Forecast Update Live – May 2024

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Hello and welcome to another edition of Forecast Update Live, a video series from EG insights, where each month we gather to discuss our dairy market forecast. I’m your host John Spain. Our. We’re joined today by Erica McKee, McCool and Phil Plourde to get us started. Erica, please run us through the highlights of this month’s forecast compared to last month’s.

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Good morning John. Thanks for having me back again. So we have made some changes to our forecast. I would say in the cheese and whey the class three complex, we’re looking at a couple of cents off in the nearby months for both cheese and whey. As we look at nonfat dry milk, we’ve also taken that down. That one extends a little bit further and a little bit deeper.

00;00;51;16 – 00;01;15;21

So we’ll talk about what’s going on there. But some months we’ve taken down as much as a dime and make cuts even into the first half of 2025, I would say the biggest change that we have made. Drumroll please, a big move up in our butter forecast. So individual months in this season for 2024 up anywhere from 15 to $0.25 for an individual month.

00;01;15;21 – 00;01;18;22

And taking that butter curve certainly a lot higher.

00;01;18;24 – 00;01;29;09

Wonderful. Well, each month we ask two of our panelists to take the bull in the bear case. This month, Erica has agreed to take the bull case. Erica, take it away.

00;01;29;11 – 00;01;53;11

On the bull side of things, I would say there’s a couple of major factors that override the various commodities, one of which is milk supplies generally being a little bit tighter. And most of that is related to margins and producers, especially here in the United States. Lower output. As you look at USDA numbers, we had 89,000 fewer cows in the last report.

00;01;53;11 – 00;02;15;06

And certainly if we needed to respond, we just don’t have the cows either in the herd, in the pipeline. I don’t want to speculate on what’s going on with avian influenza, but that’s certainly another factor to the milk supply that we’re watching to see how that plays out as that disease spreads to more herds in more states. Another piece to watch for many of our commodities.

00;02;15;08 – 00;02;38;13

We’re at what could be the low point in the price cycle that makes the United States product attractive in export markets. So as we think about cheese in particular, somewhere in the dollar 40s, as you compare that to the rest of the world, that’s an attractive price that usually sets us up on the cycle to go sell some exports and see a bit of a run higher as that product leads the country.

00;02;38;13 – 00;03;00;28

And with that, the peso has been appreciating. So as you think about not only our prices here in the United States, low if you’re a buyer in Mexico and they are consistently some of our largest buyers for both cheese and for nonfat, you actually get a deal because not only do you have a low price, your currency helps you extend your purchasing power.

00;03;00;28 – 00;03;22;23

And then finally, just the butter story, I think has been based off of some really good demand. Continue to see good scanner data. Consumers buying a lot of butter within the wholesale community. Buyers have to buy. And so we’re starting to see people coming into the marketplace. They have to get coverage, whether it’s based on their policy or their boss saying it’s time.

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And then you’ve got other folks that say, well, if the prices are going higher, me too. I need to get some of that coverage. And so you start to see a lot of buyers step in, in what is truly a thinly traded market.

00;03;34;09 – 00;03;39;13

Thanks, Erica. That was a great rundown. Matt, you’re on the bare side of the case this month. Yeah, I.

00;03;39;13 – 00;03;58;14

Want to maybe pick up on the other side of the argument where Erica left off as it relates to avian influenza. She commented the supply story, which obviously has bull elements to it. I do want to highlight, you know, on the list of bearish factors is the potential for disruption of dairy demand. And this can come in two different forms.

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And I want to be clear, there’s still lots of unknowns here. I want to put clearly in the risk camp as we’re trying to assess what could happen. But the first is on trade issues. This, because it’s new, does pose some risk that international countries will be skeptical, or international customers may be skeptical of our U.S. milk supply.

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And as a result, there is the potential that we do see preference to switch to a different origin, or even non-tariff barriers show up. There’s no way to paint that in a bullish lens. The risk there is just strictly to the downside. And similarly, if you think about domestic demand, if there does become a misconception by the public as it relates to the safety of avian influenza in the milk supply, that does have a demand, negative impacts.

00;04;46;05 – 00;05;14;24

I want to start there because it’s definitely in the news, and it is very squarely the bearish demand argument, which is the flip side of Erica’s bullish supply story related to the same event. The second, what I would say has been a consistent bearish element in this market has been foodservice demand. You know, I think it’s in part because of high inflation at retail and high inflation when you go out to restaurants, maybe high inflation everywhere, we have not seen domestic foodservice demand rebound in any kind of material way.

00;05;14;24 – 00;05;44;06

And it’s so much so that we’re now seeing companies announce new strategic plans where they’re accelerating international growth. So for example, KFC and Starbucks, Pizza Hut, Dunkin, Wild Wings, Wendy’s, McDonald’s, they’ve all announced accelerated international expansion plans because domestically, they’re just not seeing a lot of growth. And so that foodservice element continues to be weak. And we haven’t seen that turnaround, which probably has the biggest impact for cheese.

00;05;44;06 – 00;06;04;07

And then finally, in my list of bearish arguments is China. Now if you’ve been on these and followed us month over month, China has remained a going concern. This month’s update is no different. One highlight that I’d like to point out is Mengniu. In their earnings report. They describe the current market conditions as it relates to dairy as oversupply.

00;06;04;08 – 00;06;10;29

The Chinese dairy demand environment, definitely as it sits today, does not need extra dairy imports.

00;06;11;02 – 00;06;21;25

Thanks, Matt and Erica, both of you brought a great perspective to this month’s report. Phil, every month you bring to us something you call your favorite look. Without further ado, take it away.

00;06;21;28 – 00;06;46;14

Yeah, this month’s favorite look has to do with China Dairy Imports. And this chart is not new. It’s been around, but I think just putting the numbers behind the deficit. Lackluster performance in Chinese imports in 2023 and so far to start 2024. It’s pretty stark. So we’ve got trade data through February from China imports down 11% versus the same period a year ago.

00;06;46;16 – 00;07;24;01

That’s bad enough. That’s 40% lower than 2022. And when you look at a full year basis in 2023, China’s dairy imports are fresh. Again, a team says, down by the equivalent of 8.4 billion pounds of milk compared to 2021. So 2023 compared to 2021, 8.4 billion pound of milk deficit. So that 8.4 billion pounds of milk shortfall equals about 3.7% of US milk production annually, or 1.5% of combined U.S., EU, New Zealand output.

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And so that’s a big number. I mean, if you’re that kind of a hole in the global demand story, it’s little wonder why we’re having difficulty finding traction in some of these markets. Because China is just not here in the same way they were in 2022 and 2021.

00;07;41;01 – 00;08;05;12

Thanks, Phil. As always. That’s a wonderful perspective on things. And it really does put some numbers behind something that I think we’ve all felt in the marketplace, but this really puts some actual numbers behind it. Okay, that’ll do it for this month’s episode of Forecast Update Live. Thank you to all of our panelists. Thank you to everyone on the Ever Egg Insights team for their work on the forecast.

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