In Forecast Update Live, our analysts gather to discuss the highlights of our monthly Forecast Update.
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Hello and welcome to Forecast Update Live, a video series from AGG 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 Phil Plourde to get us started. Erica, please run through the highlights of this month’s forecast. Compared to last.
00;00;30;24 – 00;00;52;20
Month’s. Good morning John. Thanks for having me back again. Exciting for those of us econometric nerds who love dairy modeling. This month we have made some minor adjustments to our forecast, but fundamentally, we have shifted our friends at the Fresh Agenda team, our Global Insights Group, have brought their dairy trade simulator to our modeling techniques. We have merge them together.
00;00;52;20 – 00;01;14;24
So for those of you looking at this month’s forecast versus last month’s forecast, please understand there’s some fundamental methodology changes. So don’t get hung up on little tweaks here. There. Or if you do have questions, certainly do reach out. We’d be happy to walk you through the new assumptions and the new methodology. This is where we’re going to be going forward with much more rigor and much more quantitative basis in our forecasting.
00;01;14;25 – 00;01;29;08
Thanks, Erica. Well, every month we ask our panelists to take either the bull or the bear side of the story. This month, Matt Gould has decided to take the bull side of the story. Matt, take it away and let us know what you’re seeing out there that’s so bullish.
00;01;29;09 – 00;01;57;25
I’m going to call out kind of several different disparate ideas, because I don’t know that there is just one singular driver of a bull case in this market environment. So the first one in is going to be very short term. Is this conversation around milk supply in the US and specifically California and HPI where we are seeing, you know, milk production down as a result of this spread of this virus from California, pretty, pretty substantially, maybe more substantial than other places in the country.
00;01;57;25 – 00;02;17;06
So that development, which has been obviously affecting our number one kind of powder butter stay is still out there and we’re still seeing more cases. So I want to start there. One, we still have a constrained supply situation, although that may be changing. And Erica will probably talk about that at least what’s here and now is that we do have constraints apply.
00;02;17;07 – 00;02;38;22
Second is on demand. If you think about March of 2024, one of the notable characteristics about this year is that we have seen foodservice demand slow pretty dramatically, as consumers have kind of backed off going out to eat and return to grocery because of the substantial inflation at foodservice. What we are now seeing as we head into 2025 is foodservice change.
00;02;38;24 – 00;03;12;07
And we can call out maybe McDonald’s specifically, but others as well are beginning to promote more aggressively and put together deal packages to try and win back that stomach share. So that’s a big difference as we look at 2025 compared to this year, is instead of having a consistently inflating and inflating and inflating foodservice environment, it looks like we’re now going to see a 2025 with price wars approved service establishments domestically to try to win back traffic, and if we can win that traffic in restaurants, will that, of course, you know, provides the backdrop for much stronger growth in per capita consumption, a probably cheese and butter specific.
00;03;12;07 – 00;03;38;06
So as we look to the new year, I would call out the level with which we can see people return to food service is going to drive out bullish. Maybe the domestic consumption forecast can be a similar topic. Where next year looks different from this year is China. China’s dairy imports plummeted this year, and as the year has gone on, we’ve seen the Chinese dairy balance sheet begin to shore up, at least for no other reason that we’ve seen supply drop in China.
00;03;38;06 – 00;04;03;05
But the latest milk production numbers showing China down something close to 7%. Now, we’re also seeing the government in China roll out stimulus measures, although they do seem to be more measured than stimulus measures in the past. They’re stimulus nonetheless. And so I think if they’re going to paint a bull picture for next year, this lack of supply in China and a return to even moderate growth in dairy consumption certainly could paint the backdrop of a much more price supportive 2025.
00;04;03;06 – 00;04;18;26
Matt, as a dad of two little girls under the age of ten who love fast food. Interested to hear more about these price wars at the fast food side of things? So thanks for passing that on, Erica. You’ve agreed to take the bare side of the case this month. Go ahead and let us know what you’re seeing out there.
00;04;18;26 – 00;04;50;28
It’s interesting how Matt and I look at two sides of the same coin, where Matt sees some very bullish factors in the supply side with China being down, I would say let’s look at the other side of that coin. Let’s look at New Zealand. They’ve had a great season early start to having our friends in the first group have pointed out that palm kernel extract imports are up into New Zealand, which to me says it makes sense for dairy producers in New Zealand to feed supplemental feed to really be driving for more marginal milk production growth.
00;04;50;28 – 00;05;10;11
So I think we’re going to continue to see New Zealand be very strong in terms of their milk output back here domestically in the United States. I continue to see growth expected here. There’s the underlying profitability at the dairy farm level. On paper margins. Look good, feed is available and a decent quality in the Midwestern region for sure.
00;05;10;11 – 00;05;30;26
As we look at cow numbers, the last milk production report, we had 65,000 more cows. This year than last year in three of the states where we’re seeing new capacity. So that’s Texas, Kansas and South Dakota. And don’t forget, there was another 9000 to add on to that in Idaho where we’ve also seen some growth. So I think the cows are here.
00;05;30;26 – 00;05;50;28
They are sticking around from a dairy producer perspective. We should be driving towards more growth. And we’re just getting started. Usually when we’re on one of these stretches of growth, it lasts for a year or two years. So certainly we are looking at more milk supply here in the United States, particularly as this new cheese capacity comes online.
00;05;50;29 – 00;06;12;23
Now, on terms of the demand coin, I think it’s interesting as we look at that price inflation, where maybe inflation is starting to flatten out, but we still have to look at the cumulative effect over multiple years, where in many cases prices are up 30% or more compared to where they were 3 or 4 years ago. So it’s still is a lot of sticker shock when you maybe go out to eat.
00;06;12;23 – 00;06;32;06
I think the other question is in these promotional deals, how heavy are they going to be focused on cheese? Now? In the past, we’ve looked at them and seen that there’s a lot of chicken there, maybe not necessarily a lot of cheeseburgers. So perhaps if we do see some lower prices for cheese, maybe we’ll see more promotional efforts with the cheeseburger space.
00;06;32;06 – 00;06;36;18
I think that’s still yet to be seen in terms of a demand boost for us.
00;06;36;20 – 00;06;46;13
Thanks, Erica and Matt. Every month Phil presents to us what he calls his favorite look. Phil, take it away and let us know what you’re seeing this month. So interesting.
00;06;46;13 – 00;07;16;12
Yeah, we’re going a little bit maybe granular, a little inside baseball this month on our favorite look. But it pertains to the butter futures market, open interest levels. Because if you look at where things are today for the first part of next year, we are basically at a record level of open interest for the first part of the year ahead over 7500 contracts as of December 2nd, and that’s up 37 or 38% versus where we were last year, this time for 2024.
00;07;16;12 – 00;07;50;20
So pretty big open interest. And I think it’s interesting that end users have been able to get hedges in place and a pace that’s much quicker than usual. And it begs the question, if I have more coverage that I thought I would have at this juncture is my next bid going to be lower? I think that we always talk about or often talk about the butter hedge, your bid being a supportive factor in the complex overall, if end users are willing to pay, you know, 280 for butter, they’re still there every day that it’s hard for the spot price to get very low in that construct.
00;07;50;20 – 00;08;16;02
Well, I think that these end users got to 80 butter, and then I think they got some 270 butter, and then they got some 260 butter. And I think it becomes an interesting question of what’s their appetite to pay more given that they have some in place. And from a sell side perspective, if you saying, you know, I’ll sell this stuff when it’s 280 and you missed it, if the bid gets back to 265, are people all over it?
00;08;16;02 – 00;08;34;13
It’s sort of an interesting dynamic that we haven’t seen in a while, where it looks like end users have pretty good levels, afford cover the butter market to a degree that we’ve not seen in many years, if not ever. And that could color how the spot market and the whole complex behaves over the next 2 to 3 months.
00;08;34;13 – 00;08;54;14
So I think that also dovetails in really well with some of the work you’ve done monitoring the fat test in the milk, as well as what Erica mentioned earlier, the growth in milk production. So now you’re putting a growth in milk production on top of an increase fat test. It makes for quite a bit of hedging taking place in the butter complex favor.
00;08;54;14 – 00;09;02;26
Look number two this month is the fat test. So thanks for the teaser there. But it’s still a phenomenon and it’s still growing. And it matters.
00;09;02;29 – 00;09;22;18
Well thanks for sharing Phil I appreciate it as always. It’s such an interesting look and you do always find a way to bring something unique to the table. That’ll do it for this month’s edition of Forecast Update Live. Thank you to our panelists. Thank you to everyone on the Drag Insights team for their work on the forecast. And thank you, the viewers, for tuning in.
00;09;22;18 – 00;09;41;19
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