GDT Review with Jon Spainhour – August 1, 2023

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;19;05
CODY
Hello everybody. Welcome back to another Great Tuesday. I’m your host, Cody Koster. With me from Chicago, Mr. John Spain, our John, how are you doing on this very first day of August 2023?

00;00;19;05 – 00;00;24;24
JON
You know, Cody, I very rarely say this, but I’m just happy to see the calendar turn into August.

00;00;25;01 – 00;00;29;26
CODY
I mean, it’s been a good year. It’s been a fun year that’s flown by it seems like it has.

00;00;29;26 – 00;00;34;13
JON
But boy, was July, a slow month in the dairy industry. It felt like.

00;00;34;17 – 00;00;42;23
CODY
That is also very true. Well, I guess with today’s GDT, we’re kind of on to bigger and better things. You could say.

00;00;42;23 – 00;01;11;01
JON
Yeah, the GDT today, you know, it just follows suit with the idea of poor performances. I would say coming into this GDT, there was an expectation that prices were going to move a little bit lower. I think that the net results here, we exceeded those expectations to the downside To begin with. The net result of the auction was for point 3% lower.

00;01;11;01 – 00;01;31;19
JON
When we look at that average price on an index basis, this is the lowest we have seen. The GDT aggregate index since September of 2020. I think as we dig into the numbers here a little bit more, there are just some things that really stand out. Let’s start out with cheese. The cheese price edged a little bit lower.

00;01;31;25 – 00;02;04;25
JON
It’s going to be the lowest cheese price on the GDT since December of 2020. It’s going to come in at 177. That’s going to compare to the EU cheddar price of about 186 and the U.S. price right now of an average of about one 9150. And then as we move to butter, butter came in about a half a percent lower, actually perform probably the best of all of the main product categories by coming in a half a percent lower that came in at 207.

00;02;05;01 – 00;02;30;14
JON
That’s going to compare to the EU price of 209 and the U.S. price currently of about 267. As we move to S&P, that edged a little bit lower here today as well. That came in at an equivalent of about 111 per pound on a U.S. dollars per pound basis, 2% lower, and came in at the lowest price since May of 2020.

00;02;30;16 – 00;02;52;13
JON
If we want to say that, hey, May of 2020, John, that was during the pandemic. That’s just not fair to compare to it. We’ll have to go back to August of 2019 to get to an S&P price this low. The EU is at 111 per pound and the U.S. today started the day at one 1475 and moved to 114.

00;02;52;15 – 00;03;21;11
JON
I think it would be we’d be remiss if we didn’t focus on what we’ve commonly referred to as the big dog of the auction. Whole milk powder powder today was down a striking 7.6%. We haven’t seen a number quite this aggressive in a long time. I think we have to go back to the 2000, the mid 2000s to find a whole milk powder price that move that much on a percentage basis.

00;03;21;15 – 00;03;54;02
JON
However, this is the lowest whole milk powder price since June of 2020. Again, that was during the pandemic. So if we want to just say, hey, let’s strike that one from the record and see it as an outlier, we have to go back to January of 2019 to find a whole milk powder price. This low reasons for the whole milk powder price moving this low, I think hormone powder is probably performed a little bit better over the last few auctions coming into this one than what most people’s expectations were.

00;03;54;05 – 00;04;25;11
JON
The GDT pulse was consistently saying we’d be 3 to 4% lower and then we come in just a little bit lower or unchanged. And then finally today, coming into this, the pulse and the futures were suggesting about 3 to 4% lower again. And then bam, when the dust settled were 7.6% lower in just a big downdraft there. If we look at it from a who was here buying and who was not, we kind of keep going through this pinball is China here.

00;04;25;11 – 00;04;50;17
JON
And when they are Southeast Asia isn’t. And when China’s not here, Southeast Asia tends to be here. We kind of continued that cycle today. Southeast Asia has generally been an outperformer and has bought quite a bit of product in the absence of China. The last few auctions, I guess on this auction, they were 12% lower than the last auction and 16% lower on a year over year basis.

00;04;50;24 – 00;05;12;18
JON
However, the good news is, is that China, who’s been relatively absent, came back and they bought 82% more than they bought last auction. That sounds like a lot. And certainly it is good to see them step back into the game. However, if you remember correctly, their participation on the last auction was just dismal. And then if we compare that on a year over year basis, that was 32% higher.

00;05;12;21 – 00;05;33;18
JON
On the aggregate basis, though, China is just way, way behind on their buying. It’s also worth noting there was quite a bit of homo powder for sale on this auction, quite a bit more than the last auction. So the supply was there, the demand. Some players showed up, other players backed off. The net result is we just move significantly.

00;05;33;18 – 00;05;54;21
CODY
Lower, kind of going back to the Chinese side of things, John, I think it’s very interesting to note out that last time we had talked middle of July, our prices at about a dollar 50 to New Zealand of a dollar 79 iu a dollar 94. So it’s been quite the ride to see this inversion of us being 35 to $0.45 lower to the rest of the world.

00;05;54;23 – 00;05;57;23
CODY
It’s now been on the higher side of the pricing on that.

00;05;57;23 – 00;06;23;07
JON
Yeah, the U.S. dairy industry generally been below everybody else and pricing and here in the last couple of weeks was really specifically on cheese and nonfat has made a big transition. I think there are a few things that go into it. When we look at the cheese market, there is the possibility that we did see some exports go off, at least on a spot basis here as we transitioned into July.

00;06;23;09 – 00;06;50;10
JON
If you remember, the cheese price here on a spot basis was as low as a dollar 35. The rest of the world was still in that 170 to 185 area. So could we have gotten some exports out on a spot basis? Certainly. But again, those types of trades tend to happen on a longer term basis. And as far as we know, our futures prices never really got into a good place that would facilitate longer term contracts.

00;06;50;17 – 00;07;07;15
JON
However, we do feel certain some product was able to leave the country at a dollar 35 and probably clean things up. On the other side of the coin, we have to look at it to say it got hot in July and it gets hot every summer. And so we want to be really, really, really careful about how we categorize this.

00;07;07;16 – 00;07;27;23
JON
It certainly did get hot, but in certain areas of the country, specifically the southwest, there were some extreme temperatures. That seems to have also reduced the milk supply quite a bit. I don’t know that that put everybody in a tight milk situation as much as it puts people in a I have less milk than I thought I was going to have.

00;07;28;00 – 00;07;48;19
JON
And we go back, you know, six weeks ago there was sloppy milk everywhere looking for a home that seems to have gotten cleaned up, at least in the short term, partially because of the July milk check is going to be 1380. But also I would say that the heat probably had some effect on it. And then finally, it’s taken a couple of weeks for it to come to light here.

00;07;48;19 – 00;08;06;28
JON
But it sounds like there may have been some cheese production issues out there in the country, you know, that might have caused not as much cheese to be manufactured specifically on the fresh cheddar. That’s between four and 30 days old. I think Phil Ford here says that all the time. They’re going to be all the cheese in the world.

00;08;06;28 – 00;08;28;22
JON
But we trade for a 30 day old cheddar in the block form and the barrel form. And if it doesn’t fit into that exact category, it leaves a little bit of a price vacuum here on the CME. And I think we did have a little bit of problems out there. And that just kind of came right at the same time that there were some extra exports and a little less milk and prices vacuumed higher.

00;08;28;28 – 00;08;52;10
JON
As you know, we went from a dollar 35 to right now. I think cheddar is 195, 196. And that was all in the course of about three weeks. So if we look at the long term implications of that, just looking at it via the rest of the world, I would say that today’s whole milk powder price is a statement and it is a real statement.

00;08;52;10 – 00;09;27;03
JON
And I guess to me it makes me feel like there is probably a little bit of a temporary factor to this cheese price right now. The simple fact of the matter is, is that we won’t be exporting now, at least on a spot basis. And again, I don’t think that we got the contracted basis out there. So there’s a pretty good chance that, you know, as we work through whatever spot issues we have right now and whatever exports we have right now, that we probably do have enough cheese in the U.S. sometimes we run into these glitches.

00;09;27;05 – 00;09;52;29
JON
Glitches get fixed if it’s not a structural issue, we start dealing with the issue of too much milk and too much cheese in a pretty fast way. And we look at it from the nonfat basis. Again, I’m impressed with today’s spot. Nonfat was able to hold its ground at about 114 to 1 1450 in there, I believe. I think that is pretty impressive because the skim milk powder price is 111.

00;09;53;06 – 00;10;11;07
JON
I’ve said it before on here. There are certainly can be times that the U.S. price can hold that pole position in the world, but it’s generally pretty fleeting. And it’s generally that the U.S. price moves up before the rest of the world has a chance to move up, you know, during an auction or when we get the pricing.

00;10;11;07 – 00;10;29;09
JON
And before we know it, the U.S. isn’t the highest price in this case. We have the U.S. price is the highest. And from what we can tell, the rest of the world is moving down, at least on the GDT. Europe is a little bit difficult right now to get a good reading out of a lot of people on vacation.

00;10;29;14 – 00;10;48;25
JON
Just hard to get any confidence in where the price is going. But right now we’ll say it’s steady. And I would be willing to bet that after this GDT, we’ll see European prices go down. That’s going to make the U.S. price at 114 look pretty expensive. And my guess is we’ll see some downside out of that pricing as well.

00;10;48;28 – 00;11;08;26
JON
When it comes to butter, that’s always difficult, right? It lives on its own island to a certain degree. But with the U.S. currently in the high two sixties, I believe to 67 and New Zealand at 207 and Europe right there, I don’t know that it’s going to cut off a lot of exports. I don’t think we’re very dependent on exports.

00;11;09;00 – 00;11;29;18
JON
But it was about this time last year we started hearing, Hey, the New Zealanders are sending it’s almost like a heat seeking missile, looking for a home for fat. We start dealing with imports and that really starts to work into the ingredient grade butter that can be very important for prices here in the US.

00;11;29;21 – 00;11;42;05
CODY
Well, John, it’s got quite a bit to wrap up in one global dairy trade for this first day of August. Is there anything about the auction that stuck out to you specifically on things that we have not particularly covered so far?

00;11;42;07 – 00;12;03;01
JON
Well, I’m just going to focus real quick here. Back on home powder and again, I don’t want to beat a dead horse, but I can’t express enough how important that prices and I said earlier in the podcast here, Cody, I said this was if we exclude the pandemic, this was the lowest price since January of 2019 on there.

00;12;03;06 – 00;12;28;19
JON
So I went back and look, where were we in the U.S. when whole milk powder was this low last time? And so if I go back to January of 2019, we’ll say that cheese was in the low one forties nonfat was at $0.91, butter was at 226 and whey was at $0.35. So I guess if I, if I look at that I’ll say you know, way is, is a little bit lower than that right now.

00;12;28;19 – 00;12;48;12
JON
But we were just developing the CME spot market. So I’ll say whey is probably, you know right where it should be if we look at it through that relationship, the butter market, you know, we were at 226, now we’re at 268. There’s a lot of different ways this butter market can still turn out. But I would say the butter market looks a little high related to that.

00;12;48;19 – 00;13;17;06
JON
But I think it’s interesting, the nonfat market was at $0.91 and I think New Zealand was at a dollar at that point in time. Right now New Zealand’s at 111. Right? So we’re really not far off of that. And I guess I just have to look at it to say maybe $0.91 is a little too cheap on this comparison, but I wouldn’t doubt it if the U.S. market doesn’t migrate back towards that dollar mark, which would put it right in where whole milk powder was in 2019.

00;13;17;08 – 00;13;38;09
JON
And then finally the cheese market was at 142. Again, I’m just forced to look at what we saw happen in cheese here over the last three weeks as being, you know, a bit of a bit of a blip, if you will. And again, those things certainly can happen, especially when you’re talking about a market that has to be between four and 30 days old.

00;13;38;11 – 00;14;17;29
JON
I just don’t want to rule out the idea that we see prices come back down and migrate more towards that. 142 That doesn’t mean that’s where I’m saying we’re going. There’s probably enough, you know, angst in the system right now that coming from 135 going up to 195, we can probably middle out here around 165. But again, I just really want to say that, you know, this whole milk powder price that we saw and if we look at it, we probably say is probably pretty representative of the global condition, talking to Phil earlier today and kind of working through this, he just had such a great statement here.

00;14;17;29 – 00;14;49;04
JON
And it really feels like milk supply is steady, Eddy. Right. It’s not great. It’s not terrible throughout the world. We’ll just call milk supply pretty steady. Where we seem to be suffering is on the demand front, specifically out of China. Again, they were here today, but they haven’t been in the past. And, you know, I would say that demand is struggling and that is just something that I think we can all stand back and say we haven’t had this kind of discussion in a very long time.

00;14;49;07 – 00;15;07;18
JON
Right. You have to go back before the pandemic again, there was pandemic demand. And what does that mean? That again, that was such a unique situation. But if we go back to genuine structural issues in the demand picture, we haven’t talked about that in a long time. And I think we really have to focus on that because that’s what it feels like.

00;15;07;18 – 00;15;29;01
JON
We’re seen here on the home milk powder side. And then finally, how do we fix this? How do we get out of this? And, you know, we need supply is something we can kind of forecast. Demand is is not easy to forecast. And right now I would look at it to say the demand picture without trying to forecast it too much and saying this is just where we’re at right now.

00;15;29;08 – 00;15;46;19
JON
Demand isn’t great. And so I guess if I look at it through that lens, I don’t want to sound like a Debbie Downer here. I want to have kind of a sober approach to this to say, I think the prices that we’re seeing here in the U.S. right now are kind of out there at the higher side of things.

00;15;46;21 – 00;16;10;22
JON
They’re to be taken advantage of through one function or another from a producer side and from an end user side. I think it’s something that, sure, anything can happen. We can certainly go higher and the market can change. But I think you’re trying to secure your hedges in some way with some sort of optionality so that you can participate to the downside because it just feels like we might have some downside from our current pricing structure.

00;16;10;25 – 00;16;32;26
CODY
I agree, John. And I think with that being said, I mean, there are definitely different tools on both sides from the producer to the end user. We can definitely help to mitigate a lot of that risk here at other AG with these volatile markets that we’re seeing day to day any more honestly. So to learn more about that, please feel free to give us a call and we will walk you through those different tools for the toolbox.

00;16;32;26 – 00;17;01;00
CODY
But with that, that’s going to wrap it up for this Tuesday with myself and John. And we will see everybody in about two weeks on the 15th of August is the next global dairy trade. So until then, everybody, have a great week, great weekend. Stay safe and we will see you next time. And every year 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.

00;17;01;02 – 00;17;11;00
CODY
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