Let’s Chat Markets: Weekly Recap October 8, 2021

Let’s Chat Markets is a weekly podcast presented by HighGround Dairy, hosted by analysts Alyssa Badger and Lucas Fuess. Every Friday, they sit down to recap the week in dairy markets and summarize recent reports and relevant news. The podcast can be found here, or wherever you listen to your podcasts. Subscribe so that you never miss an episode!

Alyssa: Welcome back to Let’s Chat Markets, your favorite weekly dairy market roundup. It’s a beautiful Friday here in Chicago. We’ve got class III milk, nonfat dry milk, and dry whey experiencing a really strong performance this week. Those charts are just on fire and carrying strength over the week prior as well. Support continues to come from seasonal tightness, lower milk collections, a solid economic outlook, and decent demand. It was a busy first half of the week for dairy analysis as U.S. August trade data became available, there was a global dairy trade event on Tuesday, and then the USDA released August production figures of U.S. dairy commodities. I think we should start there, how does that sound, Lucas?

Lucas: That sounds great. It was the first data that we got this week on Monday afternoon, that dairy products and dry stocks report. There are some interesting numbers to glean from this, kind of as-expected with total cheese production higher versus prior year. That was no real surprise as milk was still decent into August and that cheese processing capacity has been expanded over the past several months. But, what was surprising in that data was milk is flowing into Italian-style cheeses and non-cheddar, American cheeses so think your Monterey jack or your Colby jacks—and that’s all at the expense of cheddar. Cheddar output actually lower versus prior year: down 1.5%. Initially, the July data had called cheddar lower versus prior year as well but that was revised a little bit higher so this was technically the first month of weakness that we saw but overall kind of surprising there to see that number. I do think that generally leans supportive for cheese prices here in the coming weeks. Certainly, we have seen strength develop already as blocks moved into the $1.80’s, and the block barrel spread kind of narrow to a much more traditional level after the very wide spreads that we’ve been dealing with. But, if this cheddar weakness persists that’s, of course, less fresh cheese it’s available for the CME stock market. I think the other key takeaway here is on the class IV side of things—both butter and nonfat dry milk output well below prior-year levels. Butter, I don’t think it’s a huge deal there, just a slight weakness and there’s plenty of product in stock so really not a concern as we move into the peak demand period of the year. I do think prices will continue to be relatively range-bound in that market. On the nonfat dry milk side of things there’s significant weakness, especially driven by weaker output across the Western States, California included. On a combined nonfat and skim basis I’ll put down 16% versus prior-year levels. Then, looking to the stock numbers as well a 9% decline versus the prior month. Stock still higher versus prior year but kind of in line with where we would typically expect to see August inventories. I do think, though, that that significant drawdown in recent months from what were pretty strong stocks at the beginning of the summer is notable. 

Alyssa, you might talk to this a little bit as we move into the global side of things but nonfat is generally tight around the globe and prices are well-supported. I think buyers will turn to the U.S. if they can for product since we do have the availability but of course, port congestion persisting and making exports a little bit difficult. However, that didn’t necessarily show up in the export data. Tell us what that looked like Alyssa.

Alyssa: We broke an export record for August and, in fact, there have been monthly records set on U.S. Dairy exports every month since February. The bulk of the growth and U.S. exports has been in the form of the aforementioned nonfat dry milk and skim milk powder market as the country continues to be the value-buy against the rest of the world. U.S. nonfat prices have been competitively priced against Europe and Oceania since May 2020 so about a year-and-a-half now. However, as you mentioned, those port congestions and shipping difficulties continue to worsen and that might prevent experts from climbing even further into the next couple of quarters here. The scenario has the potential to be a double-edged sword because end users are continuing to over-buy and build inventories whenever they can which has the possibility to kind of hamper demand once things improve after about the next 6 months. Do you agree with that Lucas?

Lucas: I think so. We’ve talked a little bit about China’s inventories both on whole and skim milk powder just continuing to climb in recent months—very evident in that Chinese import data as well. We talked about this in the past but it continues to ring true that end users, as you mentioned, aren’t taking any risks and I think they’re over-buying and doing anything that they can to just kind of guarantee availability. If these shipping issues are kind of a cascading delay then that won’t be a near-term problem but at some point we could see some demand slow if end users are comfortable with their inventory levels in the shipping situation. I think it’s also important to mention the GDT this week. Kind of quiet or auction—the average winning price actually flat versus the prior auction. Whole milk powder just slightly lower and other commodities just slightly higher. in the key products, whole skim, and on the backside of things all of the weighted average price among all contracts changing just less than 0.5% in all those so just subtle movement there. On whole milk powder, Fonterra c2 did see a slight dip, opposite expectations. Skim, Fonterra also saw very subtle weakness but we did see some strength from both European and North American values. Fats, subtle support there, maybe just slightly bullish opposite NZX expectations for some weakness. I do think, though, that if we dig past the surface level pricing, there’s some interesting market share and offer volume trends we can glean. What can you say about that, Alyssa?

Alyssa: Despite offer volumes being weaker again of course into this auction whole milk powder prices did fall. North Asia’s participation has remained historically weak over the past couple of months and given the amount of powder that has been committed off the platform this year that makes sense. During the first half of the year, North Asia’s market share on the GDP event averaged about 66%—the highest for the first half of the year that the market has seen in at least a decade. So, what this did is it pushed other buyers out of the platform and prompted deals to be completed offline and as a result, the removal of some product on the auction platform. North Asia’s total market share just for comparison here dropped below 35% so from 66% in the first half to now below 35%. And that was an overall volumes of commodities purchased as well as on whole milk powder specifically. That’s a direct result of that strong purchasing made throughout the first half of the year as well as the removal of some buyers at the auction, which is something that we heard of course anecdotally. It did help that demand from Southeast Asia, Africa, and the Middle East helped offset some of that weaker participation as basically every commodity outside of whole milk powder moved higher.

Lucas: Certainly lots to digest this week. That wasn’t it, though. We also had a weekly EU report where we cover the EEX indices on a weekly basis with some commentary in there. Of course, our Platinum users can log into the website and read our technical analysis. As we speak today we are getting ready to release our forecast report with new, updated forecast prices and domestic and global analysis will be released next Friday the 15th. As our normal and longtime customers know, we always published those forecast in the middle of the month. Be sure to head to our website for more extensive writing, opinion, and analysis on everything that we discussed here today.

Alyssa: Thank you so much for tuning in with us each week we sure hope you have a wonderful weekend, cheers!

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