In Forecast Update Live, our analysts gather to discuss the highlights of our monthly Forecast Update.
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00;00;09;07 – 00;00;35;01
Hello and welcome to Forecast Update Live a video series from ever again 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, Matt gould and Philip ward. To get us started, erica, we’ve made some changes to this month’s forecast, specifically in class four. Can you give us a rundown of where we may have made some changes?
00;00;35;02 – 00;01;02;04
Hi, John. Thanks for having me back. The biggest changes to our forecast as you mentioned, are in the class four space. So the last couple of days, record high butter prices. Our butter forecasts have reflected that high. We’ve also anticipated a little bit in the first quarter of an increase. Just recognizing that folks are resetting expectations for a higher number and that we’re unlikely to see numbers drop down below that 240 range.
00;01;02;06 – 00;01;30;08
On the powder side of things, the change is more so in the back half of 2024, where we anticipate U.S. milk production coming back, especially as we think about the new cheese plants coming on line for 2025 as some of that milk comes online in advance of the plants. There should be more milk going into butter powder at that time periods and then a few tweaks to cheese and way to bring it closer in line with where the markets are today.
00;01;30;14 – 00;01;45;13
Thanks, Erica. Each month we ask Matt or Erica we’re taking out of the bull or the bear side of the story. This month, we’ve tasked Matt with taking the bear side of the story. Matt, what say you, sir.
00;01;45;15 – 00;02;19;12
When it comes to the bearish story today? It’s largely focused on demand or maybe the lack thereof. You know, domestically we’re facing a number of economic headwinds and we’re starting to see consumers shift in a more significant fashion to move from premium brands to private label and to go from food service back to eating in. And those domestic demand issues leave us in a situation, especially in the case of cheese, where in order to balance our market today, we need exports in a similar fashion.
00;02;19;14 – 00;02;44;28
Our butter prices, which are at record high levels, are are squarely in demand killing region. And so whether we’re talking cheese or we’re talking butter, that the current demand issues that we have today and also the demand issues that will face as we go through the rest of this quarter and into the new year, those are those are significant headwinds and are going to put a cap on how much further we can go, certainly in the butter situation.
00;02;45;00 – 00;03;11;06
But also in the case of cheese, it puts us in a situation where we have to price at a discount to move product overseas. The other piece of the demand is leaving the US and going internationally. It’s because of these demand issues which aren’t necessarily US specific. They exist in a more challenging macro environment. We’re having to go head to head and compete aggressively, and the result of that is we see cheese prices around the world are suppressed.
00;03;11;08 – 00;03;39;11
And so if we’re going to talk about the bearish drivers, I look immediately at demand of domestic and international. And then as it relates to supply near term, there really aren’t any major bearish headwinds. Actually, we’re decreasing supplies in the US, but what we see developing over the course of next year and actually it’s why our forecast has been adjusted is we’re raising our expectations of what we think we can achieve in terms of supply growth later next year.
00;03;39;12 – 00;04;02;15
From my perspective, the biggest development that we’re seeing is we’re seeing in the southwest region of the country the removal of supply constraint or quotas that were put in place to manage supply. We’re seeing those pulled off and now that milk has tightened in the region. And so between that and what looks to be a better milk price that farmers are receiving now, we do expect more supply later next year.
00;04;02;18 – 00;04;08;18
So short term, the bear case is all about demand. And then at longer term, we do see supply coming back.
00;04;08;24 – 00;04;16;09
Thanks, Matt. Those are some great points and I appreciate you sharing them with us. Erica, can you present the Bulls side of the story to us today?
00;04;16;16 – 00;04;38;29
Absolutely. And I think Matt actually helped me out a little bit. And sharing some of the bulls side on the milk production is certainly in the near term that we do see lighter growth around the globe and actual contraction in many places. Early numbers out of New Zealand do indicate negative year over year comparisons. Most of Europe is slowing in terms of its growth.
00;04;38;29 – 00;05;02;09
Germany being the major driver there, continuing to decline week over week, month over month. So Europe is actually getting close to flat in terms of output growth here in the United States. We’ve seen negative for the last two months. And to that point, if these base access plans at some of that quarter program is coming off, that doesn’t necessarily mean that the milk is coming behind it.
00;05;02;12 – 00;05;20;18
And so we’ve heard some stories from producers who’ve been wanting to expand, suddenly looking at the interest rates where they are today and saying that’s a little too expensive. I don’t know that that pencils anymore. So again, that’s what higher interest rates are supposed to do, is curtail some of the growth in the economy, and that is having an impact.
00;05;20;20 – 00;05;49;19
So as we think ahead, certainly supply is going to be challenged. The other factor and is always a wildcard is China. So what could take us higher is China being active. So two years ago, China was back in force. This last one I’m going to put a pause on that one because China was our holiday. So if we see the next unity event come back with strong China buying, they might be back in a real way to drive this market higher.
00;05;49;20 – 00;06;07;11
Thanks, Erica and Matt, Those are both great points and counter points to each other every month. So you always bring us what we refer to as our favorite look. And I think this one fits in really well with both Matt and Erica’s argument related to supply. Would you like to share your slide today?
00;06;07;15 – 00;06;33;05
Yeah. This month we’re taking a look at the history of dairy revenue protection. Net indemnities paid out to dairy producers. And if you look at the first two quarters of this year, producers participating in Deer Peak collected a total of $342 million. And it wasn’t a lot of milk, you know, £29 billion over the two quarters. About 25% of U.S. milk output.
00;06;33;08 – 00;07;06;08
And so participants in the DRP program, participants in the DMC program received a, you know, meaningful sums of money to offset some of the declines in milk income that they suffered in the first half of the year. And while, you know, I don’t think we can pretend like these are black and white game changing on the edges, on the margins, I think that to the extent that dairy farmers have had a disappointing year income wise, these sorts of payouts definitely help preserve business operations that otherwise would be more strained in the absence of these dollars.
00;07;06;11 – 00;07;28;21
Thanks, Bill. That is always a great look and I appreciate you bringing that to our attention. That will do it for this month’s episode of Forecast Update live. Thank you to all of our panelists. Thank you to everyone on the Air AG Insights team for their work on the forecast. And thank you, the viewers, for tuning in. If you don’t receive our forecast update and you would like to subscribe.
00;07;28;28 – 00;07;45;18
Please reach out via email at insights at ever dot egg. If you like this video, be sure to subscribe to our YouTube channel. Give us a thumbs up and share us with a friend. We’ll see you next month for another episode of Forecast Update Live.
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