Let’s Chat Markets – 24 March 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] Eric: Hello, everyone, and welcome back to another episode of Let’s Chat Markets—your favorite weekly podcast. Today is Friday, March 24th and I’m Eric Meyer, President of HighGround Dairy, and I’m remoting into the podcast from sunny Palm Springs, California as I provided a market outlook to restaurant supply chain executives at the Market Vision conference this week.

[00:31] It always seems that markets get amped up in one direction or another when I’m traveling, and this week was no different as CME Spot cheese caught a serious bid this week.  After settling for one day on a six-month low at $1.78 per pound just two weeks ago, blocks have rallied 32 cents, or nearly 18% to finish at $2.10/lb today, the highest price since January 11th. Just this week alone, prices have improved more than 10 cents from last Friday’s settlement. It feels like the squeeze is on, and the spot market is telling us that 4-30 day old CME-eligible block cheddar is tight for immediate delivery. Industry contacts report that there’s plenty of cheese available, but not in the correct format or age. Until that immediate demand for 40-pound blocks gets fulfilled, buyers will continue to test on the bid side. The weekly average finished 10 cents, or 5.2% higher to $2.0290 per pound. At just 14 loads traded, believe it or not, this was the strongest block trading volume since the week ending May 13, 2022.

[01:36] CME Spot barrels remain bid this week as well as a pretty large buyer has been busy accumulating inventory during the final month of the first quarter. But the price didn’t move from last Friday’s close, $1.96 per pound. Since March 2nd, the price of spot barrels has moved more than 28% higher. Impressive given where this market was from late January through early March, trading within a narrow range near the $1.60 mark. The weekly average gained 8 cents to settle at $1.9535/lb, up 4.2% vs. the prior week. Barrel trading has slowed though—at 19 loads, it was the slowest volume since the week ended January 20th, 2023. Year to date, a total of 346 loads of barrels have exchanged hands at the CME, compared to just 91 loads of block.

[02:26] The CME spot butter market peaked at $2.41 on Monday and has grinded lower throughout the week, settling at $2.3450 per pound Friday. Easter holiday demand should be coming to a close and seasonal milk should ramp up in the Upper Midwest which should provide further resistance, but yesterday’s Cold Storage report may give sellers slight pause to wait for more data before letting more inventory go. Butter’s weekly average finished at $2.3780, down a penny from last week.

[02:56] Whey prices on the CME have been bouncing between .43 and .46 half-cents for the past few weeks and has remained in that range this week as well, settling today at 44.5 cents. The weekly average settled right at that level, which was down less than a penny from the prior week.

[03:12] Lastly, NFDM spot prices have held at $1.15 per pound for four of five trading days this week, which is the lowest price since March 2021, a two-year low. Futures activity has gotten pretty quiet this week as the NFDM and global skim milk powder market look for further direction.

[03:30] In fundamental news, there was a lot going on this week, both in the US as well as internationally. On Monday, USDA released the February Milk Production report, with the All-US growing 0.8% versus the prior year, slightly below our expectations but within the range. While the output per cow is slowing, likely due to lower margins, we were surprised at another monthly increase in the national herd count, now 21,000 head higher than two months ago. HighGround published both a Dairy Skim podcast and comprehensive written analysis if you want to get into the weeds on this report.

[04:06] US Cold Storage was released on Thursday with figures that all came in neutral to perhaps slightly bullish versus expectations, with butter seeing a seasonal increase from January but ended February at 295 million pounds, about 8 million pounds below the 5-year average. Total, Natural and other cheese stock levels fell versus the previous year which also included slight monthly declineS in the Natural American-style cheese category from January. Similar to milk production, HighGround published both a podcast and written analysis with a lot more detail.

[04:39] We also had a plethora of international reports and events released this week and joining me is Stu Davison, HighGround’s international insights consultant to give us a run down. Stu, let’s start off with the Global Dairy Trade auction that took place this past Tuesday.

[04:53] Stu: Yeah, another weak result for Oceania dairy commodity pricing this week. GDT Event 328 resulted in a price index decline of 2.6% with prices for every commodity in the market crashing. One of the key drivers of the poor result was weak demand arriving from Southeast Asia/Oceania and the Middle East region. Most notably, there were seven less buyers from the Southeast Asia/Oceania region compared to the previous auction—quite substantial. The real headline news from this auction is the GDT cheddar result which crashed lower again, falling $10.2% on average at this auction. Cheddar prices have lost 20% or $1,000/MT over the month of March alone. It seems GDT cheddar buyers are well aware of the amount of cheese available to the world market currently, with the reports noting that there’s a lot of cheap European cheese available to the world market. Not to mention the amount of cheese available in the US at the moment.

[05:53] Moving on to milk powders: both products lost at this event but it was a somewhat neutral event for whole milk powder prices, easing 1.5% on average to an average price of $3,228/MT which keeps whole milk powder prices in range-bound trading mode, around the $3,250/MT mark like the last nine auctions.

[06:14] The futures market did pick this result really well with some of the best conversions that the futures market has achieved for six months. On a positive note for the whole milk powder market, a lifting forward sales curve gives some confidence in the expectation that demand for whole milk powder might lift in the second half of 2023.

[06:35] Moving to skim milk powder, the result wasn’t as rosy. Prices fell 3.5% on average with price declines across the forward curve and a solid price limit set at this auction $2,650/MT. This result pushes GDT prices to a two-and-a-half-year low. With the high volume of skim milk powder being produced in Oceania and Europe, I would expect to see prices keep falling for a few more auctions yet—I doubt this is the bottom.

[07:04] Moving on to the milk fats: butter and AMF prices melted yet again, losing 3.0% and 3.8% respectively. This auction result adds to butter’s premium over AMF prices as these two products move apart on a milk value basis. Overall, North Asia was the most dominant purchasing region and crushing their purchases from the prior auction. As the market has been signaling over the last nine months, dominant buying from North Asia on the GDT platform does not translate to an increased demand from this region. It is more of a case of a lack of competition on the platform—something that is clear when looking at the weak levels of demand arriving at the outset of each auction.

[07:47] Taking those results and translating them to milk price for Kiwi farmers, the outlook is getting worse. The milk price futures for the current season are now treading at $8.37/kilo of milksolids post the GDT auction. While shifting to the coming season, the futures for that season is now treading at $8.52/kilo of milksolids.

[08:08] Now, taking a step back and trying to measure how volatile the dairy commodities market has been in relation to farmgate milk price for New Zealand farmers, that second milk price future contract has fallen from a contract high of $10.35 in October. So that’s a shift of the last six months from $8.52—a very volatile market.

[08:28] Looking into other international news, China has reported their import volumes for January and February with a massive of 200,000MT of total dairy imports missing for this period compared to the year prior. The bulk of this result is 179,000MT less of New Zealand-origin whole milk powder compared to the year prior. Really key to note here that this reduction of these whole milk powder imports is a result of the New Zealand-China free trade agreement. With a lot of the zero-tariff window used in 2022, leaving none available for 2023. Next year, the zero-tariff window is removed and there are no tariffs on any dairy imports from New Zealand into China. So we expect to see the import trend change moving forward.

[09:15] Other key data that was released this week includes EU exports and milk production with EU milk registering at 0.9% growth figure for January year-over-year. New Zealand exports have been released and we await to dig into this data for NZ milk production for the month of February. We are expecting a large growth figure to be brought into this month, considering how good things have been on the ground in New Zealand.

All right, that’s it for me. back to you, Eric.

[09:41] Eric: Thanks, Stu, great insights as always! Well, that does it for this week’s Let’s Chat Markets. We look forward to catching up with you next week! Cheers.

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