Let’s Chat Markets: Weekly Recap September 24, 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: Okay, that was fast! We’re already recording our last podcast of September and then it’s hello October. I’m always ready for the spooky season but time is going way too fast throughout this pandemic. October doesn’t just mean ghouls and pumpkin spice—it also brings us into the peak milk production month in New Zealand. We had heard that some farmers were having a difficult time achieving growth in recent weeks and we got confirmation overnight that New Zealand milk production was down 4.8% from prior year in August on a milk solids basis. Not to mention, we’ve heard anecdotally that September wasn’t much better. But we’ll come back to that. Let’s head back to the beginning of the week, shall we? Lucas, how about that U.S. August milk production report that came out on Monday?

Lucas:  It was quite an interesting report, that’s for sure. A little bit of a surprise—less milk produced than expected throughout August and a little bit of a bullish signal for markets to ponder. Both U.S. milk per cow and the total herd size surprising and contributing to that weaker output. We were still up versus prior year, that’s for sure, up 1.1%. Not necessarily any shortage of milk to go around just yet but as we reach the seasonal low, spot milk has definitely increase in costs around the Midwest for those seeking it.

Diving into the exact numbers, the milk cow herds declining 19,000 head in the month versus July, of course. That is a steep reduction and much quicker than we anticipated that the herd size would be weakening. While that Weekly Slaughter data continues to show pretty substantial cull rates. That suggests that this could persist into the fall and the overall heard size could reach parity much sooner than we expected. The HighGround model—our milk production forecast model that we run—showed the herd size reaching parity into March or late Q1 of 2022 but this data suggests that can happen as soon as the end of this year. It’s surprising there how quickly we can shed cow numbers. 
Yield also was quite surprising. It was actually weaker versus prior year and that’s rare to see. Usually, milk per cow is a consistently climbing trend—something we seen for decades. Milk per cow is weaker during the pandemic but before that, we have to go back to 2015 to see a number in the red here. So, heat, weather, some ration changes, kind of all of these factors combined to weaken overall yields. California, the largest milk-producing state, up 0.7%. So, recovered from the July weakness but contributed to some of the weaker numbers here that we saw into August. Looking ahead, I think a key takeaway is previously we weren’t necessarily expecting milk to slip weaker versus prior year at any point in the coming months, but I think this does increase the chance that we could see some red or some negative numbers into the first half of 2022.

That was on Monday. There were quite a few other things that we pushed out throughout the week. What else happened, Alyssa?

Alyssa: Yeah, you weren’t kidding! China’s August trade data was released over the weekend and, wow, that was strong and there was, of course, another massive jump in whole milk powder and China basically continues to diversify suppliers to meet their elevated demand needs that have clearly surpassed seasonal availability from New Zealand. Skim milk powder imports were stronger versus prior year for the 8th consecutive month into August and marked a new all-time record high for that month and despite anecdotal chatter that milk production is strong throughout China, fluid milk and cream import growth was also substantial.

Lucas: It’s definitely been crazy to watch some of that data from China and their insatiable demand—just green all over the board there, watching their imports recently. Switching back to the U.S. though, there was more domestic data that we got this week. The Cold Storage report was released on Wednesday—August data again for both butter and cheese, measuring, of course, total inventories in warehouses at the end of last month. I think the biggest takeaway was the quicker than expected and quite impressive decline in overall butter stocks. You know, we’ve been talking for months about burdensome volumes and ample availability and while I don’t think that’s necessarily changed, stocks are declining a little bit quicker than expected which is a touch of bullish for this market here as we move into the peak demand season. Stocks slipped lower versus prior year for the first time after 25 consecutive months of strength—down 7.4% versus the prior month, even though we are still well above 2 years ago and levels typically seen pre-pandemic. I don’t think we’ll see the price racing higher as there’s still plenty of product to meet anticipated demand needs here in the coming months but a little bit of tightening here was welcome and good to see. On the cheese side, total cheese stocks slipping slightly lower in the August as well. Kind of on a seasonal basis but a lot of that was driven on non-American style cheese—huge reduction in there in those non-american volumes. The bearish note here, though, on American or likely, specifically, cheddar volumes jumping higher versus prior month in a counter-seasonal move there into August. Plenty of cheddar available to meet anticipated upcoming needs. It leans a little bit bearish here from the amount of product that we’re seeing in these stocks numbers but, of course, as the cheese market is driven by that forward to 30 day old product, anything can happen in spot here. If there is a shortage of fresh cheddar, then the stocks numbers don’t necessarily drive price as much as we might think that they would.

Alyssa: Geesh we really got hit with a lot this week. Heading back toward the beginning of the week on Tuesday we saw some relatively neutral results from the global Dairy trade Auction but prices still supported. The lack of forward curve developing across nearly every GDT product does lend support to the fact that uncertainty continues to blanket the global dairy industry. C1 premiums have remained intact throughout the second half of the calendar year across whole milk powder, butter, and androgynous milk fat, and cheddar as buyers continue to purchase hand-to-mouth.
For more in-depth opinions on that event every other events that were covered in this episode, you’ll have to request a free trial to our analysis which can be found on our website: highgrounddairy.com. We hope you guys have a wonderful weekend and look forward to being back next week and welcoming in October with you, cheers!

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