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: It’s another very happy Friday here at HighGround Dairy as we wrapped up another forecast week. We dug into some key global fundamentals around the world impacting prices today and well into next year. Generally speaking, dairy commodities continue to find support on tighter milk supplies around the globe. The European Union finalized their July figures this week which reflected negative growth from the region. U.S. milk should be tempered into the end of the year and New Zealand milk is expected to be near flat to the end of Q4.
Lucas, you did such an amazing job on our monthly webinar this week, recapping all of this. Could you please go over what our team considers upside and downside risk to our current price forecast on dairy markets?
Lucas: Thanks, Alyssa. Yes, if you are not a customer we just wanted to remind you that we put together our comprehensive forecast report around the middle of the month—usually comes out on the 15th of the month if that’s a weekday. As you said, Alyssa, we submitted that to all of our customers on the 15th and did a comprehensive webinar yesterday so I’ll just run through a few of the key points here. Usually, we go through Global and domestic pieces of the puzzle that are impacting our opinion on the markets and I think when we look to prices—of course, right now we have price forecast out a little over a year through December 2022–there are few things both weighing on the bullish and bearish side of things. Upside risks to some of our prices are a strong US economy. So, we continue to watch the inflation rate, GDP growth, retail sales data, consumer spending, and a variety of those indicators that point to a continued sustained recovery in the economy as we continue to move past the struggles that we saw throughout 2020. Those pressures, that spending, coupled with even some carry over from the stimulus and some extended SNAP benefits—all those kind of lean a little bit more supportive towards dairy prices in the coming months. Globally, I also think that this firm global demand that we’ve seen over the past several months could persist in the near-term, especially as China shows limited hesitation to slow their buying, especially on the whole and skim milk powder side of things. If that global demand continues or strengthens even further, that lends support to some of our price forecasts as well. Opposite that, though, on the downside risk part of the equation, I think domestically, even though the economy is strong and there are a lot of signs that things are growing nicely there are some red flags as well. The Delta variant of covid-19 continues to spread in basically the entire country, some areas are struggling with this worse than others, of course, but that spread remains problematic and kind of a limiting factor on a full return to normal. Of course, those supply chain issues that we’ve been talking about are complicating logistics, show no signs of easing at any point. We mentioned this on our webinar but if we were here six months ago we might have said that things might have been clearing up a little bit here as we move towards the end of the year but at this point, with a pandemic and shipping issues and costs, I don’t think those are going away at any point. Labor shortages as well are a challenge especially at the restaurant level, reduction in restaurant hours and capacity also prevents dairy demand from reaching its full potential. Finally, on the US milk production side of things we have seen corns, soybean, and soybean meal prices tick lower here in recent weeks. That has improved our outlook for feed costs over the next few months and into next year. That’s allowed dairy farmers an opportunity to hedge some of their feed cost risk there at lower prices versus what we saw throughout most of the summer. It has improved our profitability outlook and our income over feed cost outlook. I think this kind of lends a little bit of support to our milk production forecast. I think we’ll be close to prior-year levels here in the coming months, especially in 2022 but those cheaper feed costs are a little bit of a relief from the farm side.
Alyssa: Let’s talk about all that red on the European milk production data as well as on their export figures. The combination of those two data points continue to point to the entire supply situation, especially given that European indices on the European energy exchange have only strengthened throughout summer. It was interesting that each of the top six milk-producing regions within Europe—and that includes the United Kingdom—recorded losses with a steep drop in exports across every key commodity except cheese.
Lucas: Yeah, lots of red in those charts—both milk production and exports in July. I think it was striking, you mentioned this but, the top five countries in the continent—Germany, France, UK, Netherlands, and Poland—all seeing lower milk production versus the prior year. On the SMP side of things, it was the fourth consecutive month that shipments were lower versus the prior year. Products to China were actually higher which is kind of representative of China’s persistent buying but the total decline in EU SMP exports is driven by less product to Algeria and Lydia. On a total product basis, of course, all that red means that total exports were down—however, it was still the second strongest July on record. Deteriorating demand for infant formula and some whey and lactose into China drove some of that. But like you said, cheese did eek out some gains with the strongest EU cheese exports for July on record, driven by product moving to the US. Of course, no big surprise there that the U.S. is a key market for European cheese but just as a reminder, a reduction of the tariff escalation situation has kind of helped EU butter and cheese move to the U.S. over the past few months which is a little bit easier than what we saw throughout 2019 and 2020.
Alyssa: Thank you for that. Lastly, Fonterra’s forecast offer volumes were updated ahead of next week’s Global Dairy trade event. There are not really any major changes there for the first time in a while. I think the biggest expectation that we’re observing on NZX price action is that milk powders are expected to just keep trending higher. Fats are pricing in a loss but HighGround continues to hear fat is tight so there should continue to be some underlying support on Oceania fat markets.
That does it for today’s episode. We thank you so much for joining us and, please, if you’re not already a customer, head to our website, click on the free trial button and start reading our global dairy comprehensive analysis today. Have a great weekend, cheers!
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