Let’s Chat Markets – 3 February 2023

[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. Strength was observed within the Class IV milk complex as both nonfat dry milk and butter recorded week-over-week gains into Friday. Butter pretty much recaptured all the losses from the prior week and on impressive weekly volumes that were the strongest we’ve seen since the end of last August. That was 43 loads that traded hands this week. What’s behind the Class IV strength, Eric?

[00:45] Eric: Thanks, Alyssa. We kind of thought that the strength in the markets might come after the IDFA Conference where everyone seemingly lines up on one side of the fence when it comes to sentiment and last week, everyone was bearish. So, we felt that we could definitely see potential for a short-covering rally. We would have expected that to have occurred last week but alas, it happened this week. So nonfat and butter on the CME Spot market rallied back to mid-January levels with butter up $0.10 from the recent lows. Nonfat up nearly $0.10 as well and futures rallying hard this week in both commodities. We’re not necessarily seeing any major shifts in the supply/demand situation at the moment so our feeling is that this is somewhat of a short-covering rally. Buyers have been sitting on their hands for quite some time, watching prices come down and any little instance of increase in the Spot market has not only brought end users back to the market to take advantage of these discounted prices from where they were a few months ago but also those who were short this market, believing there was more potential downside to step back and take some profits on some of their derivatives positions. We are going to start to see more fundamental data come out. HighGround isn’t so sure that we’ve seen the bottom in either of those markets yet.

[02:17] Alyssa: Cheese prices actually lost ground this week but the same can’t be said for dry whey, which gained from last week after four weeks of losses. Anything to add on those products?

[02:27] Eric: Well, the whey market is certainly putting in a big number here after a whole bunch of volume transacted, with manufacturers being aggressive and pushing that number down into the low 30s. We bumped up—seems like a little trend here—$0.10 after the seller disappeared. We’ve moved sharply higher over the last few days on almost zero volume there. Futures on dry whey are up a little bit from where they had bottomed out but certainly a little optimism in the short term here on the whey market as well. Cheese had a bit of a quieter week when it came to price movements. We did see some correction and consolidation in the block-barrel spread. We’re now down to $0.2350 here on Friday. A little bit of support on the barrels, seemingly $1.60 and under were of value to buyers, whereas in the block market, we’re still seeing a bit more aggression on the sell side.

[03:23] Alyssa: While we’re still discussing the situation here in the U.S., HighGround started a new email this week to share more detail about the weekly cattle slaughter data as those numbers have been strong to begin the new year. So far in 2023, weekly slaughter data is justifying the possibility of further milking herd reductions in the coming months.

[03:43] Eric: I think that we want to make sure that we noted this a bit more on a weekly basis and stress what’s going on with the slaughter numbers. We typically publish this in our Daily News Wire on Thursday afternoons in a very basic chart but we wanted to expand that a little bit, especially with how strong the slaughter rates have been to start off this year. We’ve got over 200,000 head that have been slaughtered in the first three weeks of this year. That’s up 9% and just this past week ending January 21st, we had nearly 71,000 head. That was up over 13%. So, to finish off last year and to start off this year, weekly cow slaughter is stronger which is suggestive that we will not have as much in the inventory pipeline here and farmers are looking to get cash for those cows.

Also released this week was the semi-annual USDA Cattle Inventory report, where milk cow replacement showed seven straight years of declines. For the January 1st report that was published this week, the milk cow replacements expected to calve number was 2.769 million. that was down 2% vs prior year. That’s down 5% over the last two years and seven straight years of declines down 11% from the 2016 peak on replacements that are expected to calve. What this insinuates to us is that we’re not going to have the inventory of replacement cows needed here. It could suggest further declines and then when looking at this number—let’s say we move to a bull market—it’ll be a lot harder for U.S. dairy farmers to build on the milking herd if replacements are down here. So these data points are not necessarily bullish today but I think when we look out in the next handful of months, we could continue to see further herd declines here—a little bit sooner than we expected—we do need demand to turn around. I think it’s important to note that we’ve been looking at milk production declines in New Zealand now over the last two years we’ve seen somewhat shocking milk production declines yet prices have fallen in that time frame because demand has been down so much. This could be the trend in 2023 for the U.S. dairy industry and markets as well, but when demand does return, looking at these types of numbers indicated that it will be much more difficult to see growth in the coming months and so prices could turn around much quicker. Our feeling is that’s more toward the second half than anything upfront here. These movements or upward corrections in price are typically short-covering squeezes that occur in bear markets. If we had any additional indication that demand would be stronger, we’d have a much more bullish view but at this point, right now it seems like a short-term upward correction in an otherwise down-trending market, from a price perspective.

[06:46] Alyssa: It was a light data week otherwise but there was an interesting GDT Pulse event on Tuesday as C2 whole milk powder increased for the second consecutive Pulse event. There were only eight winning bidders, unchanged from the prior week when China was on holiday, but there was certainly more interest from those bidders in securing product. It’s possible there is some nervousness being created by the weather headlines in New Zealand. The North Island remains incredibly wet while the South Island started to dry out early this year. On Thursday, Fonterra released their offer volume forecasts for next week’s official GDT auction and those continue to be left unchanged. SGX traders are pricing in gains on just about everything except skim milk powder though.

[07:34] Eric: As we record this, we are still waiting on the USDA December 2022 Dairy Products report but stay tuned later today for a Dairy Skim episode from our team recapping our initial thoughts on that data.

[07:48] Alyssa: Into next week, expect to see comprehensive analysis regarding the GDT event, December 2022 U.S. Trade Data and a World Agricultural Supply and Demand update from the USDA. The team will also start to dig into our forecast report to begin updating our 18-month price outlook for CME and international indices.

We hope you have a great weekend and we look forward to jumping on next week to chat dairy markets with you.