Host 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;13 – 00;00;16;15
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00;00;16;18 – 00;00;24;24
Hello everybody. Welcome back to another GDC Tuesday. I am your host, Cody Courser, with me from Chicagoland, Mr. John Spain, our John, how are you today?
00;00;24;25 – 00;00;28;09
Doing so great, Cody, and very happy to be here.
00;00;28;11 – 00;00;56;27
We are happy to have you here on this glorious GDC Tuesday. Markets kind of all over the board this morning, but it looks like if I’m reading our insights correctly, unchanged from prior auction two weeks ago, I think the big movers were probably milk fat, down 1.7%, cheddar cheese up 2.2%, butter down 1.1%, but mozzarella a down a whole whopping 9% today on GDP.
00;00;57;02 – 00;00;57;26
Where do you want to start?
00;00;57;27 – 00;01;24;14
Let’s start with the good news. On the good news side of things, I’ll say that the fat market continues to hold in there. Right. And as you mentioned, both AMF and butter were down between 1.1% and 1.7%. That’s going to put that New Zealand valuation on 82% butter fat at about 313 a pound, demonstrating that there is still a significant premium to the US market.
00;01;24;21 – 00;01;47;18
If we put that in context with where Europe is trading right now, it’s really not too far off of where the European butter market is trading as well. So both New Zealand and the European markets are trading at a big premium and really held their ground today. As we move to the powder side of things, I think this is more of where the surprise was.
00;01;47;18 – 00;02;06;26
If we were looking for one in this auction, skim milk powder down 0.2%, coming in at about 119 a pound. I think that the futures were looking for a little bit more weakness than that. To be honest with you, most of the futures were just looking for a little bit more downside, but I don’t think there was anything really a surprise there.
00;02;06;26 – 00;02;32;25
However, as we move to whole milk powder, futures were looking like we would be 5% lower on this auction. And while we did come in 0.5% lower, that’s a far cry from where the futures were predicting. So I think whole milk powder, even though it was lower, exceeded expectations. And I think that’s probably what helped keep the rest of the market rather supported as we moved to the cheese side here.
00;02;32;28 – 00;03;00;21
Here’s where there’s a real divergence in here. Cheddar cheese, which is more on the GDT, which is more of a New Zealand related product, came in 2.2% higher, as you said, at an average price of about $2.18 a pound. When we get over to the mozzarella side, though, which is mainly a European product on the GDP, it made a significant decline, like you said, down 9%, coming in at a dollars 75 per pound.
00;03;00;21 – 00;03;27;08
So if we were to look at the US cheddar price at $1.63 right now, and we came in at $1.62, we have been at a significant discount to the European markets and to the GDP market. And that GDP market has mozzarella GDP price and mozzarella EU actual index price that we see in Europe has moved lower very rapidly.
00;03;27;13 – 00;03;42;21
Now at $1.75. Again we’re at $1.63. It starts to say, hey, that export window that we’ve counted on for most of this year seems to have closed pretty dramatically here in the course of the last month or so.
00;03;42;21 – 00;03;54;16
I think you’ve made it mentioned on this show before, actually, I know you have, John, but when people look at GDP, instead of comparing our cheddar to their cheddar cheese, we need to compare our cheddar, our block price to the mozzarella, correct? More so.
00;03;54;16 – 00;04;13;16
Than that. That is what we’ve said. I believe in that. That’s a hard one because, you know, you look at it and you say, well, cheddar is cheddar right through our international contacts a lot. We’ll say, well, cheddar is cheddar, but New Zealand cheddar can be different than European cheddar. And even within Europe there can be different types of cheddar depending on the country of origin.
00;04;13;18 – 00;04;35;03
And then there’s really the US standard. Are they substitutable? Somewhat. But when we’re talking about our exports, you know, we export a lot of chatter out of the US down in New Mexico. But when we’re talking about the contestable markets, the ones that really put our exports over the top, that is typically mozzarella, and we typically compare ourselves against the European price.
00;04;35;03 – 00;04;56;14
So yes, New Zealand cheddar is at 218 a pound, a significant premium to the US. I’m not saying that we won’t get any exports because of that, but I do think it’s important that we keep an eye on that. Mozzarella price, as mozzarella here seems to be the more fungible product, and the one that is probably the one that we’re competing with.
00;04;56;14 – 00;05;13;18
And again, for most of this year, we enjoyed a pretty substantial discount to that EU Mott’s price and that got exports out the door. We probably still have exports that are booked, but in terms of getting new exports, it feels like this European price is going to make things more difficult.
00;05;13;24 – 00;05;35;27
Gotcha. Okay. That makes sense. I just want to clarify what we were kind of on the subject there. If we kind of scroll down to the regions that were buying on this GDP look a little wonky on paper, but China. Sure. Definitely. Here in the volume category, down about 19% from bench change, 16% lower year over year. But Southeast Asia and Oceania, they were actually up 24%.
00;05;35;27 – 00;05;40;21
Event change. So kind of a little bit of a shift in what we’ve seen with past couple auctions. But China is still here.
00;05;40;23 – 00;06;00;15
Well, you know, we’ve noted on here that in the past it used to be when China was here, prices went up and when China wasn’t here, prices went down. And I would say that over the course of maybe the last three months, if we look at the pattern when China is there, prices actually go down. But the southeast Asian area, they aren’t there.
00;06;00;15 – 00;06;29;11
And then the next auction, China goes away because their pattern is to come in and go out on the next auction. China goes away. Southeast Asia comes in and prices go up. And that seems to be exactly what we did here. As you pointed out, China, Chinese participation down 19% on an event change down 16% on a year over year change when we go to Southeast Asia, up 24% event over event and up 53% on a year over year basis.
00;06;29;11 – 00;06;50;05
So if you were to say, why did we overperform versus expectations? Again, I think it has very much to do with Southeast Asia’s participation. If the pattern follows, then neck auction. And again, we’re already talking about two weeks from now. Right. But in the next auction, China will likely be present in their normal state, but Southeast Asia won’t.
00;06;50;11 – 00;07;09;10
And that’s typically led to prices moving lower. I will also point out that we are in that, you know, we were beginning that point of the year when volumes on the GDP start to go down and not up, this auction versus last auction down 6%. We’ll see how that plays out here over the course of the next few auctions.
00;07;09;10 – 00;07;35;20
But we should be entering a phase where volumes go down. China is very much aware of that. And they will try to time. You know, I think they’ve done the bulk of their purchasing already to be here during those big volume offers. And now that we’re going to start going lower, we’ll likely see Chinese participation there. They’re always there, but they seem to time their volumes with the market in terms of the volumes that are offered on the GTI.
00;07;35;21 – 00;07;41;21
Understood. Well, John, with this auction today, is there anything else that we haven’t discussed so far that kind of stood out in your mind for GTI?
00;07;41;22 – 00;08;07;12
You know, we talked about it at the beginning and I think, you know, as we look at the U.S. market, without digging too far into things, I would say the U.S. market has enjoyed extremely good exports for both cheese and butter for most of this year. Again, that is had a lot to do with that price spread between the European market and the US market, or really the international market in general versus the US market.
00;08;07;12 – 00;08;34;00
Prices would go low, we would get exports, it would put us in balance and we would go back up or at least stabilize. And it’s tempting to say, well, that’s what’s going to happen again, why wouldn’t it? Well, one of the reasons why it wouldn’t happen again is because our price prices, at least in Chinese, while they are lower, that doesn’t represent as much of a value today to an export customer as it did in the past.
00;08;34;00 – 00;08;56;25
And I just can imagine that yes, we will have some exports that have been contracted into the fourth quarter, but my guess is if things remain this way on the international market in order to gain exports, the US market is going to have to go lower. And or maybe we miss some exports and we’ll have to, you know, we will just go lower because we’re not exporting.
00;08;56;25 – 00;09;21;20
And I think that’s just so important in our market today because we have more milk production. We know that because of the milk production report, we also have more finished goods capacity as new cheese plants have come online to handle that milk. So we said from the very beginning with a steady demand, domestic demand, we still are going to need exports to do a lot of work to keep things steady here in the cheese market.
00;09;21;20 – 00;09;50;02
Well guess what? Exports did do a lot of work. We got record exports in June and near record exports in July, and we still find ourselves at $1.63 right now. Imagine a world where if we miss those exports and our domestic demand right now just isn’t sharp. I hate to be bearish at the bottom. Potential, but it just starts to say, I think at the very least, we’ve lowered the ceiling where we can go with cheese prices for right now unless that European market turns around.
00;09;50;02 – 00;10;08;10
But right now, we came into this market feeling that European price was in the 180 area. We came out of the GDP this morning at $1.75, and I won’t rule out the idea that we can still see the mozzarella market continue to move lower. And that drags the US market lower.
00;10;08;11 – 00;10;24;27
Awesome. Well John, appreciate your insights into this GDP auction. And myself and John will be back with everyone in about two weeks for the next global dairy trade for the beginning of October, end of September. So with that, everyone have a great rest of the week, even better weekends. We’ll see you in two weeks.
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