we were able to eke out a quarter-cent gain, settling the week at $0.4925 per pound. The futures market was also quiet but nearly all futures made a near-term bottom on Wednesday and found support to close out the week.

We did ship out a breaking news story to kick off the week on Monday as the USDA announced its recommended decision to amend Federal Milk Marketing Orders (FMMO) pricing formulas, highlighting five proposals. In its 332-page document, the agency recommended adjusting milk composition factors, raising true protein, other solids, and nonfat solids. It also called for eliminating the 500-pound barrel cheddar price from the dairy product’s mandatory reporting program, using only the 40-pound block cheddar price. An increase to make allowances was included in the decision with the values representing a compromise between farm groups and processor lobbies. The heavily discussed base Class I skim milk price was included in the recommendation. USDA suggested a return to the higher of Class III or Class IV skim milk pricing factors, ending the average of scheme that began in 2019. Finally, Class I differentials across the country were updated. The next steps include a 60-day comment period and a 60-day review by the USDA. At that point, a final decision will be released. In other words, it’s going to be some time before this issue is resolved.

All right, Stu, let’s get into the Global Dairy Trade Auction. We, as a team and as well as traders, were expecting a fall but those were some steep losses.

(3:44) Stu Davison:
Yes, GDT Event 359 was a sea of red arrows with sizable declines across key commodities. Let’s start with milk fat products, butter and AMF, with index price for each product down 10.2% and 10.7% respectively. This decline is large but unsurprising considering that milk fat prices have hit record highs over the last two months, with desperation of buyers driving prices to these points. Even with this price decline, butter prices remain significantly above the long-term price average and the market is expected to remain buoyant over the coming months as demand remains firm. Mostly due to strong cream demand in Europe, low seasonal availability from Oceania, and not to mention the butter market in the US being tight. Regionally, North Asia bought the most butter on this GDT auction.

The only product this usually dominant region bought the majority of North Asia’s weak purchasing behavior was a key driver of the decline of the remaining products, with the skim milk powder index falling 6.1%, while the whole milk powder index eased 4.3%. Fonterra’s medium heat skim milk powder prices eased across all contract periods, with the bulk of the overall decline due to the large change in contracts 4 through 6, which printed very odd results at the previous event. With the fall of these three contracts as much as $325/MT, or 11%, whole milk powder prices slipped, somewhat in line with the SGX trader’s expectations and our own, back to levels last priced during March. And these prices are expected to keep sliding over the coming three months, as Fonterra’s Offer Volumes for whole milk powder on the GDT platform increased significantly and seasonally in line with the impending peak milk months in New Zealand. Regionally, Southeast Asia/Oceania purchased the most whole milk powder and skim milk powder at this event, with a noticeable lack of participation from the Middle Eastern region at this event.

Cheese prices also declined, down 6.9%, returning volatility to the GDT cheddar market. It’s noticeable to reference that the prices across each contract period within the auction, there is wild variation of price, with no trend apparent across the forward curve. As such, we expect GDT cheddar prices to be varied again at the next auction. Volatility has not disappeared.

Three out of the 24 auctions for the New Zealand dairy season means that there is little known about the New Zealand Farmgate Milk Price for the season ahead, with the market spooked as much as we expected following this auction. Sentiment remains somewhat steady, with the SGX Milk Price future only trading down 0.95% following the auction, to $8.35/kgMS. This is still above Fonterra’s current forecast midpoint. On the ground in New Zealand, calves are starting to appear. Calving is underway, and the season is about to kick off in earnest. Farmers look ahead with uncertainty on both milk price and milk production outlooks. We’ll keep an eye on things down under in the months ahead. Back to you, Alyssa.

(6:41) Alyssa:
Thanks Stu, great recap. I think the global market was pretty quiet after that as well, but European Energy Exchange (EEX) Indices reacted just a bit to that GDT Auction and had a hard time finding some solid support. The skim milk powder index fell 3.1% in US dollar terms, settling around $2,580/MT or around $1.17 per pound. Whey indices fell 0.9%, while butter and whole milk powder actually moved slightly higher because of the exchange rate. A quick update on production, European milk collections in Germany and France, when you look at the weekly figures, are ahead of last year’s levels for June, while collections in the UK are slowly catching up to last year’s levels, and Dutch milk production is still significantly lagging behind last year. As a result of adequate milk supplies within the larger producing regions, though, reports suggest that the spot milk market has calmed a bit following a very tense period throughout May when we were short milk. Adequate soil moisture levels across the bulk of the European Union are supporting pasture and milk production during the early stages of summer. However, hot temperatures amid unstable weather in the forecast have the potential to balance that outlook.

Other than that, the rest of the week was really dominated by US-centric data releases. We got May 2024 Dairy Product Production numbers, May Trade Figures, and another look at Weekly Slaughter Rates. We already did an in-depth look at the Dairy Products Report on our Dairy Skim episode on Wednesday, but here’s what you need to know. It was bullish dry whey, slightly bullish cheese, neutral on butter, WPC 34%, WPC 80%, and lactose, slightly bearish nonfat dry milk, and definitely bearish whey protein isolates. Total cheese production logged a second consecutive month of year-over-year increases, but the story was in the line item data. Mozzarella production was up for the third month in a row, while cheddar volume tanked, falling for the seventh consecutive month. Dry whey production dropped year-on-year for the first time in 2024 and fell a sizable 6.8 million pounds from April to May. Copious amounts of butter were churned in May, with the year-to-date total exceeding 1 billion pounds, the first time that production has crossed this threshold before June. Combined production of nonfat dry milk and skim milk powder has recorded a full year of annual decreases, as demand for US product internationally remains pretty poor.

Talking US Trade now, total US dairy exports in May reached 228,990 MT. That’s a 1.7% decrease on May of 2023, and recorded the lowest value for the month since 2020. While exports to Mexico were the second-highest ever recorded, sales to other US trading partners dropped significantly, such as China, Canada, and Southeast Asia. Demand from Southeast Asia was the smallest May total since 2017, dropping 22% relative to last year, on weak nonfat and skim milk powder as well as dry whey exports to the region. However, the US shipped 34,430 MT of dairy products to China, the greatest amount so far this calendar year. Total solids sent abroad were 15.8% of US Milk Production in May, the lowest mark since January 2023, and down 5% from last year.

I think the last thing worth mentioning here is in the weekly slaughter numbers. US Weekly Dairy Cow Slaughter dropped off a cliff once again, falling to the lowest level for week 25 since 2008 at just 44,800 head, which was down 20.7% from a year. The largest drop of the prior year was in Region 5—Minnesota, Wisconsin, Illinois, Michigan, Indiana, and Ohio—at just 11,700 head, which was a 23% drop from a year ago.

All this and more can of course be found on our dashboard, so get in there and check out all the comprehensive analysis that we’ve pushed out this week. Not a customer? No problem. Hit the Free Trial button on the website and we’ll get you set up right away. Thanks for tuning in to this week’s Let’s Chat Dairy. Be sure to subscribe and join us next week for another discussion on dairy fundamentals. If you have any questions or topics you’d like us to cover, feel free to reach out to us via email at info@highgrounddairy.com. Cheers.

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