GDT Review with Jon Spainhour – October 3, 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;11 – 00;00;08;21
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;23 – 00;00;17;18
CODY
Hello everybody, and welcome back to another glorious GDT Tuesday. I am your host, Cody Koster. With me from Chicago, Mr. Jon Spainhour. Jon, how are you?

00;00;17;19 – 00;00;20;10
JON
Good afternoon, Cody. I am excited to be here.

00;00;20;16 – 00;00;40;15
CODY
Hey, we are happy to have you here on this very first week, the 3rd of October 2023, on this awesome global dairy trade. Tuesday. So jumping into the GDT, another higher auction, third one in a row from the graphs that we were looking at in some decently higher prices today, wouldn’t you say?

00;00;40;15 – 00;01;03;10
JON
You bet, Cody. It is. As you said, the third higher auction in a row here. Today’s aggregate auction is going to come in at 4.4% higher. That is on the heels of the last auction that came in 4.6% higher. And before that, back in the beginning of September, we had our first higher auction in a while and that was 2.7% higher.

00;01;03;15 – 00;01;11;06
JON
So we’ve certainly seen you seem to have found a bottom here on the GDT in the last few auctions.

00;01;11;10 – 00;01;22;23
CODY
Now even with the GDT and higher today, Jon, it wasn’t quite up to will say expectations as we were rolling into the auction from what futures had kind of started to predict for us, correct?

00;01;22;23 – 00;01;52;19
JON
Yeah. You know, this is one where you always have to be careful about getting too nuanced. The fact of the matter is that the auction was higher and higher is higher, right. There’s no way around that. So that is bullish to a certain degree. However, there were a lot of expectations coming into this auction. If you remember correctly, Cody, on the last auction, we saw the Chinese come in with one of their biggest purchasing rounds since 2021.

00;01;52;21 – 00;02;13;16
JON
There’s been a large debate within the community that watches GDT to say, hey, is China back? Are they back for good? Was that a one time spend? And as we reached out to a lot of people in the international market before we could ask that same question of them, they would ask that question of us. So there’s been a lot of confusion about that.

00;02;13;18 – 00;02;41;00
JON
But nevertheless, coming into this auction, there seemed to be the expectation that China was going to be here and they would be here as big as they were last time. Skim milk powder futures were forecasting that we would be 16% higher in some cases on this auction, depending on which contract you were comparing to. On today’s auction, we did rally, as you noted, a 6.6% to a dollar 16 on GDT skim.

00;02;41;03 – 00;03;06;14
JON
So again, we were looking for 16%. We out 6.6 on the whole milk powder side, kind of the same action here. Whole milk powder futures were in general looking for a 10% rally and we came in 4.7% higher. So in both cases, we can say that our percentage gain was not even one half of what the futures were looking for off of this auction.

00;03;06;20 – 00;03;31;20
JON
So, again, we don’t want to take away from the fact that the result was higher. But I do think it’s important to look at it in the context of maybe this auction is going to be a bit disappointing to some people as we go across to the other products. AMP was up 4%, butter was up 1.8%. Butter is going to come in about a to 12 a pound equivalent on an 80% per pound equivalent.

00;03;31;22 – 00;04;02;08
JON
The one loser on the auction today was cheddar cheese. Cheddar was down 4.7% to come in at a dollar 75. Just to give a little bit of context here, too, on the cheddar side, I did want to point out that since the last auction that we talked about, again, cheddar was down 4.7% on this auction. During that time, the CME aggregate average has come down $0.14 a pound on the average.

00;04;02;08 – 00;04;24;10
JON
So remember, the CME was significantly higher than the rest of the world. Then we kept saying we’re probably not going to get exports. It’s one of those times where you expect to see the CME come down and the rest of the world come up a little bit. And this case, the New Zealand price went down to a dollar 75 and the CME average right now is about a dollar 69.

00;04;24;10 – 00;04;27;29
JON
So on this time we saw both cheese averages come down.

00;04;28;02 – 00;04;49;26
CODY
Jon, I had someone asked me a question this past week on global dairy trade and I told him I would ask you, is there any rhyme or reason to going into a new quarter like right now, 3rd of October, beginning of quarter four, Is there usually more or less buying and selling on the GDT going into a brand new quarter?

00;04;49;26 – 00;04;53;25
CODY
Or does that not really take into effect anything on the global dairy trade?

00;04;53;28 – 00;05;17;13
JON
I think we normally see higher volumes this time of year, right? And I believe we see that and I apologize for not having a great answer for that, but I believe we see that simply due to we’re going into the peak of the season here in New Zealand or right about that time. Right. So there’s a lot of product that gets marketed against this time frame of the year.

00;05;17;13 – 00;05;46;25
JON
I don’t know that it’s necessarily traded on the GDT that, you know, what would be being made now. Right. Is probably already been purchased a while ago. So we do see a little bit more activity during in this time. What I can say, though, is a few weeks ago, maybe a month ago, if you remember correctly, the New Zealanders really added a lot of skimmed milk powder and whole milk powder to the auction itself, and it was generally on the front end.

00;05;47;02 – 00;05;55;21
JON
So I think we’ve had some relatively heavy volume here on the front end of the auction and then volumes taper off as we get to the back end.

00;05;55;27 – 00;06;06;08
CODY
All right, Awesome. No, I appreciate that. I didn’t know if it was kind of like our auction as we get closer to the holiday demand season where it picks up for the most part or not. So I appreciate that insight on there.

00;06;06;08 – 00;06;29;10
JON
You betcha. I think there’s probably a little you know, the questions about is China back or is this a one time deal or what can we be looking for? I don’t know that we answered that question either way on this auction. Again, last auction, the Chinese performance was huge, probably a little bit of a reflection of, hey, the price was cheap.

00;06;29;13 – 00;06;50;11
JON
And secondly, there was a national holiday that’s going out. There is a national holiday taking place in China right now. The thought was that there’ll be plenty of people away from their desk traveling, so maybe a little bit got purchased early and anticipation of that. And maybe on the next auction, the Chinese will be back in force again or in mass.

00;06;50;11 – 00;07;13;20
JON
But I would say on this auction, you know, where they they’re yeah, they were there they they bought 45% more than they did last year on the same auction. However, their performance just wasn’t as robust as it was last time. They bought 27% less. So yeah, they were there. If you look at it on the chart, you would say, yeah, they’re kind of about average in there on what they purchased.

00;07;13;20 – 00;07;33;26
JON
I wouldn’t say it’s awesome. I wouldn’t say it’s terrible. Maybe a little bit above average. So if we look at it through the lens of will they be back for more on the next auction, my guess is, is that we’ll probably see them remain in here to a certain degree, but maybe their performance tapers off. We’ll see on this auction.

00;07;34;02 – 00;07;57;25
JON
We will say that Southeast Asia was the probably I don’t want to say the star of the show, but in terms of really rebounding from the last auction, the Southeast Asians came back in. They purchased 83% more versus the last auction. However, that was still 2% less than the year before. So Southeast Asia really in and out, in and out, in and out of this thing.

00;07;57;27 – 00;08;18;09
JON
And China has been, again, not not absent from the GDT, but China has been relatively quiet for most of the last year and suddenly popping their head back up in here. But it’s Southeast Asia that has really been coming out as well on this auction. We’ve seen the Middle East start to come out of the woodwork a little bit here.

00;08;18;11 – 00;08;47;05
JON
And again, two auctions ago, the middle East and Southeast Asia were here and China wasn’t one auction ago, China was here and these other countries weren’t. And now China was relatively here. And these, you know, Middle East and Southeast Asia were here and were higher. Again, however, I just feel like, yes, it’s higher. It’s just again, I think there was a lot of anticipation built into this and this could be seen as a letdown.

00;08;47;05 – 00;09;06;00
JON
You you asked me last time, what would it look like if we had China, Middle East and Southeast Asia all buying relatively strong at the same time. And I think this was your answer is 4.4% higher? Yes. Are we well off the bottom of the index? Yes. Does it make me feel like, boy, we’re off to the races?

00;09;06;02 – 00;09;36;28
JON
I just can’t get on board with that yet. And I think we still have a few more questions to answer. What we can say is that there has been some word out of China that their internal milk production, which has been running strong for the last few years, has started to slow down a little bit. Their internal domestic milk price got to a point where we’re losing some production and possibly some cows, and we could be in a situation where the Chinese are actually going to need to demand a little bit more here than they have.

00;09;37;00 – 00;09;51;04
JON
We’ll see. Again, any data that we get out of there is a bit suspect, if you will, but we do have to take it for what it is. And what we have been hearing is that milk production in China has slowed down and that might bring them.

00;09;51;04 – 00;10;13;24
CODY
Out of the woodwork. I was just going to say, you know, you had mentioned it. We talked about it in previous episodes, that when China’s here, the other countries are a little bit more lackluster than vice versa. And this was a pretty good auction. But if you what you’re saying for Chinese milk production is true, I mean, we could see a decently sized ramp up going into the latter part of this year if all countries are on the same wavelength.

00;10;13;29 – 00;10;17;03
CODY
You know, as far as participation in the GDT.

00;10;17;04 – 00;10;38;09
JON
Well, ifs and buts in that argument, Cody, But we definitely have to look at that and say that is a possibility, right? We just do. I think one of the things that I find interesting about this auction is that the Middle East was so active and I just don’t quite understand why they’re as active as they are. If they’re looking for skim milk powder.

00;10;38;15 – 00;10;59;24
JON
There was certainly cheaper skim milk powder for sale in Europe and European milk has tightened up a little bit, but you still don’t get the sense out of there that we’re seeing European milk production move lower in a significant way. There was some heat that ran through Europe the end of last month, maybe even having to go back into the beginning of August.

00;10;59;27 – 00;11;26;04
JON
We think we’re through that. That did seem to have some effect on milk production, specifically up in that northwestern territory of Europe. But again, we think we’re through that. And, you know, there should be plenty of milk in Europe. If anything, I guess I’m tempted to look at the auction results and my outlook moving forward here would be probably we found a bottom, but it still feels like the upside is fairly limited.

00;11;26;11 – 00;11;39;10
CODY
Awesome. Well, Jon, we’ve kind of hit on a lot on this podcast today. Is there anything else besides the buying of the regions and the prices that really stood out to you for this specific auction?

00;11;39;16 – 00;12;05;20
JON
The only thing I would point out is the U.S. nonfat price is at 118 and a quarter after today’s auction. Futures are probably $0.04 higher than that on average. Again, I do point out that the premium market that the U.S. is carrying to New Zealand and the rest of the world is unusual, especially on nonfat or skim. We simply don’t normally carry a premium and in fact we carry a discount.

00;12;05;23 – 00;12;34;08
JON
So having I think maybe part of the premium that was there was reflective of we had some tighter milk supplies than what we thought, but also reflective of people’s expectation that this GDT was going to be higher than it was. And so I think with this GDT coming in lower and milk production gaining some ground here in the U.S. every day, again, not in full capacity like we were back in June or early July, but certainly that the heat has passed.

00;12;34;13 – 00;12;57;22
JON
We’ve got reports that milk is a little bit stronger in areas now. I think as a we start to lose that justification from the premium right on that line. But again, with this GDT coming in lower than what we thought it might or what the futures were expecting, we might see the U.S. nonfat market start to slip here and that premium starts to lose its justification.

00;12;57;26 – 00;13;19;09
CODY
Okay. Definitely something to watch from our side and let the viewers know what is going on. And the next time Jon and I will be with you folks is in two weeks on the 17th is the next GDT auction. But until then, Jon, we appreciate you coming in, giving everybody your expertise on the global markets. And we hope that everybody has a fantastic week, an even better weekend.

00;13;19;09 – 00;13;23;12
CODY
And we will see you next time. On the Ever.Ag GDT podcast.

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