GDT Review with Jon Spainhour – July 18, 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;08;21 – 00;00;19;19
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 on this glorious Tuesday afternoon?

00;00;19;22 – 00;00;21;27
JON
Doing fantastic, Cody. Happy to be here.

00;00;22;03 – 00;00;37;24
CODY
I’m happy to have you, my friend. Well, I guess as we jump into another global dairy trade Tuesday, another down auction, we had some bright spots here and there, but all in all, a little bit lower. Not as quite as bad as two weeks ago.

00;00;37;29 – 00;01;01;16
JON
Yeah, you bet Cody. I think the last auction was down 3% or 3.3%. This auction on the whole was down 1%. So still lower, just not as low as it was last week. And we’ll go through some of the minutia here, but will point out that some prices came in, specifically whole milk powder actually fared a little bit better than what was expected.

00;01;01;23 – 00;01;32;16
JON
However, the net result is that we settled lower digging into the individual products here. Cody, let’s start with the fats to begin with. AMP came in about 3.6% higher. On the other hand, we had the butter price come in about 2.8% lower. That is going to be a butter equivalent on an 80% basis of about 208. Just want to point out here that the EU right now owns about 207 and the U.S. is 256.

00;01;32;19 – 00;01;55;00
JON
So quite a spread that’s opened up here again. And the fat market specifically on the butter side. And what we’ve got is the U.S. price at a huge premium to the rest of the world. Certainly that’s going to make sure that we probably don’t have exports. And at the same point in time, it’s hard not to imagine that this isn’t going to stand out and attract exports.

00;01;55;02 – 00;02;19;28
JON
This is almost exactly what happened last year, maybe not quite as big of a spread. Ah, I’m not exactly sure what the spread was, but last year I should say. But I would say that, well, I remember we had a big spread and that attracted some exports that came in in the fourth quarter. As we move over to the cheddar side, this one is really bounced around quite a bit out there over the course of the last three or four months.

00;02;20;01 – 00;02;45;18
JON
This auction down 9.8%. This brings us to a cheddar equivalent. And I keep in mind, I say a cheddar equivalent of about a dollar 79 to a dollar 80. If we look at it from a historical perspective, we haven’t really been this low on Cheddar since July of 2021. So this is a new recent low in the cheese department here.

00;02;45;26 – 00;03;09;11
JON
As we shift to the powder side, though, we’ll see the whole milk powder came in 1.6% lower. This is a little bit interesting from the standpoint that the GDT post, which is the sub auction that takes place every other week from the GDT, we would look at it and say that those results were suggesting that this would be about 3 to 4% lower, as well as the whole milk powder.

00;03;09;11 – 00;03;32;24
JON
Futures were suggesting about a 3% decline on today’s auction. We came in -1.6. So there is somewhat of a glass half full that, yes, we were lower and at the same point in time, not as low as expectations. This is the second auction in a row where we’ve seen this market really defy the expectations there. And then finally moving on to skim milk powder.

00;03;33;00 – 00;03;56;29
JON
We would say that skim milk powder was down about 0.9%, came in roughly 114 a pound. As we compare that to the rest of the world, we’d say that New Zealand right around 114, the EU 109 and the U.S. is going to end today at 110 after today’s session. That’s quite a tight spread in there for the different powders from around the world.

00;03;57;01 – 00;03;57;20
JON
Absolutely.

00;03;57;20 – 00;04;25;24
CODY
In kind of looking, you know, you had mentioned it, Jon, about the export market and not to dive too deep into the weeds on this, but a big talking point for the past week has kind of been our weakening dollar here in the States as we start chatter on the GDP, kind of fall apart. Looking at cheese in our region, having a nice rally today, do you think a little bit of the export talk would be on this weakening dollar compared to the rest of the world?

00;04;25;24 – 00;04;56;21
JON
Well, I think that’s a great argument from a theoretical standpoint, and I think your economics teacher would be really proud of you, Cody. I appreciate that. Yeah. In reality, I’m not sure that we move quite that efficiently, but I do think there’s a strong case that can be made from the standpoint of the GDT. Price today may have moved lower on the cheddar side because buyers said, I don’t want to pay a $2 cheese when in the U.S. I might be able to pay something significantly cheaper than that.

00;04;56;21 – 00;05;25;16
JON
Right? We’ve had a spread that’s existed like that for a long time. So if that happened, you know, if that suddenly manifests itself today, that would be pretty incredible. I’m not saying that it didn’t, but we have had a spread that has made that possible for a long time. But, you know, if we just go with that story or down that narrative, you can say, hey, one 1.40 to 1.45 cheese here in the U.S. versus $2 cheese in New Zealand.

00;05;25;22 – 00;05;47;06
JON
I think I’ll pass on the New Zealand cheese and come here as a U.S. and buy that if we follow it up with your argument about the currency as well. We have seen the dollar weakening quite a bit here in the last couple of weeks for, you know, from several different reasons. And if we look at it from that standpoint, it’s just made purchasing product here in the U.S. even cheaper.

00;05;47;07 – 00;05;54;21
JON
Again, the best laid plans of mice and men, I’m not sure exactly that that translated here today, but it certainly is a possibility. Yeah.

00;05;54;21 – 00;06;04;13
CODY
I mean, that’s something that we could really dive in to get down a deep rabbit hole on. But I just kind of wanted your thoughts on what was happening today in this previous week with with currencies fluctuating.

00;06;04;17 – 00;06;26;22
JON
Well, certainly out there when it comes to the cheese market in general from an export standpoint, again, we would look at it to say we probably have even now have the the ability to pick up some spot exports. When we look at it through the lens of our spot prices, significantly cheaper than the rest of the world. And again, that’s it.

00;06;26;22 – 00;07;02;22
JON
We’re comparing cheddar. Our cheddar price is considerably lower than everybody else. When we get into the mozzarella price, though, which I would say is the really the number we want to keep an eye on, we are competitive. There’s just the price spread isn’t as significant as the price spreads on cheddar. And after our most recent rally here in the last week or so on the CME, we have probably close that gap in quite a bit between the US mozzarella export potential and the mozzarella in Europe or in New Zealand.

00;07;02;25 – 00;07;29;26
JON
However, I do want to point out though, things don’t look as bleak as they did from an export standpoint ever. AG Insights team pointed out here in the last week or so that Q4 futures out here on the CME are for U.S. cheddar cheese futures, that they are finally below some of the forward prices that we’re seeing out of Europe and that opens the door to longer term structural exports, at least from a potential standpoint.

00;07;30;04 – 00;07;41;27
JON
Whether we get those or not remains to be seen. But they’re certainly for the first time in a long time, we’ve got the ability to be more competitive, not just on a spot basis, but on a forward basis as well.

00;07;42;04 – 00;07;58;23
CODY
So, Jon, looking at the regions that we’re in here buying on this GDP auction, one thing that really stuck out to myself and you included as we talked about this kind of off air as China not being in the driver’s seat on the buying side again.

00;07;58;27 – 00;08;22;09
JON
Yeah, Cody, that’s really the concerning part for me as I as we comb through the data here, last auction, we were able to point out that Chinese participation on whole milk powder was the lowest it’s been on record on the GDT in the history of the GDT. I think that in itself is a very significant statement as we look at today’s auction results.

00;08;22;11 – 00;08;50;14
JON
The Chinese participation picked up a little bit as it compares to the last auction. So we know it’s not a new record low, but it has picked up a little bit. But still, it’s not significant at all. It’s very much on the low side of things. I would say that yes China bought a little bit more on this auction, but the real star of the show has been Southeast Asia and they have bought a significant amount of product here in the last few auctions.

00;08;50;14 – 00;09;22;13
JON
And I’ll make the argument that they’ve been able to keep the GDT price buoyant in the absence of China. Two things I just really want to dig a little bit deeper on on this subject is a I think the Chinese demand is just isn’t there. And there’s there’s probably two reasons for it. One would be that Chinese internal domestic demand for not just dairy products, but probably all products from an economic standpoint is lower their economy just hasn’t recovered in the same way that ours has from covid.

00;09;22;13 – 00;09;43;16
JON
They stayed locked down forever. They did stimulus in a different way. You know, you really want to see them come out of this. And yet a lot of the articles you read just say, hey, these guys aren’t coming out of COVID with big demand numbers. And at the same point in time, we’ve seen internal domestic Chinese milk production ramp up.

00;09;43;19 – 00;10;09;02
JON
So not only is there demand down, but their ability to service what demand is there. They’re able to service it with their own internal milk and they don’t have to reach out to the export market as much as they may have in the past. What that has resulted in is Chinese demand for home milk powder is not significant right now, or this is probably an understatement, but it’s kind of dismal.

00;10;09;05 – 00;10;30;06
JON
And I look at that and say that means that somebody else has to buy that whole milk powder or the New Zealanders are going to start making other products with their whole milk powder. So that brings me to the second point there that I want to focus on, and that would be that Southeast Asia has been the star of the show here on this auction.

00;10;30;12 – 00;10;49;09
JON
They bought about 30% more than China did. That is a statement in itself, and I think that’s great. And I think there probably is some pretty good demand down there. But this is several auctions in a row that they’ve been able to do that and really stand out. I just don’t think, though, that they can maintain this level of purchasing.

00;10;49;11 – 00;11;10;15
JON
So if we go back to the standpoint that somebody else has got to buy this or New Zealand is going to start making other products, I think we’re starting to lean towards the idea that New Zealand is going to have to start making other products, probably start with skim and butter and cheddar and we may already be seeing a little bit of that manifest itself in the marketplace.

00;11;10;17 – 00;11;18;24
JON
But they’re probably, you know, going to start doing that. And that is something that I feel like could really put some pressure on the marketplace.

00;11;19;00 – 00;11;30;10
CODY
Okay. Well, I mean, we’ve kind of hit on quite a bit of different details in this podcast, Jon. But before we go, is there any last thought in your mind about this specific GDT that you’d like to get out to the viewers today?

00;11;30;13 – 00;11;56;06
JON
You know, I guess if we just take a second here to focus on skim milk powder, I mentioned it earlier, the New Zealand price is about 114 Europe right now, 109, and the U.S. at 110. You know, if there’s any product in the world market, specifically on the GDT that really has such a close relationship with their product in the U.S., it’s going to be skim milk powder to nonfat dry milk here in the US.

00;11;56;08 – 00;12;22;02
JON
And again, for a lot of different reasons, the skim milk powder market is feeling heavy, but with it at 113 to 114, I just don’t feel great about the idea of the U.S. being able to maintain this 110 area. I think we made it down to the 107 area on nonfat just a few weeks ago and we’re able to bounce back out of there.

00;12;22;04 – 00;12;41;26
JON
My sense is that we’re probably going to go test new lows of the year. I just don’t want to rule out the idea of making it to a dollar. Would certainly see a lot of trade at a dollar. That’s going to be a hugely psychological number. I just can’t help but think that this GDT is something that will help us get there.

00;12;41;26 – 00;13;04;24
JON
I think there are a lot of people that were holding out thinking that we were going to get higher prices in the powder market again, that not only did we not get higher prices, we got lower prices. The Chinese haven’t come back. Probably going to lead to the New Zealanders making more skim. If that’s the case, I just feel like we’ve got a date with the $1 price area on the nonfat market.

00;13;04;26 – 00;13;25;29
CODY
Okay, well I guess we have to wait to see how that all plays out and transpires. That’s going to do it for this episode of GDT Tuesday. We will see everyone back in two weeks, August 1st, I believe. But until then, we appreciate you guys tuning in have a great couple of weeks, weekends, and we will see you soon at Ever.Ag.

00;13;26;04 – 00;13;45;23
CODY
We partner with every corner of the agriculture industry, from dairy to livestock crops and agribusiness, to deliver intelligent supply chain and risk management solutions. We are Ever.Ag everything agriculture. Learn more at WWW.ever.org/everything.

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