Parlor to Plate – August 9, 2023

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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.

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ERICA
Hello and welcome to Parlor to Plate a weekly podcast from Ever.Ag Insights dedicated to offering listeners enlightening discussion and actionable intelligence about dairy markets. I’m your host, Erica Meadke. We are very excited to have you along today. If you like what you hear, please like us. Subscribe and tell a friend or two. First things first. Today, it’s Wednesday, August 9th, about 1:00 Central Standard Time.

00;00;33;10 – 00;00;56;05
ERICA
A quick rundown of the markets. CME black cheddar today. Dollar 97, we’re up a penny from last week. Barrels down $0.07 to a dollar 80 whey at 27 and a half cents. Up a penny and a half on the week. Butter to 67 gaining $0.04 and nonfat dry milk at 113, up a penny from last week in the grain space.

00;00;56;06 – 00;01;23;04
ERICA
September corn at 480 we are down $0.08. August soybeans at 1432, giving up $0.03 and soybean meal dropping $23 a ton to 429. Today, I’m grateful to have another all star cast from the ever.ag team Joining me. We’ve got Zach Bowers, who supports dairy risk management. He’s out of our Chicago office. Sitting next to him is Kevin Peterson and advisor for our commercial clients.

00;01;23;07 – 00;01;28;11
ERICA
And finally, Jake Kingsley is our director of Feed Procurement Team. How are we today doing?

00;01;28;11 – 00;01;28;28
ZACH
Good.

00;01;29;04 – 00;01;42;08
ERICA
So let’s start with what’s the buzz? Kevin Certainly a lot of activity in the commercial space, seeing a bit of a run up in the chase prices, butter running hard too. What’s going on with commercial folks these days?

00;01;42;11 – 00;02;01;29
KEVIN
Yeah, I think right now the main talk is tightening up in some of those milk supplies around the country here. And it’s pretty pretty tight in Wisconsin specifically. Obviously, coming off of the hottest month out of the year in July. And I think some of that heat has definitely tightened some stuff up for the farmers. Demand continues to hang in there.

00;02;02;01 – 00;02;17;19
KEVIN
I also think there’s some some users out there that are replenishing some stocks that they had kind of tried to eat through when we were up at $2 in March. So I think all of that kind of culminated around the same time. And that’s what kind of got us that 50 to 60 cent run up in blocks and barrels and what about four weeks?

00;02;17;25 – 00;02;42;16
KEVIN
Kind of chasing our tails a little bit there. I think butter kind of came off at lower than average or lower than expected. Stock number really propelled that even a little higher and not trading higher than most people would have thought it could this year. But that’s helping class four hang in there really nicely for those farmers. And, you know, obviously nonfat, you know, kind of trading sideways, really just waiting for, you know, anything to come out of Mexico with with some strong buy side.

00;02;42;16 – 00;02;47;21
KEVIN
So if that doesn’t happen, we’ll continue to probably trade that market sideways throughout the rest of the year. I would say.

00;02;47;23 – 00;03;04;15
ZACH
Just a riff off of what Kevin was saying there from the producer side of things, you know, it’s kind of been the similar thing we’re hearing across the U.S. is, you know, milk production is tight, right? I mean, obviously, we just came off of a couple of weeks where almost the whole country was in triple digits for an extended period of time.

00;03;04;22 – 00;03;20;14
ZACH
We know the South Southwest is still going through some heat. Midwest has cooled off a little bit, but still running in the 80 to 90 range here for the last couple of weeks. I think milk’s going to going to be tight there for a bit yet. But I think coming off of that, the the question is I talked about it last week.

00;03;20;14 – 00;03;46;25
ZACH
I’m going to talk about it again is again, we saw very strong dairy cow slaughter numbers as the last week’s numbers were coming in at 61,000 in the previous week, 59,000 averaging 57 and a half thousand, you know, running almost 11% higher year over year. So, I mean, my question is and I think a lot of dairy men’s question is, is when the heat does subside, how many cows have we already lost and how many were getting continue to lose into the future?

00;03;46;25 – 00;04;10;04
ZACH
Here was, you know, even though we’ve had a nice price rally, it’s still not a number that is very attractive for guys break even. And with where beef prices are at, it still says killing cows right and breed to beef. So that still is been the strong buzz is where milk production is at and where it’s going to be when the weather does turn back around again, just based off of how many cows we’re losing and how many cows will continue to lose.

00;04;10;06 – 00;04;16;14
ERICA
So speaking of weather, Jake, weather’s been the big news for grain space. What’s the buzz there?

00;04;16;17 – 00;04;40;26
JAKE
Yeah, I think the buzz here is really an another opportunity in cash price and the ability to purchase some much better values than we’ve seen in quite a while here. A lot of the important parts of the Midwest have got, as you guys alluded to, some cooler, wetter weather. We think that has helped avoid catastrophe as far as yields go in corn and soybeans.

00;04;40;29 – 00;04;57;11
JAKE
And early on in the year, a lot of the western states had some nice weather and good precipitation to be able to put up quite a bit of forage to really cheapen up their rations. And so we’ve seen basis kind of cool off and really get close to historically average values for the first time in 18 months or more.

00;04;57;11 – 00;05;02;05
JAKE
And now futures are reflecting some similar moves to give real opportunity here.

00;05;02;05 – 00;05;23;26
ERICA
Thanks team. So the next segment, let’s move to the center of the plate. And today I want to bring up the topic of China. It’s certainly been top of the news lately. So if anybody’s been watching the scary news of deflation in China, much different than we’ve seen in other parts of the world where prices run high after the pandemic.

00;05;23;28 – 00;05;45;25
ERICA
In China, certainly seeing a bit of contraction in their economy and a concern that that may spill over. Some of the latest news looking at exports out of China being down more than double digits. What happened out of the pandemic? Did people move manufacturing to other locations that just not looking for China to be the economic engine anymore?

00;05;45;27 – 00;06;08;06
ERICA
Some fascinating data in terms of the birth rate dropping nearly in half over the last decade. So just some challenges as we think about future population, current consumption, especially of babies and young children, seeing some numbers in terms of high youth unemployment as well. So certainly a lot of challenges for the Chinese economy and the Chinese government to manage.

00;06;08;08 – 00;06;12;26
ERICA
So I’m wondering, Zach, what that means as we get into the dairy space?

00;06;13;01 – 00;06;29;24
ZACH
Yeah, I mean, I think from the dairy side of things, it’s interesting. You know, a lot of talk this week with a lot of producers about what their economy looks like, what their demand is going to look like based off of what’s happening. And, you know, the easy response I get from a lot of dairymen is, well, they still have to eat right?

00;06;29;24 – 00;06;48;24
ZACH
Which that’s true. They still do have to eat and they have to feed their people. So, yes, demand will still be there. But the bigger question is, when you go to look at their dairy supply. Right. Their milk production has been running very strong all year. They are up 5% year over year, year to date versus where the rest of the world has been trending lower.

00;06;49;00 – 00;07;07;17
ZACH
Their last June milk production part was up 1%. Right. So they’ve been making a lot of milk over there, which translates and I’ll let Kevin touch on that a little bit more into obviously more product. Right. So the question isn’t are they going to feed them? Obviously, they’re going to feed them, but it’s going to be where do they need to get it from?

00;07;07;17 – 00;07;21;18
ZACH
And more than likely, that’s not from the U.S. They have their own stocks and if they needed more, they’re more than likely going to go to New Zealand and we would be almost their last case scenario. Right. So right now, a weaker economy isn’t going to help us by any means.

00;07;21;20 – 00;07;48;20
KEVIN
Yeah, and a great point there, Zach. I mean, you know, their powder production year to date is about 20% higher than last year. And you go look at their powder stocks, the usage and their whole milk powder stocks are usage and we’re looking at easily multi-year highs there. So, you know, most of the clientele I talked to and what I’m hearing is the reality is China is probably gone for the rest of the year in some of their larger purchases and maybe even out into 2024.

00;07;48;22 – 00;08;14;13
ERICA
So as I look at some of the data for China, again, the concern for the short term, if they can go to New Zealand, is to meet their needs. I think the birth rate is also a concern at the very much in the short term. We’re seeing infant formula moving into China at a slower pace. So that’s a pretty direct impact in terms of volume and reduced exports out of the US to China.

00;08;14;15 – 00;08;32;20
ERICA
But I also think it sets the stage for challenges for consumption longer term. So if I’m sitting in an exporter seat, you’ve got to change the Chinese palate to a more Western diet and now there’s just fewer mouths. So the challenge not just today, but multiple years into the future for them.

00;08;32;25 – 00;08;59;28
KEVIN
Yeah, definitely. You know, again, we’re definitely hearing that they’re likely done buying, at least from us for the rest of the year. But to your point, I mean, with their birth rate and just overall their their general economy kind of being in a decline, this could be a multi-year thing. We start to see where there just overall demand for U.S. dairy products could definitely be trending lower and where if if at all, can we find a replacement in that product or is it going to be kind of backed up in U.S. warehouses, which.

00;09;00;07 – 00;09;05;29
KEVIN
So, yes, definitely your point. I mean, this is something we’re keeping a close eye on and we’ll need to monitor into the future here.

00;09;06;01 – 00;09;09;28
ERICA
Right. So as you look back over history, 2021 may be the high watermark.

00;09;10;03 – 00;09;11;27
KEVIN
Absolutely, it could be.

00;09;11;27 – 00;09;24;10
ERICA
Jake, there’s also been a lot of activity on the grain side of things, which is having a direct impact on U.S. corn and soybean prices. So can you talk a little bit about what China is and isn’t doing in the grain space?

00;09;24;16 – 00;09;46;24
JAKE
Yeah, I think the the lack of activity is probably the more important piece to look at there. Right. They are not moving very well into our export space here and they’re not expected to really ramp up their export pace this coming crop year. So we’ve already talked the big question of whether and its effect on yields for the coming crop here in the US.

00;09;46;24 – 00;10;17;11
JAKE
And then the other big variable for our balance sheets tends to be exports primarily to China. We still believe there’s plenty of room to cut exports to China on the coming corn crop. We’ve seen them step into Canada and buy some canola here at a pretty healthy pace. I think that’s just on the back of maybe some lack of availability out of Ukraine, but maybe more importantly, the failure to produce in Argentina this past spring.

00;10;17;14 – 00;10;43;12
JAKE
But they very well could go hand to mouth here for a little while, get through our crop season, and if South America can put together somewhat normal production both in Brazil and Argentina for corn and soybeans, we could really see some significant reductions in the amount of grain moving out of the US to China and that could finally break this three year cycle of high prices that we’ve been on.

00;10;43;16 – 00;11;09;19
JAKE
It’s really been part of what’s allowed us to have these breaks and futures here recently and allowed basis to be a little bit subdued closer to historically average numbers. If we get into the first quarter of 2024 and it looks like South America is putting something decent together, China could just rely on those folks a lot more heavily and allow our balance sheets to rebound quite a bit and really drive these prices lower.

00;11;09;19 – 00;11;17;10
JAKE
So I think that is a good thing for our dairies here. If we can properly manage risk while we’re down at these levels and catch a break next spring.

00;11;17;11 – 00;11;26;10
ERICA
So it sounds like China is really putting a lot more eggs in the basket of Brazil and Argentina as they think about where to procure big grains from.

00;11;26;15 – 00;11;56;04
JAKE
Certainly I think we saw particularly with corn out of Brazil this year, China hadn’t really bought anything from them for about almost a decade until this year. And then they stepped in in a very big way and have put together a exceptionally large corn program out of Brazil. I think really the only reason that our protein export program here in the US has any legs under it at all is because the Argentine soybean crop was effectively cut in half this last crop cycle.

00;11;56;04 – 00;12;25;02
JAKE
So again, big drought effects there in Argentina. Now we move into an El Nino year here that typically tends to be better growing weather for Argentina. So again, if they can return to something of normal production, we could see a hit to our demand both in corn and beans there, which should drive prices back towards pre-pandemic kind of that 2015 to 2019 cycle that we were in.

00;12;25;02 – 00;12;32;18
JAKE
Do we get all the way back there? Hard to say. Probably not, but we can make some pretty big strides in that direction. I think.

00;12;32;20 – 00;12;50;19
ERICA
A big thank you today to Zach, Kevin and Jake for joining me. Great contributions to the buzz and the center of the play. Really appreciate you being here and sharing your insights about dairy and grain markets. Thank you, as always to our media team Paige Driscoll for mixing and mastering. And thank you to the listeners for joining us today.

00;12;50;21 – 00;13;01;02
ERICA
If you like what you hear, subscribe on your favorite app. If you’d like to learn more about how we help people manage risk. Contact us at Insights at Ever.Ag.

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CODY
And Ever.Ag. 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 dot ever dot ag slash everything