GDT Review with Jon Spainhour – September 5, 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;20
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;22 – 00;00;19;21
CODY
Hello everybody. Welcome back to another Tuesday. I am your host, Cody Koster. With me from Chicago, Mr. John Spray and Howard. John, how are you on this fantastically hot September day?

00;00;19;24 – 00;00;31;00
JON
Well, doing very well, Cody. And this seems to be the final final of the hot today and tomorrow. So I hope everybody enjoys it. Before we start our march into the cooler weather.

00;00;31;03 – 00;00;43;26
CODY
Absolutely. I mean, speaking about hot, we had a couple of different highs and a few different lows on the GDP today. I guess starting out first higher, all encompassing auction. And what did you say, seven.

00;00;44;02 – 00;00;55;00
JON
Auction, if you exclude today, it would be seven auctions. What have you put today in? This will be the first higher auction in the last eight sessions of the GDP.

00;00;55;02 – 00;00;59;27
CODY
All right. Well, I mean, I guess it’s something to note. It’s very, very noteworthy for the GTI today.

00;00;59;28 – 00;01;23;07
JON
Yeah. Let’s dig into some of the specifics here. To start out with, we had the fat complex kind of on the higher side here, AMF registering in at 2.4% higher around 207. Moving over to the butter side, we got a 1.1% higher at 208. If we adjust that back to a US dollars per pound, we get into that 202.

00;01;23;07 – 00;01;49;11
JON
So a little bit of adjustment there on the fat side. Moving into the cheddar side here, we’re down point six at 186 cheddar out here. Nothing too special going on there where the majority of the action was and what was somewhat interesting to watch today were the powders. Skim milk powder came in, ultimately a 2% lower at 104 on a dollars per pound basis.

00;01;49;13 – 00;02;12;17
JON
And if you were to have watched the auction on a play by play, like some of us who are very vested in GDP tend to do, you would have thought that skim milk powder was going to die out at about 10% lower this morning. We were on a very low demand factor on skim milk powder, but whole milk powder had a lot of action in it and was actually able to come in at 6% higher.

00;02;12;19 – 00;02;44;07
JON
And I think what happened is as whole milk powder started dragging higher, some demand shifted out of the whole milk powder complex and into the skim milk powder. So whole milk powder ultimately ended up settling 6% higher while skim again, you would have thought early on in the auction that we were done at -10%. And as that demand shifted out of whole milk powder came into skim, we settled the day ultimately at 1.4, again, only 2% lower on the day.

00;02;44;10 – 00;02;52;16
JON
All in all, putting that auction together, we find ourselves at a net auction result of positive 2.7%.

00;02;52;23 – 00;03;03;20
CODY
Like you said, looking back, it’s the first time in about seven auctions, including today, that we have been higher. But as you had mentioned, skim milk powder. On the other hand, little bit on the lows on this auction.

00;03;03;20 – 00;03;28;12
JON
Yeah, if we look from a historical standpoint, even though skim only settled 2% lower, this will be our lowest skimmed milk powder price since January of 2019. If you remember, last auction, we noted that the whole milk powder price was the lowest price since 2016. So whole milk powder was able to come up a little bit off of those long term lows.

00;03;28;17 – 00;03;47;14
JON
While skim milk powder is now continuing to move lower and again is reaching its lowest point since January of 2019. And that translated into today’s CME spot market for nonfat dry milk moving to its lowest point since November of 2020.

00;03;47;21 – 00;04;01;28
CODY
And looking at the participants on this auction, John, it looks like we had a little bit of a divergence between North Asia and Southeast Asia in Oceana, kind of making a little bit of a comeback for both of those countries respectively.

00;04;02;01 – 00;04;27;13
JON
Well, you know, this has been a big part of the debate. If we stand back and say why in the heck that whole milk powder move so low? Last auction, much of that argument or discussion has revolved around China or as it’s on the GDP designated as North Asia. If we look at the North Asian numbers, you would say, well, GDP went higher today, so we must have had Chinese participation back.

00;04;27;20 – 00;04;54;11
JON
Looking at the actual breakdown here, what I can say is Chinese participation was okay, but it wasn’t really great from a year over year standpoint. And actually on an auction over auction standpoint, it died down versus last auction. So then that leaves you saying, well, okay, if if Chinese participation came down, why did the price go up? There are two things I would go ahead and suggest.

00;04;54;18 – 00;05;18;22
JON
One is that the low, low prices that we saw since the lowest price since 2016 looks like it brought in the Middle East and also Southeast Asia. And we saw some of the participation out of those countries be the best that it’s been in a while, specifically the Middle East. So I think that they were able to scoop up some of that product as well in Southeast Asia.

00;05;18;24 – 00;05;45;08
JON
But I would also say is on the Thursday night before the auction, Fonterra, they typically release their forecasts moving forward for products on that announcement. That gives us some guidance on what the forecast is going to be and specifically if there’s going to be any changes to the amount of product that’s forecast to be sold over the course of the next year or the types of product that they’re going to sell.

00;05;45;10 – 00;06;10;10
JON
And what we saw come out on this past Thursday was Fonterra saying, hey, listen, there’s going to be less whole milk powder for sale on the GDP and there’s going to be less skim milk powder. Now, that might make some people say, well, that’s pretty bullish, there’s less product for sale. If you remember two auctions ago, they increased the amount of those products, but on this one they decreased them but shifted them to the GDP.

00;06;10;10 – 00;06;42;26
JON
Pulse If you remember, the GDC pulse is a sub auction that takes place on the weeks between the actual GDP and this case. They remove some product from the actual GDP and they’re placing more of it on the GDP. Pulse as well as this also says that, hey, we’re going to be putting skim on the GDP pulse. So I actually look at it to say the actual big auctions are still going to be very, very important for a lot of different reasons.

00;06;43;03 – 00;07;10;10
JON
But also there’s reason to believe that the sub auctions now are going to start becoming more important as well. What it does mean, though, is there was a little less expectation of product being on the GDP itself. And I think you take a little product off the GDP moving forward and you add some of these other buyers in here and voila, we get a powder that is 6% higher and finally bouncing off the bottom.

00;07;10;17 – 00;07;27;02
CODY
Do you think going forward, John, will take different products and kind of do the same thing that you’re talking about, Maybe take them away from the GDS and put them on the pulse for maybe cheddar or butter? Or will everything pretty much stay on the GDP going forward unless otherwise said so?

00;07;27;04 – 00;07;51;25
JON
Well, I think that as we move forward, you have to have the expectation at this point in time that there will be more product that is put on the pulse and that again, the pulse becomes more important and maybe the big auction becomes a little less important. They probably all lead to the same thing though, right. And that is going to be the price of New Zealand’s dairy products one way or another.

00;07;52;02 – 00;08;15;05
JON
I actually am excited about the pulse becoming more important and the continuity of the pulse because what that’s going to mean is instead of us waiting for this auction signal or this price signal that comes to us once every two weeks right now, or in this case, once every three weeks right now, this is going to ensure that we have a price signal coming out of New Zealand every week.

00;08;15;08 – 00;08;21;10
JON
And the more products they put on there and the more product that clears, the more important that price signal is going to be.

00;08;21;12 – 00;08;29;29
CODY
Great way to look at it. Would there be any downside to doing what you’re talking about or is there just pretty much all upside in your eyes going this way?

00;08;29;29 – 00;08;53;14
JON
I haven’t thought about it in that deep of regards there, Cody. What I can say, as always, I come from a world where I look at it and say more transparency is good and less transparency is bad. And in this case, I believe this brings more transparency to the price, and I think it ultimately will make the New Zealand market a little bit more vibrant.

00;08;53;21 – 00;09;01;13
JON
And the information that we can glean out of that market as it translates to our market will become even more vibrant as.

00;09;01;15 – 00;09;16;08
CODY
A great transparency is always great for the market. It seems like, well, for this specific GTI auction that we had today. John, is there anything big that really stood out to you besides everything that we’ve talked about so far? A lot of big things that have happened, but anything that we haven’t mentioned.

00;09;16;08 – 00;09;44;26
JON
Yet, you know, if we look at the whole milk powder, skim milk powder relationship, we typically see about a $500 difference between the two. And on this prior auction, what we saw was that relationship got down to about $200 where whole milk powder was only premium of about $200. So that meant that whole milk powder has to come up or skim milk powder has to come down to get to that $500 premium or one of both needs to happen or both need to happen.

00;09;44;26 – 00;10;07;25
JON
I suppose when all milk powder was at where it was at prior to this auction, it suggested that skim milk powder needed to be about $0.92 to get back to that relationship. And what we saw here today was almost powder went up, skim milk powder came down. And in fact, early on in the auction, it looked like we were going to settle about 92 to $0.94.

00;10;07;28 – 00;10;31;14
JON
And like I said, we saw a late market rally as whole milk powder went up. I guess what I would take away from this, though, is I think skim milk powder maybe right at the level it needs to be. But in no way, shape or form is skim milk powder at 100 for all that bullish for the US, we did see whole milk powder bounce maybe a little bit of short cover rally in here.

00;10;31;14 – 00;10;53;23
JON
Again, as I mentioned, Chinese demand was there but nothing significant as we’ve said for a while on here, Cody, the Southeast Asian and Middle Eastern demand can do its job for a while, but there is no buyer that can make up for the Chinese demand. So Southeast Asia may have come in, Middle East comes in. In the absence of large scale Chinese buying and the price goes up.

00;10;53;25 – 00;11;16;23
JON
But if we don’t see the Chinese come back in, then the ability of that buying to keep the market supported is probably going to fade, right? And it just won’t be enough to keep the market supported. And I guess I would say I don’t think whole milk powder has seen maybe it’s seen the low, but I don’t think we’re quite ready to see a significant rally until we see China come back in.

00;11;16;25 – 00;11;57;27
JON
And with that said, that makes me feel that skimmed milk powder is probably still a little expensive with very limited upside. And then when I look at the US here at 100, roughly 106, I guess it’s 105 75 today to 105 and a half. When I look at it through that lens, it’s just difficult for the U.S. nonfat market to maintain a premium to New Zealand and or Europe that if we look at it and say, I think that New Zealand has limited upside to it, maybe some more downside, I think if we extrapolate that further over the medium to long term, I think the U.S. has more downside to it.

00;11;57;29 – 00;12;23;09
JON
I absolutely recognize that the U.S. milk production situation right now has been handicapped by the severe weather that has now hit several parts of the country. Specific to Southwest. But there has been a had an effect on California, had an effect on the Midwest. That effect is kind of into its dying days, if you will, at least in California, in the Midwest.

00;12;23;09 – 00;12;45;29
JON
And I think by the end of the week here, some of our highs are 67. And I think you’ll see more of that. The less as we march into the fall. I think we that means that we’re going to get a return of at least some of that milk that we lost that is going to eliminate, if not hinder, a lot of the reason that the U.S. has been able to maintain this premium to the world market for as long as it has.

00;12;45;29 – 00;13;08;05
JON
And I think the U.S. can move in the lower left. As it relates to cheese, it is always difficult to make too much out of the New Zealand cheese auction, but I would say the U.S. cheese market, as we said, probably not going to have very many exports moving forward, at least at this moment in time. And I guess we’ll see how it shapes up.

00;13;08;05 – 00;13;35;20
JON
But the U.S. is the highest spot price and probably the highest, and it seems to be the highest forward or futures price in the world as well. So it’s going to be difficult for us to capture those exports. And as we start to wind down some of the exports that it appears we have on right now, I suspect the combination of less exports and the potential for more milk coming back, it probably means the cheese market is near its highs or near a zenith, if you will.

00;13;35;20 – 00;13;44;06
JON
And I don’t know that we’re going to see an outright collapse in cheese prices, but I would dare say the the one nineties are probably a little too high. Absolutely.

00;13;44;08 – 00;14;05;08
CODY
Well, John, as always, we appreciate your insights into the global dairy that we have out in the world right now. And we will be back with everybody in two weeks. Should be the 19th of September. So not a three week hiatus. Is time just the two week John and I will be back to give you a look at the auction at that time.

00;14;05;10 – 00;14;15;14
CODY
But until then, everyone have a great couple weeks. Enjoy the weather while we have it and we will see you next time.

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