Cody Koster and Jon Spainhour take a deep dive into this week’s GDT report.

Questions or comments? Contact Jon at jcs@ever.ag, Cody at cjk@ever.ag, or give us a call at (312) 492-4200.

Disclaimer: TRADING FUTURES AND OPTIONS ON FUTURES INVOLVES SIGNIFICANT RISK OF LOSS AND MAY NOT BE SUITABLE FOR EVERYONE. THEREFORE, CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THE INFORMATION AND COMMENTS CONTAINED HEREIN ARE PROVIDED BY EVER.AG AS GENERAL COMMENTARY OF MARKET CONDITIONS. THIS INFORMATION SHOULD NOT BE INTERPRETED AS TRADING ADVICE OR RECOMMENDATION WITHOUT FURTHER DISCUSSION WITH YOUR EVER.AG ADVISOR. THIS IS A MATTER OF SOLICITATION.

—

The following music was used for this media project:

Music: Funky Intro 29 by TaigaSoundProd

Free download: https://filmmusic.io/song/9520-funky-intro-29

License (CC BY 4.0): https://filmmusic.io/standard-license

Artist website: https://linktr.ee/taigasoundprod

© Ever.Ag 2023, confidential and proprietary.

—

Transcript:

00;00;00;00 – 00;00;08;15
VOICEOVER
Futures trading involves risk and is not suitable for all investors. Content provided in this segment is meant for educational purposes and is not a solicitation to buy or sell commodities.

00;00;08;18 – 00;00;16;21
CODY
Hello, everybody. Welcome back to another GDT Tuesday. I’m your host, Cody Koster. With me from Chicago, Mr. Jon Spainhour. Jon, how are you today?

00;00;16;23 – 00;00;18;15
JON
Doing great. Cody, how about yourself?

00;00;18;16 – 00;00;23;22
CODY
I am doing well, my friend. We could use a little rain, but you know what? We’re not going to complain too much.

00;00;23;28 – 00;00;27;27
JON
Oh, it’s just been such a beautiful spring. If you complain, that might get upset.

00;00;27;27 – 00;00;39;14
CODY
That’s true. So I’m not going to do it. But the reason we are here is another glorious global dairy trade on the 6th of June. Today, a little bit of a mixed bag today, huh?

00;00;39;15 – 00;01;02;12
JON
Yeah, you bet. You know, it’s been three weeks since we last spoke. It’s one of those rare times when there’s three weeks between auctions. Was expecting the market to change a little bit more than maybe it actually did. And there are some movements out here, but certainly not a clear and concise direction in on where we’re going, at least after today’s auction.

00;01;02;17 – 00;01;29;26
JON
If we start out with some of the big numbers here, we’ll look at it and say the big winner on the day was cheddar at 7.4% higher. When we put that in terms of dollars per pound, that puts us at $2.12. Keep in mind that right now the U.S. market is an average of about a dollar 52 and the E.U. price is about a dollar 98.

00;01;29;29 – 00;01;54;16
JON
So if we were to look at this cheddar price today, one could walk away from that saying that is extremely bullish. Certainly hard to say it’s bearish when we see that price go up. However, we always have to warn people that there is a very small amount of cheese that is traded on the GDT. It look like today, if I did my math correct, always hard to do when you’re going metric tons and the dollars per pound, but getting pretty good at it.

00;01;54;22 – 00;02;24;24
JON
And I think it looked like there was a total of about 28 loads of cheese that traded on the GDT today. For perspective on that, we’ve been trading almost that amount every day on the CME Spot Exchange in the last few weeks. So just keep that in mind. However, again, we do have to look at it and say the New Zealand price was about 2 to 12 again, EU 198 in the U.S., 152 So at the very least it does start to open the doors to the idea of maybe some exports.

00;02;24;26 – 00;02;49;11
JON
When we move over to the butter market, butter was up 0.5% today and we’ll put that in on a translation of about $2.25 for the EU. Right now there are about $2.21. And then finally, the U.S. right now ended the day at 238. That was down a little bit last week. We put in our highest butter price on the CME of the year, year to date.

00;02;49;13 – 00;03;14;19
JON
And this week we’ve been moving lower ever since we hit that point. And I don’t think that today’s GDT is necessarily going to help or hurt that cause in terms of where we’re going, in terms of a price. But I would like to point out that in the world of butter right now, the U.S. to 38 EU to 21, New Zealand to 25, in the world of butter, that is about as close to convergence as I think we can probably ask for.

00;03;14;22 – 00;03;48;05
JON
So I would say the butter market’s in relatively good harmony when we get into probably the ones that are going to influence us the most. Let’s look at skim milk powder. It came in at 0.0%, exactly unchanged. That’s, you know, at least on the GDT website and depending on what contract you’re looking at. But on average, 0.0 and I would put that in at a price of a dollar 25, that really hasn’t moved here in the last three 2 to 3 auctions.

00;03;48;05 – 00;04;15;02
JON
I don’t believe I think it’s important to point out that coming into the auction, futures were looking for a better result to the tune of about 3% of a higher price than what we ended up with. So if we were to look at skim milk powder as a result today, even though 0.01 could say it was a bit of a disappointment to market expectations, however, again are to say flat is bearish.

00;04;15;07 – 00;04;36;03
JON
So we’ll just go ahead and say that it just came in a little bit less than expectations where things are a little interesting as whole. Milk powder, almost powder came in at 3% lower today. When we look at the also suggesting that we would come in about 4% lower, futures were looking at between three and 4% lower at one point in time.

00;04;36;06 – 00;04;58;17
JON
Some of the back ones were actually looking for the back month. Futures were looking for like 9% lower. So that did not happen. But if we were to say is 3% lower real negative, I’d say yes. Again, though, if we were looking for it to be 4% lower, maybe some people could say this was a bit of a better result than expectations.

00;04;58;19 – 00;05;19;06
JON
I’m going to go ahead and say sure on that one. But when you just look at a whole milk powder and say that it’s the big dog of the race here, lower is lower. Hormone powder was kind of the guide or, you know, the lodestar, if you will, showing that the market could go higher. Part of that was based on Chinese buying, which has been relatively aggressive.

00;05;19;09 – 00;05;42;16
JON
When we look at the results of this auction and stand back and look at the geographic breakdown, China was here, but they didn’t outperform. And maybe for the last few auctions or earlier in the year, they were very much outperforming on this auction. They did not. And this was their lowest volume since September of last year. And so, again, we always look at it, say home milk powder.

00;05;42;18 – 00;06;07;06
JON
The biggest buyer out there is going to be China. We know that there are some problems going on in China from a demand perspective right now. There have been, but they’re not really getting better. But we also know that milk production in China is up considerably and probably so is home up powder production. So we’ve got kind of a demand problem and an increased supply problem in China just really backs them off of those purchases on the GDT.

00;06;07;10 – 00;06;25;28
JON
On the flip side of that, though, Southeast Asia, who is a very big buyer of skimmed milk powder and more than likely one of the buyers of cheese out here today, they were very aggressive and put in a very nice performance, probably one of the strongest that we’ve seen all year to date. So, again, a little bit of a mixed bag.

00;06;26;00 – 00;06;46;08
JON
I would look at it, say homo powder is so important to the health of the international milk price. And so it going down puts me in a bit of, oh boy, this isn’t good camp. And at the same point in time, when we look at it from Southeast Asia is popping back up here, that kind of puts you in a well, okay, let’s keep an eye on this thing.

00;06;46;08 – 00;07;07;09
JON
Still, maybe it’s not over with yet is the way I would look at it. So I so it leaves me on the sidelines in either case, I would say probably not a tremendous amount of downside in any of these products at this point in time. But I still have to call into question the amount of upside potential that we might have, especially after an auction like this one.

00;07;07;09 – 00;07;27;10
CODY
I think you’ve mentioned it on previous episodes, John, looking at this, saying, you know, if China and Southeast Asia get going in the same direction, whether that be higher or lower, we have at least a little bit of something to look at here. But if you look at the purchase by region on a bar graph, I mean, they are directly directly opposite of each other, which we haven’t seen in quite a long time.

00;07;27;10 – 00;07;31;13
CODY
I mean, it is they cross paths and it’s not looking very good over there.

00;07;31;13 – 00;07;48;02
JON
You know what’s even weirder about a coyote is, is that when you talk to people out in the international market, a lot of them will say, hey, my Southeast Asian demand is a little softer right now. So I guess I’m surprised to see the GDT perform as well as it did, at least in terms of Southeast Asian participation.

00;07;48;05 – 00;07;55;03
JON
Yet the print is the print. And for right now, we have to look at it and say, well, they were they were here and they soaked up some product.

00;07;55;05 – 00;08;16;19
CODY
Exactly. Kind of looking at the Chinese price, John, you’d mentioned such a discrepancy in our Chinese price compared to things overseas. And we’ve seen this in previous I mean, the past couple of weeks we’ve done these episodes quite the price discrepancy. And you mentioned possibly maybe a little bit more bullish for us looking forward with our price so much lower compared to the GDT auction right now.

00;08;16;21 – 00;08;44;08
JON
You know, yeah, I did mention that and I guess I have reservations about getting too excited about it. I do want to remind everybody about some of the conversations we’ve had on this podcast over the last six months or so, and that is that exports are typically done on a 3 to 6 month contractual basis. Is it possible to do spot exports when the spot price of the U.S. goes lower than the EU or New Zealand?

00;08;44;10 – 00;09;17;26
JON
The answer is, of course, right, and that can soak up product and get some temporary excess out of the market. But in order to have sustained exports that have a structural effect on the price of cheese, I think you have to have contractual exports. And by that I mean somebody from Southeast Asia says I will take X amount of pounds a month out of the country and I’m going to do it at this flat price, because if not, you’re just going always looking for that spot buyer.

00;09;17;26 – 00;09;48;27
JON
And it’s not impossible to have that spot buyer on a month to month basis. It’s just typically not the way things are done. So if I look out here and see that New Zealand cheddar prices 212 of course I’m going to look at that with some skepticism in terms of just how important it is. But if I want to bring it back to the EU price, which is probably our biggest competitor, like I mentioned, a dollar 98 for cheddar right now, dig down into the mozzarella side of things, which is probably the biggest area that we compete with is EU mozzarella.

00;09;49;00 – 00;10;09;03
JON
That’s come up from a dollar 50 probably trading a dollar 60 right now. In some cases, people saying, hey, we think we’re about to get a dollar 71 could look at a dollar 70 mozzarella and say, well, why can’t we get that that price at a dollar when we’re at a dollar 50 or excuse me, why can’t we capture those exports?

00;10;09;06 – 00;10;48;06
JON
And again, I have no doubt that there is a possibility of spot exports or that it that it hasn’t already happened. Just here in the last few days, we’ve seen the the spot cheese market come up in the U.S. and volume has really slowed down on the exchange. However, if again, when I look out there and see that the July of this cheese bid is a dollar 85 and a half, I really look at that and say, boy, I don’t know how we would have gotten sustained exports right, to really move this stuff because our price, our futures price, which would allow people to get a longer term structural export deal, it’s too high.

00;10;48;09 – 00;11;07;13
JON
I’m not saying that somebody didn’t cut a deal. I just look at it and say, I’m not exactly sure why they would or how they would get it done. So with that said, just because the rest of the world is moving a little bit higher now, I’m not sure that that’s going to lead to bigger exports here in the U.S. and therefore higher prices in order to make that happen.

00;11;07;13 – 00;11;33;00
JON
I think either the rest of the world, the futures price has to go higher or the US price needs to stay down here until we get possibly into the next quarter where we can maybe get into some longer term deals. But for right now I look at it to say, boy, there’s a huge disconnect between our spot price and our futures price, and that’s probably going to prohibit us from getting those exports.

00;11;33;04 – 00;11;43;16
CODY
Understood. Well, besides everything that we’ve talked about so far, John, is there anything specifically on this auction that really stuck out to you? It kind of hit you in the face as something that we need to kind of cover going in, looking into the future here.

00;11;43;17 – 00;12;04;28
JON
I don’t know about this auction in particular, but I’m sure everybody on this podcast is tired of me talking about the export market. We’ve been harping on it for so long, but we can say that those, you know, no slowdown in exports. I can look at it and say, boy, I can directly attribute a lot of the weakness in the Chinese market right now to a loss in exports.

00;12;05;05 – 00;12;26;21
JON
We’ll get our April export report. We’ll probably see that exports were way down, or at least I expect they’ll say that. I think that’s a big factor of it. But I do want to point out that in just the last few weeks here, we’ve had some people come to us with the idea that domestic demand is actually starting to slow down for cheese.

00;12;26;24 – 00;12;47;19
JON
And I have to say we haven’t heard this kind of rhetoric or talk since before the pandemic. And by that I mean during the pandemic, of course, if prices got too high, people would say, oh, well, I’m going to slow down because next month will be cheaper and then I’ll pick up more or boy, I’m losing a little bit of demand around the margins.

00;12;47;23 – 00;13;19;11
JON
But those were all at very high prices. Here we are on the cheddar market at one of the lowest prices we’ve seen since the pandemic. A price point we would look at to say lower prices should create demand. And several manufacturers, suppliers, traders in general are coming back and saying, boy, my end users, the people that face the grocery store and the people that face foodservice, they’re starting to see a little bit of a not just a little bit of a slowdown in demand, but a slowdown in demand.

00;13;19;11 – 00;13;45;10
JON
Just that the end user side of things as to what’s creating that slowdown, you could say higher prices. You can say inflation, probably all of the above. Maybe a little bit of everybody is kind of shifting back out of that eating at home mind frame as much. But nevertheless, you just have to stand back from it and say, boy, the demand side domestically is starting to feel a little sloppy here.

00;13;45;10 – 00;14;09;22
JON
So now it’s like we have double trouble on the demand front and at the same point in time, it just doesn’t feel like we have seen milk production slowdown in a demonstrable way. Yet. I don’t know exactly where to go with that other than to say, I don’t know that we’ve a maybe we haven’t seen the worst of the prices in class three or cheese or milk in general.

00;14;09;24 – 00;14;29;11
JON
But B, again, I go back to the idea that I don’t know that we’re going to come out of this price point in a really, really quick way. Certainly there’s room for a little bit more downside maybe, But in terms of the upside on the spot price right now, boy, it kind of has me on my heels. I know on this podcast, we talked about it for a while.

00;14;29;13 – 00;14;53;26
JON
The idea that lower prices in Q1 and Q2, we’re going to cause milk production to slow down and two, three and four and then prices would go higher again. I think we’re at a point now where the ships kind of sailed for for that argument to happen in three and I think that’s why in general, you’ve seen those Q3 prices slide pretty hard as compared to the queue for prices.

00;14;53;29 – 00;15;10;00
CODY
There seems to be kind of a gigantic shift happening in the industry right now where a lot of folks were talking like that and you and I were on the same podcast and now it’s more of a a things are not really picking up as much. You know, there’s always the argument for we got into the spring flush early, the spring flush that should end early.

00;15;10;07 – 00;15;20;09
CODY
But as we know, producers are always very good at keeping very good care of the cows and keeping the milk coming. And that is seemingly what is happening in the States as we speak.

00;15;20;12 – 00;15;39;00
JON
You know, I’ve often gotten caught in the trap before that it’s often darkest before the dawn or it’s often the most bearish at the bottom. So I don’t want to get caught in that trap. I really want to reserve the right of saying I don’t think there’s a whole lot of downside from 143 cheese or 150 cheese. Of course there could be.

00;15;39;07 – 00;16;11;05
JON
I just look at that to say that’s a price point that is probably affordable by most people’s budgets. Again, with those futures out there at such a premium, it creates an enormous cash and carry opportunity. But at the same point in time, I guess where I’m willing to go a little bit more out on a limb is to say I just don’t know how aggressive or longstanding any sort of rally we see here and during the summer can be, unless we see demand really pull back in or unless we see production slowdown.

00;16;11;08 – 00;16;33;10
CODY
Awesome. Well, John, as always, we appreciate your insights to the GDT, the dairy markets in general. The next time we’re going to get together is on the 20th. So in about two weeks. But before we go, as everyone knows or should know, June is dairy month. And because June is dairy month, the Ever.AG Insights team is offering a free trial of some of our world class publications.

00;16;33;12 – 00;16;48;20
CODY
If you would check out the link in the description to this podcast for more information and check out those publications. We appreciate you guys listening tuning in. Until next time. Have a great week.