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.
00;00;00;10 – 00;00;08;28
VOICEOVER
Future trading involves risk and is not suitable for all investors. Content provided in the statement is meant for educational purposes and is not a solicitation to buy or sell commodities.
00;00;09;00 – 00;00;17;16
CODY
Hello everybody. Welcome back to another GDT Tuesday. I’m your host, Cody Koster, with me from Chicago. Mr. John Spain hour. John, how are you today?
00;00;17;19 – 00;00;20;00
JON
Doing so well? Cody Happy to be here.
00;00;20;03 – 00;00;35;11
CODY
Hey, we’re happy to have you. And last GDC of 2023. Our next one is going to come first part of January, but ending the year on a higher note price wise, maybe a little bit of a lackluster demand on this global dairy trade.
00;00;35;13 – 00;01;00;29
JON
You said it, Cody. I mean, the overall auction result is up 2.3%. That is a good sign. We would look at this and say this is the third higher GDP index in a row. And if we go back one, two, three, four, five, six, seven, eight, this will be the seventh higher auction out of the last eight on the GDP index.
00;01;00;29 – 00;01;16;20
JON
So we went down pretty low back there at the end of August on the total index, generally led by powder. And we’ve been dragging our heels but moving higher inch by inch, at least when we look at the overall category here.
00;01;16;22 – 00;01;27;24
CODY
Majority of the products that we had today were higher. The one that I guess was a little bit lackluster, lower, skimmed milk powder really stuck out at almost 2% lower from last auction.
00;01;27;27 – 00;01;45;05
JON
Sure. Let’s focus on that one since you bring it up here. And indeed, it is the only lower category result on today’s auction. You know, if we just look at the average that’s going to be printed, which is going to include New Zealand, the EU and the U.S., that’s going to bring in an average price of about a dollar 19.
00;01;45;05 – 00;02;07;10
JON
I think it’s going to be important, though, for us to kind of try for this one, if you will, down into what the New Zealand skimmed milk powder do in New Zealand. Skim milk powder came in at a dollar 16 on this one. And that is right. Exactly where the U.S. is. As in response to this, I would just say that it came in at a dollar 16 futures.
00;02;07;10 – 00;02;25;11
JON
We’re expecting to see a little bit more out of this than what we got. I think they were looking for more like a dollar 25. So again, if we look at the result of this, it’s lower. If we look at the result of this compared to expectations, I think it’s going to be a pretty big disappointment, at least on the skimmed milk powder side.
00;02;25;11 – 00;02;43;29
JON
What we also will see out of this is that the European skim milk price that is listed in here went to a dollar 24. If we go back to auctions ago, I believe that was at a dollar 30 and then went down to a dollar 27 and now a dollar 24. So I think what we’re seeing is a little bit of convergence in the skim milk powder market.
00;02;43;29 – 00;03;09;03
JON
That’s of no surprise. These are probably easily the most fungible dairy products in the world, that being skim out of the EU, skim out of New Zealand or skim out of the US. So with New Zealand at a dollar 16, I still feels like the U.S. has room to go lower. We typically carry a discount and then when we’ve got the EU at a dollar 24, there’s probably some more downside out of the EU skim milk powder price.
00;03;09;10 – 00;03;26;21
CODY
Now talking about our prices, you know, usually carrying a little lesser here. John Cheddar cheese Europe Cheddar cheese is kind of rock and roll. And on the high side here as ours continues to kind of stay stagnant down in the US dollar 43 type area for the last couple of trading sessions on spot.
00;03;26;23 – 00;04;04;00
JON
Big price spreads out there on the cheese arena as you stated there, Europe probably categorized for cheddar at least in that $2 area. New Zealand today rallied another 7% to come in at 193. And here the U.S. is down here in the low one forties. Certainly if this type of price spread is able to remain in the medium term, not necessarily the short term, but in the medium term, we can expect that this will open some export channels for the U.S. In terms of chatter, it’s very difficult, though, to say when that would happen or how that would happen.
00;04;04;00 – 00;04;30;02
JON
All right. We’re coming into the end of the year here. There probably are some spot sales available out there going into Q1. But in general, we would say that the Q1 contracting is probably already done. The other factor I would remind people to look at is that the amount of cheddar that is marketed on the GTI is very light and oftentimes the people that are on there buying have to have cheddar out of New Zealand.
00;04;30;02 – 00;04;50;11
JON
So what it does is it puts a pretty strong demand factor onto a very light supply factor. And here we see cheddar up at 193 against the EU at two bucks. We have heard there’s some weakness coming out of that market from there. But that only makes sense that anybody that can will say, I don’t want to buy out of the EU right now.
00;04;50;11 – 00;05;19;11
JON
And even now I don’t want to buy out of New Zealand, but I do want to buy out of the US in terms of when does that make a difference on our pricing, That is really hard to tell and really hard to know. But even today we rallied cheese a little bit, most likely in response to this GDP result, but there was a lot for sale on the CME spot market and it’s almost as if our domestic market said, Yeah, I see what’s happening over there, but there’s still supply here in the US that needs to be moved.
00;05;19;13 – 00;05;34;18
CODY
And then finally, looking at butter, John, we’ve had a little bit of a roller coaster in the CME past few months. You know, we’ve had some high of highs, some low of lows and right now our butter price sitting on a good ten or $0.12 above what get posted today. Is there any insight into that market?
00;05;34;21 – 00;06;02;14
JON
Well, if we were to say that skim and nonfat are easily the most fungible products that are out there, I would probably say that for reasons slightly unbeknownst to me, that other prices and products can be the most nonfungible cheese following in that category as well. But we can see large price spreads between the regional butter prices and those price spreads can persist for a very long time before they start to have the economic effect that you think they would have.
00;06;02;14 – 00;06;25;10
JON
What we can say, though, is the U.S. butter price today did rally to just slightly over to 60 New Zealand today, as you can see on this result, rallied 10.6% to get to 248. And we would also then finally follow that up by saying the EU at 271, in terms of what does this mean to us to see New Zealand rally, I don’t know.
00;06;25;10 – 00;06;42;11
JON
There’s a whole lot I can take out of that other than say we’re finally starting to see convergence for butter to be within a $0.23 spread between all three regions. I’m going to have to go ahead and call that pretty even Stephen there. So I don’t know that there’s much we can take away from that, at least in terms of this auction result.
00;06;42;18 – 00;07;02;12
CODY
And so we had you know, I kind of hit on it at the beginning of this podcast, higher prices as an overall, but demand just really not there for this GDP as far as, you know, people in the buying seat. And I guess another caveat or question that John, is our next auction is going to be the 2nd of January right after our holiday.
00;07;02;12 – 00;07;08;24
CODY
Do you really see the demand picking up by the next auction that we have that?
00;07;08;24 – 00;07;39;02
JON
It’s such a difficult question. And I guess I’ve said it several times this week or in the last few weeks. What I can say is that Chinese demand is very poor. We see that not necessarily demonstrated in the GDP. If you were to look at that data, you would say it’s not great, but it’s not poor either. When you stand back, though, when you look at the overall imports of home of powder into China over the course of the last year, I think it’s down like 35%.
00;07;39;02 – 00;07;59;19
JON
It is an enormous number and it’s not one month or two months. It’s not one quarter or two quarters. Right. This is in totality of the year and it doesn’t seem to be getting any better as we approach the end of the year. Maybe the data will show something else. But certainly the behavior on the auctions doesn’t demonstrate that Chinese demand is back.
00;07;59;19 – 00;08;22;28
JON
We would also say that one of the knock on effects of a potential slowdown in Chinese demand or Chinese economic activity, if that’s what’s causing it, is that Southeast Asian demand is down significantly as well. Specifically for skim milk powder. China imports a lot of hormone powder, not a lot of skim Southeast Asia imports, a lot of skim milk powder, not a lot of hormone powder.
00;08;22;28 – 00;08;47;07
JON
And what we see is that skim imports in the Southeast Asia are pretty dismal, too. So to answer your question, Cody, do we see demand coming back? I don’t want to find myself in the Chinese demand forecasting business. What we can say is, is that so far there has been poor demand out of China, and at least for right now, we’re not seeing many signs that they’re coming back.
00;08;47;07 – 00;09;04;23
JON
That absolutely could change as we cross over into the new year. At the same point in time, you have to ask yourself, well, why would it? Again, that’s one region of the world, other regions of the world, maybe they used to see things come back. Certainly today, looking at the S&P 500, it hit new all time highs. Right.
00;09;04;23 – 00;09;27;04
JON
So there’s economic activity taking place out in the world, right? There’s inflationary factors that go in there. I understand that. I’m just saying from an economic perspective, on a global level, we’re seeing things. Okay. China, though, I would say their economic factors are an issue. And again, I don’t want to say that they will or won’t change, but as of right now, we can say that they’re not in good shape.
00;09;27;06 – 00;09;40;04
CODY
Gotcha. Okay. I was just kind of wondering if there’s any big changes as people will be getting back right from holiday when our next auction is. So any other big, I guess, hard hitting points we want to touch on in this global dairy trade. John.
00;09;40;06 – 00;10;04;08
JON
I’m going to stick to what Phil Plaut and the insights team pointed out. They’ve been on the case of this for at least the last two months and really dialing the argument down to say poor demand on a global scale for milk sales and at the same point in time, poorer supply, specifically in the northern hemisphere. Right. We got a milk production report yesterday that said the U.S. milk supply was down 0.6%.
00;10;04;08 – 00;10;30;26
JON
We’ve seen European numbers that so far said September. Overall, European milk production was down one and I don’t see any reason why we probably wouldn’t see October down 1.25 and maybe even November down one and a half. Right. So we’ve got bad demand, bad supply. I think it allows us to become pretty laser focused on what’s going to change and what needs to happen in order for prices to change out here.
00;10;30;26 – 00;10;51;20
JON
And right now, like I just said, I don’t know what’s going to change demand. But if demand were to increase and we start to see signs of that against this decrease in milk production number, you could see prices really move in a fast way. And so we really want to keep an eye on that. At the same point in time, if we take the flip side of this, I don’t know the demand is going to get much worse.
00;10;51;20 – 00;11;09;14
JON
So if we look at it from a supply side and say, well, what happens if supply starts to increase, right? If we have steady demand and supply starts to increase, I think you run into an argument for lower prices. They’re right. And I know that’s hard to believe when you’re at 140 cheese and 116 nonfat, but I think there could be room for that.
00;11;09;14 – 00;11;33;16
JON
And again, I’m not saying that milk production is going to go up or down. I think it’s something that we want to keep an eye on and really monitor that situation. But for right now, I’d say that the demand story is kind of ruling the day. And as a result, we’ve seen our dairy prices really come back down to earth here in terms of a historical price and for right now, I think we’ll just have to look out there and monitor the situation.
00;11;33;16 – 00;11;41;21
JON
But I think we’re kind of in for a steady to maybe lower outlook, certainly a limited upside at this moment in time until we see things change.
00;11;41;28 – 00;11;47;25
CODY
I agree with that. When your supply outpaces the demand, you kind of have what we’re seeing at this point in time.
00;11;47;26 – 00;11;48;12
JON
Yes, sir.
00;11;48;13 – 00;12;07;22
CODY
Well, John, we definitely appreciate this insight on the GDP, along with this whole past year. We appreciate everybody tuning in to the podcast that we have every other Tuesday. Our next one is going to be in the New Year, January 2nd, 20, 24, New Year. Same to you guys. Excited to be there. But until then, everyone have a very Merry Christmas.
00;12;07;22 – 00;12;11;03
CODY
Happiest of holidays and a fantastic New Year.
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