Let’s Chat Markets – 29 December 2023

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] Alyssa: Good afternoon and happy Friday to everyone! Thank you so much for tuning into Let’s Chat Markets, your favorite weekly dairy market podcast powered by HighGround Dairy. Today is Friday, December 29^th, and you’re hearing from Alyssa Badger, Vice President of HighGround Dairy and Cara Murphy, our Dairy Market Intelligence Manager. We hope everyone had a very lovely Christmas and is taking it easy into the new year. This week between holidays is always pretty quiet, but with markets open, something is bound to happen. Let’s kick things off with the last CME Spot market recap of 2023, Cara.

[00:44] Cara: Cheese markets saw some action this week with blocks climbing to $1.4700 per pound with a total of 35 trades, 14 of those occurring on Tuesday. The block versus barrel price spread inverted on Tuesday and Wednesday as the barrel price rose but it lost momentum heading into the weekend to close today at $1.4000 per pound with 40 trades. The Butter price also gained with the largest price movement of $0.0800 on Wednesday. Butter settled today at $2.6650, up over $0.1200 since Tuesday’s open but only trading just 4 times. For the last two commodities, Nonfat Dry Milk and Dry Whey, markets moved very little. Nonfat sat around $1.1600 per pound with 3 trades while dry whey hovered near $0.03800 per pound with just 1 trade.

[01:27] Alyssa: Thanks, Cara. The November Cold Storage Report was published last Friday and we were able to take a look at that before the Christmas festivities began. Can you give us a quick recap of that report? Just in case someone missed the Skim episode.

[01:39] Cara: Absolutely. In cheese, total stocks eked out a small gain of 0.2% compared to last year but the October to November decline of 31 million pounds was nearly twice as steep as the five-year average. American cheese inventories grew by 1.2% year-over-year while other-than-American cheese supplies fell by 1.1%. Overall, this outcome was neutral to our expectations as the winter holiday and football season typically brings a boost in demand. November’s butter stocks of 215.5 million pounds were the largest for October since 2020. Furthermore, the month-on-month decline of 9.6% or 22.8 million pounds was the smallest since 2012 and less than half of the five-year average. Given the tighter fat market and slowed US milk supply, the result is likely due to decreased demand rather than greater supply, a bearish indicator heading into 2023.

[02:33] Alyssa: You mention that the small monthly drawdown in butter was more of a demand issue than supply. Can you elaborate on that for us?

[02:39] Cara: Yes. On the supply side, total US milk production has pulled back compared to last year, particularly in California, the largest dairy state, and one that accounts for roughly one-third of the total US butter production. In November, milk output per cow in the state was down 1% versus last year and the milking herd was down 0.6% or about 11,000 head. Lower cow numbers was a result of greater dairy cow slaughter throughout the summer as tight on-farm margins and enticing beef prices drove more farmers to cull their old and low-producing animals. Although slaughter began moving in the opposite direction in the fall, with this latest week posting the largest year-on-year decline since October 2022 for the Western region (which includes California as well as Nevada, Hawaii, and Arizona) year to date slaughter for 2023 remains up nearly 23,000 head in the region.

Alyssa: Interesting, and on the demand side—what are we seeing?

[03:34] Cara: The demand side of things looks a bit rough. While the holiday season typically provides a boost in consumption, macroeconomic challenges continue to plague consumers. Sentiment has fallen month-over-month since July as high interest rates, persistent inflation, swelling debt, and a rocky jobs market keep American’s outlook for 2024 on the pessimistic side. Trading down at the supermarket from brand name items to private label has also been happening this year and consumers may even be opting for margarine instead of butter to save a couple of bucks. In the food service sector, higher menu prices have kept same-store sales positive but at the expense of foot traffic, and less diners means less food needed to feed them. Ultimately, I think financial and economic headwinds that consumers face in 2024 will continue to weigh heavy on demand.

[04:21] Alyssa: I think a similar dynamic can be said for the European market as well. But keeping things balanced, EU milk output continues to fall and dropped 1.8% in October (the latest data) versus the prior year and growth prospects into the end of this year and into 2024 appear to be limited due to environmental limitations and tighter profit margins. In the October data, this was the steepest decline that we have seen since February of 2017—pretty ugly. While the decrease in milk production from France (-88,090MT YoY) had been anticipated, there was also an aggressive reduction in milk output from Ireland (-89,790MT YoY) that was even more pronounced than France. Irish milk output plummeted by 12.6% in October, the largest year-on-year decline since January 2015, while butterfat production turned negative (-2.3% YoY) for the first time since January of 2023 as well. As a reminder into 2024, Ireland’s nitrate derogation will change (reducing from 250kg to 220kg), which will continue to limit milk production growth from that country. Germany’s milk production was only slightly lower, with Butter and Skim Milk Powder production falling flat. Cheese volumes from Germany continued to grow against prior year for the sixth straight month into October and exports have also reached record levels this year so that cheese is certainly moving. Be sure to check out our full analysis to see all the production trends from the top-producing regions, located on our dashboard.

Cara: I think the only region left to cover is Asia Pacific!

[05:57] Alyssa: Yes, let’s talk about our Asia Trade Flow Analysis first. Indonesia’s demand remained pretty bad in their October data. The Philippines didn’t look much better into September but there was some solid improvement in cheese demand from Japan into November, as well as South Korea as they reported an all-time high for cheese imports during November from South Korea. In fact, demand from that country improved across almost all major dairy products. Another bright spot was Malaysia as their recently released October figures reflected strong powder, fat and cheese demand. You can see the entire breakdown on the dashboard so be sure to give that read if you haven’t already.

[06:39] Last but not least, Fonterra released their Offer Volume Forecasts ahead of next week’s Global Dairy Trade event and left everything unchanged. Though there had already been strong butter volumes removed and the impact from that continues to ripple into butter futures on the Singapore Exchange. the January contract settled at $5,700/MT and if realized, it would be the highest Global Dairy Trade settlement since June 2022. Throughout January 2024, there is only 2,100MT of butter on offer. That’s 43% less than prior year and 41% less than what was originally on offer for the month before the removal that just happened just a few weeks ago. Unfavorable weather conditions on the North Island have led to limited production, and concerns are rising due to the potential for further dry conditions caused by El Nino during the summer months, which could impact fat availability further in New Zealand. However, farmers seem content with recent moisture levels and that summer dry-out may be delayed until February. Given the tighter global milk production atmosphere over the next couple of months and the discounted prices from Oceania, it is reasonable to expect strength in milk powder prices as well into January. The current SGX settlements represent a pretty realistic target to achieve in the next month if you ask me.

Well, that does it for our very last podcast episode of 2023. It’s been a great year for all of us at HighGround Dairy and we hope you all have a safe and exciting New Year celebration. We are looking forward to next year and all that it will bring. From the bottom of our hearts, thank you for being here with us each week to listen to our podcast. Your support means the world to us. Cheers.