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;10 – 00;00;09;00
VOICEOVER
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00;00;09;02 – 00;00;16;08
CODY
Hello everybody. Welcome to another GDC Tuesday. I’m your host, Cody Koster, with me from Chicago. Mr. John Spain Hour. John, how are you?

00;00;16;10 – 00;00;19;00
JON
I’m doing well. Cody. Happy to be here today.

00;00;19;02 – 00;00;32;25
CODY
Well, we’re happy to have you here for this illustrious global dairy trade Tuesday that we just had. Maybe illustrious is a little bit too much for the event that just transpired. A lower auction than we saw even two weeks ago on a whole.

00;00;33;00 – 00;00;48;21
JON
You bet, Cody. The net index as a whole for the GTI was down 2.8% and we can go through the particulars of that. But again, the net was down 2.8. That is another lower net GDP result.

00;00;48;29 – 00;00;53;21
CODY
Is there any product that you want to start with that kind of really hit home on this auction? John?

00;00;53;22 – 00;01;19;18
JON
Let’s start out with the good news. The good news on the fat side, butter was down point 8% coming in at about 291. That’s going to compare with the U.S. price of about 282 and an EU price a little bit lower than that. When we go to the AMP side, it was higher, I think 2.4% higher. So down point eight on butter, AMF up 0.24, I’m still going to call that flat for the fats.

00;01;19;19 – 00;01;55;24
JON
But when we get to the cheese side, it was a little bit of a mixed bag. Cheddar cheese was down 2% all the way down at 190. Mozzarella, which is a newer player on the GDS, was down 1%. So we want to keep in mind that the cheese world out there is significantly higher than what we’re seeing out here in the U.S. So I bring that up to say that if you were looking at those GDP, you could say, Hey, those are stable prices on the cheese side, and the cheese is much higher than the U.S. That’s probably going to open the door for exports.

00;01;55;24 – 00;02;16;05
JON
And on the fat side, you’d say, well, these prices were steady ish and right in line with the U.S. prices. So we’re by no means out of line. However, as we go a little bit deeper into the auction here, here’s where the trouble starts. Skim milk powder down 4.7%. That is going to come in right around an average of 114 a pound.

00;02;16;05 – 00;02;40;15
JON
If we were comparing that to nonfat dry milk, I would say this is the lowest price that we’ve been at since September on the GDS. And I would also point out that we came in lower on this auction than where we started the day with the U.S. nonfat dry milk price. The U.S. spot, nonfat dry mouth price reacted to today’s auction by moving to one 1250.

00;02;40;15 – 00;03;04;25
JON
And again, that’s the lowest price on the GTC skim milk powder since September and the lowest CME nonfat price since then. I would also point out that this result comes on the heels of the last auction being down almost 5%. So here it was, another almost 5% move here. And I would just point out that this result was much lower than expected by the futures price.

00;03;04;26 – 00;03;27;24
JON
So I don’t know. It’s hard to walk away from that one without going, boy, If we go to the featured product of the auction, homer, powder came in 4.4% lower and that is going to be the third lower auction in a row for home milk powder. This is the lowest price that we’ve been out on the auction since early December.

00;03;27;24 – 00;03;57;08
JON
So we’ve seen a retreat now on milk powder for the last three auctions and pulling off those highs that were made at the very beginning of the year. So when you look at it again, the fats and the cheese were relatively unchanged. Skim and home powder were the ones that were down pretty seriously here. And when we look at the volume weighting of the auction, it’s Hormel powder that really sits in the weight and that is going to make us have a -2.8% result.

00;03;57;10 – 00;04;09;00
CODY
I think it’s also important to point out, you know, like you’re talking about skim milk powder being down, our nonfat was down, and now we’ve got futures creating some new lows that we haven’t seen in quite a few months right now also.

00;04;09;03 – 00;04;35;05
JON
That’s true. And just looking at it in here, some of the auction results, keep in mind, the GTI is not just a spot price, but it is also a forward spot price, if you will. It’s kind of hard to characterize some of those. GTI prices on the forward skim curve are cheaper than our futures, so it’s just a really hard thing for the U.S. to maintain a premium to the rest of the world, especially on skimmed milk powder.

00;04;35;08 – 00;04;43;10
CODY
So I didn’t into cheese. As you had mentioned before, we are still discount to the rest of the world, though, even after our spot session today looking at mozzarella and cheddar.

00;04;43;17 – 00;05;08;20
JON
Well, our good friend Phil Plourde on the insights team has aptly pointed out that when we get into the one forties, we tend to find exports, at least on the spot side for cheese. Then we rally and get into the one sixties and because they’re spot sales and not forward contracted sales, we tend to lose exports and prices move lower sometimes very rapidly back into the one forties.

00;05;08;20 – 00;05;37;26
JON
What’s the saying there? Wash, rinse, repeat. I can’t help but think that that’s a little bit of what we’re going through right now when we look at the U.S. cheese market. Again, if I were just to look at the cheddar price on here at 190 versus the U.S. block price at 145 or the barrel price at 150 is certainly implies that if there are exports to be done, we should be doing some, at least on a spot market basis.

00;05;37;26 – 00;05;56;29
JON
We definitely want to look at the mozzarella price as well, and we would say that is premium enough to the U.S. that we should be getting some of those exports as well. There’s reason to believe that maybe we did get some exports off here and that when we move down to the one forties, keep in mind, blocks are still at 145 barrels at 150.

00;05;56;29 – 00;06;18;07
JON
But a lot of times when we export specifically mozzarella, that tends to come out of barrel production. So if we are exporting mozzarella we tend to make less barrels. And when we’re not exporting mozzarella, we tend to make more barrels. And a lot of times when we make more barrels, those barrels come to the semi and when we make less, there’s less to sell on the semi.

00;06;18;07 – 00;06;50;07
JON
And a lot of times the price reacts by moving higher or lower. Right now, our barrel price again at 150 is a nickel over the block. And there’s reason to believe, hey, maybe there were some exports that were done. That’s good news. However, when we look at the futures curve out there, it’s hard to imagine that we got the long term contractual type exports that we would need to make a structural difference simply because our futures curve was inline or at a premium to where people could have bought prices of other people’s products on the forward curve.

00;06;50;08 – 00;07;01;11
JON
So I guess if I was a focus on the result of today’s GDP, the cheddar is a standout from the standpoint that maybe it confirms the idea that we did get some exports off.

00;07;01;13 – 00;07;11;13
CODY
Okay. Well, I mean, talking about standouts, total purchases on this GDP, not necessarily a big standout. Right. Seem to be a little bit lower than that has been before.

00;07;11;13 – 00;07;44;13
JON
You know, this is a seasonal issue. We are dairying into a time where volumes move lower, not higher. And that’s simply due to going into our spring flush. The southern hemisphere is going into its fall crash, if you will, specifically in New Zealand. So there’s typically less to be offered during this time. When we look at it, we would say a lot of times that when there’s more product offered, prices tend to go lower because there’s more supply, and when there’s less volume offered, we would say that prices tend to go higher.

00;07;44;13 – 00;08;16;21
JON
That’s just kind of the cycle of economics. But specifically on the GDP, you’ve aptly pointed out there, Cody, that our event volume was relatively low and it was 7% less than the last auction. So one might expect the results of that to be prices would go up and in fact prices went down as we pointed out. And I think if you just stand back and look at that and say, we’re on a lower end of the offerings and there was less volume as compared to the last auction and prices went lower, we got to dig a little bit deeper here, right?

00;08;16;21 – 00;08;25;05
JON
Something a mess and something’s not right. And I think that’s going to come down to the make up of the people who were buying on the GDP.

00;08;25;12 – 00;08;34;00
CODY
Okay. Well, John, on this GDP auction, was there anything else that stood out to you besides the prices in the lower purchasing by region specifically?

00;08;34;07 – 00;09;00;17
JON
Sure, Cody. I think we’ve continued to look at the market to say, well, when is China going to come back? Right. And again, if we look at the breakdown of buying on here versus the last GDP, Chinese participation is down at 28%. That says something. But most importantly, on a year over year change, Chinese participation is down 57%.

00;09;00;18 – 00;09;24;05
JON
So all the listeners out there, again, I’m as surprised as the next person. Chinese demand has shaped up the way it has. I don’t think anybody forecast that to happen. What I can say is it’s not good. And, you know, I don’t see any signs that would say to me what, China’s just around the corner. What has helped keep the market a little bit more buoyant over the course of the last year.

00;09;24;05 – 00;09;46;00
JON
And the absence of Chinese participation has been Southeast Asia. They’ve been a fairly healthy buyer. If we just looked at the same metric, we would say that versus the last auction on this one, they bought 9% more and on a year over change they bought 11% more. That’s great. However, it’s just not enough to make up for the lack of Chinese buying.

00;09;46;00 – 00;10;12;05
JON
And then finally, I would say a bit player that has kind of entered the fray over the course of the last six months has been the Middle East. The Middle East came in and began purchasing from the GDP in a way that we haven’t really seen them before. Reasons for that would be first of all, the price was somewhat cheap in some cases, but at the same point in time it was significantly cheaper than what they may have been able to get out of Europe at the time.

00;10;12;05 – 00;10;32;00
JON
If you remember, European prices exploded higher this fall and went higher than the rest of the world. And I think that that made the Middle Eastern buyers say, you know what, I’m going to go over here to New Zealand and purchase some stuff. And at the same point in time, it’s important to point out that there were some disruptions to the shipping routes coming through the Red Sea.

00;10;32;00 – 00;10;51;03
JON
We’ve all read about that. We had heard that depending on where you were at in the Middle East, it might make sense to avoid those shipping channels come out of New Zealand and to bring it through the Suez Canal and through the Red Sea. Completely understood. What I would point out on this auction is the Middle East buying started to go away or started to diminish here.

00;10;51;03 – 00;11;12;07
JON
Over the course of the last few auctions, the purchasing price went lower on this auction. They were 18% lower than the last auction and 4% lower year over year. That 4% doesn’t really stand out so much until you look at it. Say they normally didn’t buy that much, so they really stepped it up here and this fall and into this early winter.

00;11;12;07 – 00;11;37;06
JON
And now they’ve backed off. And the result is that prices have moved lower. So if you were to say, what were the two main contributors to the price moving lower, I would say China remains in the wings and our bit player Middle East seems to have come off center stage here. And I think that you put those two together and that leaves New Zealand with quite a bit of dairy solids that need to be moved into the rest of the world and the price has come lower.

00;11;37;11 – 00;11;54;03
CODY
Awesome. Well, John, as always, we appreciate the deep dive into the global dairy trade. We are going to be back with everyone in two weeks. The 2nd of April is the next GDP. So we will see you all on that Tuesday. Until then, everyone have a great week and even better weekend. We’ll talk to you next time.

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