Let’s Chat Markets – 27 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. Let’s do a quick recap of what happened on the CME Spot market this week. And really, they can be defined yet again by another consolidation across nearly every product. Barrel cheddar dropped to fresh lows not seen since November 2021 with the weekly average settling at $1.61 per pound and that’s on rather strong volume changing hands. At 34 loads, this was the most weekly volume traded in the barrel market since December 18th of 2021. The Block market moved slightly higher and settled the week at $1.9630 per pound, now holding a premium of $0.4075 over barrels, the largest since November 2020. As you can see, there are lots of notable price movements here. Nonfat dry milk settled the week at $1.1640, the lowest since March 2021, so nearly two-year lows and the seventh consecutive week that prices have moved lower. Butter also continued to weaken and is now the lowest since December 2021. Last but not least, weekly Dry whey values sank to August 2020 lows of $0.3245 per pound. As you can see, the path of least resistance in dairy markets continues to be to the downside.

[01:35] Now that we’ve recapped what happened on the CME Spot market, let’s check in with Eric Meyer because we want to hear how the IDFA 2023 Dairy Forum went in Florida this week. What did you hear and what did you learn, Eric?

[01:49] Eric: Thanks, Alyssa. It was great to get down to Orlando to catch a few rays, play some golf which hasn’t happened in months and just get a chance to visit with the industry. More than 1,100 registered attendees at Dairy Forum which was a record for them and as we know, there are a bunch of stragglers who don’t have badges and are just there to hear what’s going on in the markets. So as far as takeaways that I had from the conference, it seems the sentiment right now is bearish across the different segments. A lot of nervousness around E.U. pay prices to farmers, which are far too high with product prices collapsing in recent weeks. So when is the milk production going to end there? It seems like milk production due to the mild winter and high pay prices are just keeping milk flowing when all signals from the end product prices would suggest that we should be pulling those pay prices down quickly. In the U.S., there’s a lot of discount milk—it’s pretty widespread across the midwest. USDA had in their reports that we are ranging from $6 to $10 hundredweight under class prices and that’s been confirmed at the conference, even into the late weeks of January. That’s just surprising given what we saw after the conference in the Milk Production Report. Cream multiples out West are pretty low at the moment, meaning more cream will flow into butter churns where it can, definitely against last year when cream demand was firm for most of the year. With imported AMF and other fat products coming in and hitting our shores, that does leave a lot more cream that had a need last year that is looking for a home this year. That said, when everyone leans on one side of the boat—in this case, it’s bearish—what tends to happen in the markets? Short squeezes tend to be common in bear markets like this so do not be surprised if we see an upward correction with decent upward momentum in the coming weeks. But we’re not so sure that the bottom is in yet on most U.S. dairy commodities.

[03:51] Alyssa: While you were out, we had some key reports come out from the USDA and right at the same time. On Wednesday, the USDA released both the December Milk Production report, as well as the December Cold Storage report. While we already recorded our quick take on the Dairy Skim episode, we haven’t heard your thoughts yet, Eric–let’s start with Milk Production – what was your biggest takeaway?

[04:14] Eric: Thank you very much. While I was on the airplane, you took care of Dairy Skim for us and you covered both Milk Production and Cold Storage. I would definitely recommend listening to that quick report on the podcast (link here). From a key takeaway perspective, things remain lower than we would have expected. This was the third or fourth consecutive month where our forecast—the actual data—came in below it. And, the herd size has taken a beating these last couple of months. We are at 19,000 head below the May 2022 peak and that was into some really huge milk checks this summer into early fall. Texas lost 5,000 head in December from the previous month. That’s actually the first time the state has seen a reduction of any kind since January 2016 which was the aftermath of that horrific winter blizzard that killed tens of thousands of animals during that single storm. This past year’s bull market only generated an additional 52,000 head into the milking herd over just a four-month period which is about a third of the herd increase during the June 2020 to May 2021 expansion when the nation’s herd grew by almost 150,000 head. What was different? Well, feed costs for sure—those remain stubbornly high. Production per cow was well below trend as well which could have been due to the early winter storms with frigid temperatures in December that went as far south as Florida over the holidays.

[05:40] Alyssa: And then those inventory numbers, nothing really jarring in that data as both cheese and butter were absorbed as neutral versus our expectations.

[05:49] Eric: A couple of things to note on Cold Storage. The butter stocks were above prior year for the first time since July 2021 and the November to December stock movement was actually a build of 16.5 million pounds. Somewhat higher than that five-year average but counter the 2021 monthly movement from November to December which was a net out movement of 11 million pounds. For cheese, natural American continues to trail the previous year’s frothy levels for the fourth consecutive month. But all the cheese figures and data points in this report were mostly in line with our expectations. All eyes right now in the cheese market are on what’s happening in Europe. Things are getting pretty worrisome given how quickly prices have fallen.

[06:32] Alyssa: Thanks, Eric! Of course, a reminder to our listeners that you can read our full market opinion on our new market intelligence dashboard at highgrounddairy.com. You know last week, we brought up that China’s December trade data was out but we didn’t really have a chance to talk about it so I just want to do a quick recap here. December imports were mixed but turned positive across a handful of key commodities. Most notably, SMP imports were the strongest for the month in nine years. Despite a slightly better December, Q4 of 2022 ended up being the weakest quarterly dairy imports reported from China in three years with the entire calendar year recording the same statistic–the lowest import volumes into China since 2019 for dairy as a whole. While it was a weaker import year from China due to their strong internal production and lower consumption, its worth noting that total imports from the U.S. reached an all-time high. That was really led by whey and lactose demand needs.

[07:38] Into this week though, China is celebrating the Lunar New Year and many people are traveling for the holiday for the first time in three years. As a result, tourist bookings in China surged this week but consumption and spending are still in question overall as individuals focus on getting out to visit family.

[07:58] Eric: that explains why the GDT Pulse event was so quiet this week!

[08:02] Alyssa: Right, exactly, Eric. We have a three-week gap here on GDT events but it is worth mentioning that at this week’s Pulse event, participating and winning bidder volume was the lowest on record since these events started. Also from New Zealand this week, December milk production figures were finalized and while volumes remained negative, milksolids officially turned positive and were UP 0.6% from prior year. We knew there was a high chance that milksolids turned positive in December which very well might continue throughout the rest of the season. Some key concerns though are how quickly the South Island is drying out and yet, rain continues to fall throughout the North Island.

[08:43] I think we can close it out here with a recap on European markets. German butter prices fell for the seventh week, though each region (Germany, France and the Netherlands) are all reflecting steep losses with industrial cream values reportedly dropping off a cliff. European skim milk powder (SMP) dropped to a two-year low, though the region is still holding onto a premium over U.S. nonfat dry milk. Lastly, worth noting, in just two months, the EEX Gouda and Mozzarella index dropped 34% while the German edam value has fallen 25%. German edam prices are the lowest since November 2021 with all the EEX cheese indices (USD) the lowest since the reporting began during the same month (November 2021). That’s all in U.S. Dollar terms.

[09:34] We have a pretty light week next week though. New Zealand’s December trade data should be out early Monday or Tuesday. We will have another GDT Pulse event on Tuesday, pre-GDT data from Fonterra on Thursday and then the December U.S. dairy product production report will be released on Friday afternoon. Looking forward to chatting markets with you next week. Cheers!