Forecast Update Live – August 2023

00;00;00;20 – 00;00;09;16
VOICEOVER
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00;00;09;18 – 00;00;28;29
JON
Hello and welcome to Forecast Update Live where each month we will gather to discuss our dairy market forecast. I’m your host Jon Spainhour. we’re joined today by Eric Maedke and Phil Plourd to get us started. Erika, let us know how our forecast has changed from month to month.

00;00;29;02 – 00;00;50;27
ERICA
Hey, Jon, thanks for having me here. Very excited to share some of the updates to our forecast. I would say in general, most numbers are going to be a little bit higher. The biggest change for us this year is butter for the rest of 2023. And that certainly has been a big debate among our shop of how high can butter go.

00;00;51;00 – 00;00;53;21
ERICA
Certainly after this latest run Erica.

00;00;53;21 – 00;00;59;17
JON
That’s pretty interesting regarding butter. What went into that conversation and where do you think prices can go from here?

00;00;59;18 – 00;01;22;26
ERICA
Well, for those of us who know the team here at Ever.Ag Insights, it was quite a heated discussion with many on both sides of the camp of are we going to $3, are we not? Today I’m arguing the bear. And I probably was the the bear in the conversation of I don’t think we’re going to get to $3, but again, this is the butter market and anything is possible here.

00;01;22;28 – 00;01;46;20
PHIL
Yeah, I mean, I think that that, you know, one of the realities that we’re facing is that butter seems to be in strong hands. And as we go through seasonal now, there’s less cream around seasonally. We’re about ready to go into the peak demand season. People who have butter inventory, you know, if they have money in that inventory now after kind of skidding along at about break even for most of the year.

00;01;46;22 – 00;02;07;10
PHIL
And so the question becomes, where does the incentive lie for people to sell this market off and where does the volume come from? And it’s just been hard for us to imagine, you know, that, you know, someone’s going to rain on the parade all of a sudden and bring gobs and gobs of butter to Chicago in a way that brings the price sharply lower.

00;02;07;13 – 00;02;28;26
PHIL
Now, markets work, right? If the bid backs off, people say, hey, this 270 number is too expensive. You know, basis starts to erode, people start building a little bit of inventory again, makes them nervous to build inventory at 270 instead of 240. And I think all those things factor to the mix. But, you know, we saw the butter market go to over three to quarter last year.

00;02;28;28 – 00;02;58;03
PHIL
I don’t think it’s going to happen this year. I don’t think we get to $3 either. But I think it’s a fair conversation. Have when. You know, that’s sort of like the boogeyman in the room right? Last year went to $3, which can happen again. And I think that when you have a price increase like we’ve had the past couple weeks, if you’re inclined to be nervous staying in the market, go up $0.20 over the course of ten or 15 days, doesn’t really keep you calm and might actually knock you off the fence and jump into the mix, which wittingly or unwittingly perpetuates the price increase.

00;02;58;03 – 00;03;07;19
PHIL
Right. So I know, John, I mean, that’s you know, you’ve seen this before, too, right? It becomes sort of a multilayered, multilayered exercise of training.

00;03;07;21 – 00;03;08;17
ERICA
Gain theory Exercise.

00;03;08;19 – 00;03;09;28
PHIL
Gain theory Exercise. That’s exactly right, Erica.

00;03;09;29 – 00;03;27;21
JON
Well, that old adage of bull markets have long tails. And I think everybody that paid 3.20 last year is saying, well, 250 to 70 is not 320. So that’s been kind of the the mantra all year long. And we’ll see how that plays out this year.

00;03;27;24 – 00;03;35;15
PHIL
At some point, three, does become $3, but I just don’t think we’re going to get there. But I wouldn’t rule it out. I mean, there’s the chance is more than zero.

00;03;35;18 – 00;03;50;26
JON
Thanks, Phil and Erica. Okay. Every month we like to take this opportunity from a broader standpoint to discuss the bull and bear markets in general. Erica, today you’re taking the bear side of the discussion. Take it away and let us know your thoughts on the market.

00;03;50;28 – 00;04;12;12
ERICA
All right. So let’s run down to some of the commodities on the cheese side of things. The latest cold storage report certainly is indicating more cheese hanging out in the coolers. That’s in addition to all the comments we’re hearing about older cheese, not just the eligible product that’s for 30 day old. Certainly a lot of opportunities for buyers out there.

00;04;12;14 – 00;04;31;27
ERICA
And then the other thing, this recent run up in prices will do exactly as Phil says. Markets work. This is going to kill off a little bit of demand. It’s going to be a little bit harder to run some promotions. And that, I think, has been keeping the market alive at retail to product with consumers. And finally, there’s more capacity coming online.

00;04;31;28 – 00;04;54;23
ERICA
Now, we all know it’s coming and we all know it’s here, but more cheese is still more cheese on the butter side of things. I think we started to heat that up a little bit, but I would say that some of the reasons not to get too crazy in the butter market is we have seen buyers take some more coverage this year so they’re not as exposed at this point in the year as they were last year.

00;04;54;26 – 00;05;18;10
ERICA
So some of that efforts to hedge and lock in some prices have already been done. Buyers do know how to get skinny on their supply chains when prices get high. So in terms of butter trade, the U.S. has been importing more butter fat, so filling in some of the holes. Our imports are up 36% through June, at the same time as U.S. exports are down 32%.

00;05;18;11 – 00;05;43;06
ERICA
So net net, the U.S. is a much larger importer and we’re retaining butterfat domestically as we shift into the nonfat dry milk space. I would say that this is very much a global marketplace. We saw GDT this week. Milk powder, a big drop down 7.6%. To put some pressure on skim milk complex and the U.S. price well, it is the highest in the world.

00;05;43;06 – 00;05;57;24
ERICA
It’s not that far from Europe or New Zealand. And we can’t stay this high for for that long. We can’t stay out of competition. And then just a note on the whey complex. As long as we’ve got more cheese coming, there’s more weight coming.

00;05;57;27 – 00;06;02;29
JON
Thanks, Erica. Phil, I know you’ve been waiting to take the bull side of the discussion, so take it away.

00;06;03;00 – 00;06;23;15
PHIL
Yeah, it’s not quite as lonely here with the in the bull camp this month with with the rally we’ve seen in cheese and butter. I think if you want to be bullish, the number one reason to be have a friendlier view of these markets is milk production. In June we saw output turn flat. We saw cow numbers down month over month.

00;06;23;17 – 00;06;49;20
PHIL
We saw cows down year over year for the first time in a few months. So there’s less cow power. We have, you know, incredible margin compression on farms. We see slaughter rates elevated. So there’s there’s liquidation pressure out there. And so, you know, there’s a good chance that we’ve rounded the corner in the U.S. anyway in terms of supply actually turning lower and, you know, less milk is less milk.

00;06;49;22 – 00;07;09;11
PHIL
So I think that would be the number one reason, you know, to be bullish. I think there were two reason to be friendly would be. I think that the consumer has shown a little bit more resilience than some people thought or feared. Retail demand for cheese and butter has been pretty good, has not been spectacular, but we’ve been kind of grinding out victories.

00;07;09;11 – 00;07;34;13
PHIL
The food service space. While traffic patterns remain below year prior levels, they’re less below than they were before. And we’ve seen back to back months where the dollar volume into restaurants was ahead of the pace of inflation, which says there’s more volume being consumed. And so you know, the consumer has hung in here better than some people thought they would.

00;07;34;16 – 00;07;54;00
PHIL
So if the economy doesn’t totally fall apart, which I don’t think I’ve ever been in that camp myself. But, you know, the consumer kind of hums along at a medium rate of speed domestically. It says the holidays aren’t going to be terrible. You know, there’s no Grinch this year unless we see the stock market fall apart in the next six weeks or something like that.

00;07;54;00 – 00;07;59;15
PHIL
So I just think that the second reason to be friendly would be consumer demand holding together.

00;07;59;15 – 00;08;11;03
JON
I think when we spoke at this time last month, the cheese market was in the 130 fives, right soda up here at 196. Certainly something big change in the cheese market at least.

00;08;11;04 – 00;08;35;26
PHIL
Yeah. And I think I mean another reason to be friendly cheese specifically is that it’s a fresh cheese market, right? It’s a 43 day old market. And so, you know, that’s what has to come to Chicago. And we can get tight on that. Right. Warm, hot weather, a spirit of exports. And, you know, we could go to four, six weeks where there’s a lot of cheese around generally, but not a lot of fresh cheese that matters at the Merc.

00;08;36;00 – 00;08;42;29
JON
Well, you’re exactly right. 40 to 30 day old cheese is what we trade here at the CME. And that’s has always been important and will continue to be important.

00;08;43;00 – 00;08;47;02
PHIL
We mentioned at least two or three times a year, John.

00;08;47;05 – 00;09;10;18
JON
Okay. Moving on from here, Phil, you always have just a very unique perspective that you like to bring. Once a month you call it your favorite look. This month’s favorite look is going to be centered on Chinese birthrates. And when we look at the results of the GDT yesterday, I think it’s just ever important that we focus on stuff like this.

00;09;10;18 – 00;09;12;22
JON
So I’ll let you take it away.

00;09;12;22 – 00;09;37;20
PHIL
Yeah, A hat tip here to Mark Majerus on our team who brought this chart to my attention. It’s a incredible chart, right? I’ve heard, you know that Chinese population is going to be shrinking, and you know that there’s a demographic challenge ahead for the country. But when you see the birth rate go from, you know, 15 per 1000, ten, 12 years ago to just about half of that today, I mean, you’re talking about a real slowdown in terms of potential population growth.

00;09;37;22 – 00;10;05;06
PHIL
So in 2012, we peaked at 14.6 births per thousand. We’re now at 6.8. And, you know, we’ve seen China evolve in its stance, right? It used to be one child policy and then we had a two child policy in 2021. And then last year we heard talk of a three child policy. But consumers in China or people in China say that, yeah, kids are expensive, they’re hard to manage.

00;10;05;09 – 00;10;32;28
PHIL
One in plenty. And so, you know, the the efforts to loosen the grip on population, which were, you know, a core tenet of the Chinese model for years and years near the efforts to say, hey, be fruitful and multiply have basically failed. And this means less consumers going forward and in a longer term way, but also in a very short term way, fewer babies is, you know, fewer mouths for infant formula, no youth nutrition, all those sorts of things that do matter in the dairy story.

00;10;32;28 – 00;10;38;11
PHIL
So a real fascinating look that raises some really interesting questions about China’s structural demand.

00;10;38;11 – 00;10;57;18
JON
And China has been and will continue to be very important to the health of the international dairy market. So when we do see demand factors like this potentially backing off and in reality backing off, that seems like that has broad implications to the price of dairy throughout the world.

00;10;57;20 – 00;11;09;25
PHIL
I mean, look at the price of lactose today, right? I mean, I’m not saying it’s because birth rates have fallen another two or whatever, but the these things do matter in markets like lactose and high protein products, etc., though.

00;11;09;25 – 00;11;28;24
JON
Thanks for bringing that. And to Mark Majerus. Thanks for creating that. That’s just a great look. And as always, a unique perspective. That’ll do it for this month’s episode of Forecast Update Live. Thanks to all of our panelists. Thank you to everyone on the Ever.AG Insights team for their work on the forecast. And thank you, the viewers, for tuning in.

00;11;29;00 – 00;11;49;21
JON
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