Let’s Chat Markets – 6 January 2023

Let’s Chat Markets is a weekly podcast, hosted by HighGround Dairy’s top analysts. 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!

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[00:09] Alyssa: Hello, everyone, and welcome back to another episode of Let’s Chat Markets, your favorite dairy podcast, which is just a nice easy recap of what happened in dairy markets this past week and what’s on tap into the days ahead. It was another shortened holiday week due to the observation of New Year’s Day with some key international data out for the industry. Looking domestically first, block and barrel cheddar spot values consolidated lower after last week’s gains, nonfat dry milk averages also experienced some weakness, now the lowest since August of 2021, butter moved mostly sideways and dry whey saw very small gains. Any key takeaways from this week’s spot activity, Eric?

[00:55] Eric: Alyssa, thanks for letting me join you today. Not a ton going on in some of those Spot markets, as you had mentioned. We’re drifting lower in some or maintaining a very flat market. CME Spot butter was ticked up a quarter penny here this Friday but over the last eight days, it’s barely moved at all with zero trades this week. Mostly light volume because it was still a holiday trading week–we only had four trading days this week with New Years being celebrated. But a lot of movement on the cheese side–block cheese finished last year with what appeared to be a squeeze at the $2.16 level–we’ve come off quite a bit to the start of the year but it’s been oscillating around. We got all the way down below $2 and then today, we traded all the way up to $2.0550. When comparing that against a $2 average for this week–which is what cheese buyers will be paying for physical next week off their contracts–it seems like that $2.05 level may be a little too expensive. Now, on the barrel side, $1.7250 looks pretty cheap, although that’s matched up quite well against this week’s previous average of $1.7263. But against last month’s nearly $1.84 December monthly average, that may look like a good deal. However, there was a plant fire at an AMPI Cooperative plant in Wisconsin that was a processed cheese facility. Now, it doesn’t sound like there were any manufacturing issues, but that may displace some barrel cheese that would have gone into that facility, keeping things a little bit looser in the barrel market for a little longer. But, as we head into the first part of January, we’re still hearing that 40lb blocks are tight. We’re not necessarily hearing that demand is all that strong at this point.

[02:45] Alyssa: Thanks, Eric. While we’re talking about the U.S. still, let’s talk a little about that trade data. I know you and Cara recorded a Dairy Skim episode already so if you haven’t listened to that, we recommend going back to hear our thoughts. But, something we didn’t go into detail about was the butter export number. Export volumes of butter from the U.S. neared 9-year highs because of demand from Canada. I was curious what they were paying for U.S. butter so when we checked that out, we saw some strange values. In fact, the average unit value of butter shipped to Canada was $1.20 per pound.

[03:24] Eric: Yeah that seemed off to us as well, Alyssa. When Cara and I looked at the number, it appeared very impressive that the butter volumes into Canada were at record highs but digging into the data and knowing that some of the butter that had traded had gone in well over $6,000 dollars metric ton or getting to that $3/lb level. the fact that the overall unit value was at $1.20 means something is off. It suggests that there is either some kind of blended fat or an alternative item that’s cream-based–maybe fluid–or possibly that some mislabeled product was put into that HS code. So, something that we’re going to look at a little further but that does appear to have well-overstated the butter export numbers into Canada, even though if you take a lot of that out, it’s still strong–but not like the chart suggests.

[04:16] Alyssa: Yeah and I think nonetheless, it remains impressive that the U.S. kept hitting monthly highs throughout 2022 as every month since February reached record levels. Looking toward Europe, spot prices were a little less optimistic this week with just about every commodity ticking lower. There was little activity in the European skim milk powder (SMP) market in recent weeks due to the Christmas and New Year holidays, however, inventories are said to still be elevated while short-term demand remains weak. The cheese market saw weakness at the beginning of the new year as food retail orders for the holiday season fell short of expectations through the final weeks of 2022. The strength in Europe’s milk production activity continues to be quite bearish as the calendar heads into the spring flush period over the next few months.

[05:09] Eric: Alyssa, when we talk to traders over there, it just seems like the manufacturers have plenty of stock to offer and that demand is still quite low and so we see some bearishness no matter the exchange rate with the dollar–which at the tail end of 2022 was starting to get weaker.–that did not necessarily entice more demand. So, we still see some bearish activity out of the major exported commodities like skim milk powder, butter, as well as cheese. One other thing in Europe that we’re watching closely is that it’s really warm there. That was a real critical concern going into winter with the war in Ukraine and the ban on natural gas being imported from Russia and that there would be extraordinarily high prices. Well, citizens there have lucked out with a very warm winter and so those natural gas and energy prices have come off quite a bit around the globe. However, with the above-expectation on temperatures, that may lead to more milk production in the near term. But, it is quite dry there and without that snow-pack and snow cover, they could be dealing with the potential for draught later on in 2023. So, certainly a lot of interesting factors around dairy farm, on-farm profitability and some of the things that could curb milk production later this year. While milk production is decent now in the Northern Hemisphere, that could change quite dramatically in the second half of the year if farm margins are cut quite a bit because of low commodity and milk prices starting in late Q1 and into Q2 as well as some of these weather concerns.

[06:50] Alyssa: Backing up to the very beginning of the week, and also quite bearish, we had the first Global Dairy Trade auction of 2023 on Tuesday. And the New Year started the same way 2022 came to a close – with China (North Asia) very much an active buyer, though buyers from the region did not need to be aggressive in order to secure impressive volume because Southeast Asian demand was subdued on many key commodities. As a result, prices just limped along.

[07:21] Eric: Yeah, when we start out the year like we were towards the tail end of last year, it just seems like the momentum was quite bearish. And you said it best, without Southeast Asia being in the market as a competitive buyer on the downswing, China was able to pick up significant volume and I think that leads to the potential for more bearishness. There could always be small pops in the market and we could see some gains occur in some GDT auctions or even GDT Pulse auctions. But, if China is able to pull and not have to compete with others, or over-bid to get that taken care of, they may be able to fill up as New Zealand’s milk production gets a little bit better towards the tail-end–or shoulder–of their season. We’ll see here but to open up the year, that was a bit of a bearish print and that will ripple across a number of global dairy commodities.

[08:11] Alyssa: Thanks, Eric. As we wrap up this podcast on Friday afternoon, we are still waiting for the release of the USDA November 2022 dairy products report that will be out at 2pm central time.

[08:24] Eric: I think we’re really looking forward to seeing what the butter volume and production volume was for November as that cold storage number was a bit of a bearish surprise to us and with the lack of any real movement in the butter market, I think, market participants there are eager to see what those numbers come out to here.

[08:43] Alyssa: Absolutely. That does it for today’s episode. Next week will be rather quiet as the team preps our monthly forecast report for our customers. We look forward to chatting with you then and don’t forget to head to highgrounddairy.com to check out our new website. Cheers!