Let’s Chat Markets – 25 August 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 on our dashboard, or wherever you listen to your podcasts. Subscribe so that you never miss an episode!

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[00:09] Alyssa: Hello and happy Friday to all of you! Thank you so much for tuning into Let’s Chat Markets, your favorite weekly dairy market podcast powered by HighGround Dairy. Today is Friday, August 25th, and you’re hearing from Alyssa Badger, Vice President of HighGround Dairy. Joining me to chat markets is Cara Murphy, our Dairy Market Intelligence Manager. We had a very busy week with an onslaught of data hitting the marketplace, both domestically and internationally. As always, let’s kick things off with a CME spot market recap.

[00:39] Cara: Block Cheddar was the big mover this week on the CME, falling by $0.1375 cents through the first half of the week before rebounding by $0.0550 on Thursday to $1.9450 where it closed on Friday. Barrel Cheddar had a bit less movement, bouncing within a 1-cent range all week to close finally at $1.8000. Butter moved up 4 cents on Monday, fell 5 cents on Tuesday, climbed back 1-and-a-half cents on Wednesday, and then stagnated for the rest of the week. The trading frenzy continued into this week with 12 trades on Monday, 38 on Tuesday and another 20 on Friday for butter. Nonfat dry milk slowly slid lower but jumped 1 cent on Friday to $1.1050 with just 9 trades over the week and dry whey reached $0.2800 per bound, finally breaking out of the 25-27 cents per pound range it’s been hovering in for over a month now.

[01:36] Alyssa: Thanks, Cara. Continuing to focus on the domestic side of the market, how about that July US milk production report? Those were some really ugly numbers coming out of the West and southwest regions of the country with herd sizes the lowest we’ve seen in recent history from California and New Mexico.

[01:52] Cara: Oh yes, milk output is really shoring up. Milk volumes in July fell -0.5% year over year across the US as yields and cow numbers fall. Huge productivity losses were observed in the West and Southwest while output through most of the Plains and Midwest faired well. California’s total milk flows plummeted 5.5% versus July 2022 as producers there continue dealing with negative margins, base programs, and hot temperatures during the month. The state also reported a massive decline of 105 pounds per cow compared to July 2022. New Mexico’s milk per cow was off 70 pounds as total milk production tanked 9.1% year over year. Meanwhile, Texas’ milk volumes were down 4.3% year over year, on poorer yields, down -45 pounds per cow.

[02:44] Cow herd numbers further declined—an unsurprising outcome given the trajectory of dairy cow slaughter volume over the past weeks. As of the week ending August 12, total US dairy cow slaughter is just short of 2 million head year to date. Slaughter rates in Region 9, including California, are nearly 50,000 head above levels seen by this time of year in 2022 and volumes in Region 6 (the Texas-New Mexico area) have already surpassed that count, up 26% year to date.

[03:15] Alyssa: Alright so tight milk volumes throughout the country in July. What did that mean for cheese and butter inventories during the month, Cara? (July 2023 US Cold Storage Report Analysis)

[03:23] Cara: Butter stocks appear healthy compared to last year but are decreasing rapidly on a seasonal basis. Most notably, stocks have fallen over 36 million pounds since May, the most significant decline since 1993. The sizable inventory declines in June and July suggest that demand is building, production is slowing, or a combination of the both. In either case, this could keep prices elevated at or near these levels into fall.

[03:49] On the cheese side, total cheese stocks eschewed the seasonal pattern of building slightly from June to July, falling by 1.4% or nearly 22 million pounds. Natural American-style cheese volumes dropped 15.3 million pounds from June to July, the largest drawdown between those two months since 1987, and the second biggest for the two-month period (May-July) going back to 1916. This helps to explain the rally in the CME spot cheese market we’ve seen over the past month, climbing roughly $0.70 per pound from late June to mid-August. As such, July cheese ending stocks were neutral to our expectations as the rise on the CME indicates that the drawdown was already priced into the market.

[04:34] Where should we start on the international side, Alyssa? There was a GDT Pulse event, July trade figures for China, and production data out of New Zealand.

[04:44] Alyssa: Let’s start with New Zealand and the GDT pulse event. Fonterras C2 regular whole milk powder value dropped again and by another 1.2% from the last GDT auction to $2,450/MT. Weaker Asian demand coupled with additional product volume coming to the marketplace continues to perpetuate a bearish outlook. From a supply side, yes, we did get July milk production data from New Zealand as well this week which fell 0.1% from prior year on a milksolids basis. Slighty better than we were expecting as the wet and cold winter throughout the North Island hampers production. If you read our full analysis that we released this week, you will also see where we expect production to land throughout the rest of the season so be sure to check that out. New Zealand’s trade data for July was released this week as well and one of the key data points was that this was the worst July export volumes to China since 2016. Trade with Southeast Asia was even more bleak during the month, due to weak milk powder demand, which meant these were the lowest July shipments to the region since 2015.

[05:52] Cara: Wow. Last but not least, our China demand analysis was also out this week.

[05:57] Alyssa: Yup and results were generally mixed. Skim milk powder imports have increased but remain significantly below those 2021 levels. Whole milk powder imports grew but, again, they were against very weak prior year levels with this year’s imports in July only two-thirds of the volume sailing through China’s customs that we saw in 2021. The US marked a significant milestone in July with the highest-ever import volume for cheese for the month. Also highlighted in this report is was where powder inventories were sitting as of the end of June in China and the fact that analysts are expected fewer than eight million newborns in China this year—that is less than half the number recorded in 2016 when the one-child policy was abolished. Higher inventories, slower birth rates and growing demand for domestic product will continue to keep the lid on Chinese import demand nearby.

That does it for today’s episode. We look forward to coming on next week to get you caught up on dairy markets.

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