GDT Review with Jon Spainhour – June 20, 2023

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.

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00;00;00;00 – 00;00;08;17
VOICEOVER
Future 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;19 – 00;00;17;17
CODY
Hello, everybody. Welcome back to another GDT Tuesday. I am your host, Cody Koster. With me from Chicago, Mr. Jon Spainhour. Jon, how are you doing?

00;00;17;17 – 00;00;25;05
JON
Great, Cody. Just enjoying a fabulous summer afternoon here in Chicago where it is 73 degrees and sunny.

00;00;25;12 – 00;00;27;11
CODY
No rain in the forecast. It seems like.

00;00;27;11 – 00;00;34;00
JON
No rain in the forecast unless your forecast starts on Friday. We’ll see some rain in the forecast.

00;00;34;03 – 00;00;44;13
CODY
All right. Well, it is June 20th, about 115 Central Time. GDT today, John, zero across the board as a global index.

00;00;44;13 – 00;01;07;00
JON
Yeah, you bet, Cody. And you know, if we just look at a 0.0 aggregate result by itself, it seems like that’s a pretty blasé result. And then at the other side of things, if you look at what the expectations were coming in at his auction, this is actually seen as somewhat of a positive result and I’ll be willing to dig into that.

00;01;07;00 – 00;01;18;24
JON
But I think also as we get into the details a little bit, there are some other elements here that are a little bit on the negative side as well. So believe it or not, 0.0 gives us a lot to talk about today.

00;01;19;01 – 00;01;28;00
CODY
Absolutely. One of the biggest ones leading the way was butter. And for my side looking at it, I think butter was the only higher price point today, correct?

00;01;28;00 – 00;02;03;27
JON
Butter was 5.7% higher and hydrous milkfat was 0.6 higher. So, butter wasn’t the only higher one. But we can say the fat category itself was the only higher result. That is going to put butter in, on this auction, it is going to leave butter on the GDT at 238. When you compare that to the US butter price of 235, we’ve had a transition take place here where the US butter no longer holds the pole position on international butter prices.

00;02;04;04 – 00;02;42;24
JON
We’ve had that pole position now for at least eight months or so where the US has held a significant premium to the rest of the world. That has narrowed quite a bit here over the course of the last few months. That’s mainly through New Zealand coming up in the US, butter price coming down a little bit and here we are now again, we’re making that transition. I don’t think is the most important transition in the world, but it does tell us that we are no longer the highest butter price in the world.

00;02;42;24 – 00;03;07;09
JON
As we transition into the cheese result today there was a bit of a, I don’t know how to say it, it’s a bit of more of the same in here. We had some very big downdrafts on the GDT cheese a few months ago. If you remember correctly, we were down 10%, one auction and then down 10% the next auction. And then we probably spent the last two auctions going up, two to three auctions going up 5% or 6% at a time, only for this one to pull back a little bit at 2.9%.

00;03;07;17 – 00;03;29;04
JON
That’s going to leave the New Zealand cheese price at about 206 on cheddar. When we compare that to the EU, the EU is at $1.94-ish on cheddar and finally the US is south of $1.46 when we put our block barrel average together. So, the US is by far the cheapest cheddar price in the world.

00;03;29;04 – 00;03;55;27
JON
And you’ll notice I keep harping on cheddar. I think that is an important element to point out. However, I do believe that from an export point of differentiation we would want to look at the mozzarella price that- US, we do a lot of mozzarella exports and when we’re competing against Europe, we’re generally competing against their mozz price, you know, like I said, the EU cheddar price here is $1.94.

00;03;56;00 – 00;04;22;13
JON
While I would say that the EU mozz price was as low as $1.50 and has gone up to that $1.70-ish area right now. So, on a spot basis, there is some room for us to get some exports off here. So Cody that leaves us going do skim milk powder and whole milk powder. And when we dig into that, I think this is really where the more interesting part of this auction comes down to.

00;04;22;13 – 00;04;47;18
JON
Coming into the auction, there was an expectation that skim milk powder would be 2 to 3% higher. And in fact, we came in 3.2% lower. That’s going to put the skim milk price at $1.21 on the GDT. The US is today $1.1550 and the EU at $1.13. So we, again, there’s some pretty good compression that’s taking place.

00;04;47;21 – 00;05;08;22
JON
If you were to look out into the nonfat world right now in the skim world $1.13 on the low end and $1.21 on the high end, that’s- we’re in a pretty tight range there. You could say we’re in harmony in the nonfat world. But again, the surprise there was we were anticipating coming in higher.

00;05;08;22 – 00;05;33;22
JON
As we go to the whole milk powder side of things though, that’s where things were a little bit goofy for a few different reasons. The number one of which is the GDT pulse that forecast that we would come in about 4% lower on whole milk powder for this auction result, as well as the whole the milk powder futures were forecasting about the same decline when in fact, as we noted earlier, whole milk powder came in at 0.0%.

00;05;33;25 – 00;05;59;08
JON
So, again, anticipation that we were going to be lower on whole milk powder, we come in unchanged. Anticipation that we were going to be higher on skim milk powder and we come in lower. Up is down, black is white and cats and dogs, but it’s just kind of a weird scenario. So I think digging into why that happened is a little bit more confusing.

00;05;59;08 – 00;06;22;10
JON
And from my perspective, we tend to look at it to say that whole milk powder is something that China buys. And when the Chinese are present on the GDT, prices go higher. And when they’re not present, prices tend to go lower. Skim powder seems to be the product of regions like Southeast Asia and not so much whole milk powder.

00;06;22;10 – 00;06;47;22
JON
So when the Southeast Asians are present, skim milk powder tends to go up, and when they’re not present, skim milk powder prices tend to go lower. When we look at this today and say, well, skim milk powder went lower and whole milk powder actually ended up being steady-ish. We would say that Southeast Asia was probably not present and that China was present and when we dig into the numbers, it doesn’t say that at all.

00;06;47;25 – 00;07;13;02
JON
In fact, this was a very, very weak showing on the part of the Chinese. From our records, this shows that this is their lowest participation number on the GDT since 2016. That’s a long time ago. And we’ve been through a long time. And we’ve been through so many different cycles in the dairy industry, of boom and bust, since 2016.

00;07;13;02 – 00;07;38;25
JON
And so to see us not perform, you know, the next time we got down there was 2016 really catches you off guard. And I think that speaks a little bit to the idea that we’ve been seeing that A) Chinese internal milk production has been going up and B) Chinese internal demand has been going lower. So not only is there less demand overall, but they’ve got more milk internally to service the demand that they do have.

00;07;38;27 – 00;08;00;14
JON
That explains away at least why the Chinese weren’t present. But in terms of what made us able to say unchanged on the whole milk powder in their absence, I think we somewhat have to go look at Southeast Asia. They had a fairly decent performance here. The Middle East was again relatively present and Europe had a somewhat decent showing.

00;08;00;21 – 00;08;19;17
JON
And so we have to look at and say, well, maybe these other regions were there enough to just keep the price supported. When we get over to skim milk powder, though, that one gets a little bit more confusing to me because we tend to look at it again to say a Southeast Asia was here. We would expect skim to go higher and in fact, as we stated, it did not and went lower.

00;08;19;19 – 00;08;44;02
JON
A bit confusing there and I’m just not sure how to explain that one away. What I can say, though, is as we compare it to the US, price, again, some pretty good consolidation that’s taking place on the nonfat skim complex there. But I just don’t believe that today’s result is going to be seen as a positive outcome for the U.S. nonfat price.

00;08;44;09 – 00;09;21;09
JON
It’s a little bit easy for me to say that right now because, as you stated Cody, it’s almost 1:30 after the auction that means our spot session is done. We want a quarter lower today to 115 and a half. And most of our futures out here are a penny to a penny and a half lower. I tend to look at it though and say, yeah, that may have been the initial result, but we probably have a little bit more of a reaction coming for anybody that was looking for the New Zealand price to keep moving higher and to create some space for more exports here in the U.S., I think today’s auction kind of took

00;09;21;09 – 00;09;33;01
JON
the wind out of those sales and it’s probably going to make it a little bit tougher for us to catch some exports. And if we do, it’s probably going to need to be at a lower price than where we’re at right now.

00;09;33;06 – 00;09;48;29
CODY
If you look at the past, we’ve touched on this before, but the past two auctions were lower, this one unchanged, but previously it’d be lower auction, lower auction, pretty substantially higher auction two times in a row. And like you said, this one just seemed to kind of take the wind out of its sails, as you said.

00;09;49;00 – 00;10;14;10
JON
You know, and I don’t like to dig into it too much, but I think it just does come back to the fact that we’ve come down so low out here that across every commodity in the dairy space, across almost every region of the world, we’ve just had such a major retraction in price that I think there’s an element of people saying, ‘well, you know, at a certain point we’ve got to go higher’.

00;10;14;13 – 00;10;44;16
JON
And I don’t disagree. And so, but you start to get this- the futures start pointing towards a higher price. And like you said two, a few auctions ago, we saw some significant increases in price and yet nothing seems to have really changed on the fundamental side of the supply demand function out there. And as a result, after you get out through that, you know, what seems to be a bit of a short covering rally, here we come fading back down again and again today.

00;10;44;21 – 00;11;12;07
JON
You can’t look at 0.0 and say that that was a negative result, but it certainly is not higher. And in this environment, we probably can see markets continue to move lower, especially- and I have to stress this- if the Chinese participation stays as low as it was today, which I’m not saying it will, but if it stays low at this level or even slightly above this, that is just not a good sign for the global demand of dairy.

00;11;12;13 – 00;11;25;00
JON
And I think that that just kind of backs up the systems all along the international supply chain, our demand chain, if you will. And that can really mean that we’re in here for these lower prices for a while.

00;11;25;02 – 00;11;48;12
CODY
So with that, John, we appreciate you coming on and giving us an in-depth look at the GDT auction today. I guess we’re going to know more about two weeks when we get back with you for the next auction. But until then, everyone have a fantastic week, great weekends, and we will see you soon.

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