18 episodes

Experienced dairy traders from T.C. Jacoby & Co. discuss issues, trends and dairy market movements that will impact the prices paid to U.S. dairy farmers for the milk they produce. Episodes are posted each month just before the previous month's final checks are paid to dairy farmers.

The Milk Check T.C. Jacoby & Co. - Dairy Traders

    • Business

Experienced dairy traders from T.C. Jacoby & Co. discuss issues, trends and dairy market movements that will impact the prices paid to U.S. dairy farmers for the milk they produce. Episodes are posted each month just before the previous month's final checks are paid to dairy farmers.

    COVID has changed consumer behavior. Is it permanent?

    COVID has changed consumer behavior. Is it permanent?

    Did you rediscover the joy of cooking this year?

    You're not alone.

    There's no doubt that dairy consumer behaviors have changed in the COVID era. Who does it help and who does it hurt? Who can capitalize and who's in trouble? Ted, T3 and Anna debate.

    Also, T3 observes an even more worrying trend among Millennial and Generation Z consumers on the horizon—and it's got nothing to do with the pandemic.

    Anna: Welcome to "The Milk Check," a podcast from T.C. Jacoby & Company, where we share market insights and analysis with dairy farmers in mind.

    Ted: You know, we're heading down the road from fall into winter, and temperatures are dropping and worried reports of the virus picking up speed in various parts of the country. Do we expect to have another debacle of dumped milk because of it? Obviously, my answer would be no.

    T3: Mine would too.

    Ted: And I think that there may be a silver lining, you know, not because of the virus but because of the fact that we now have some experience with it. I think it's correct to say that retail cheese sales are up. And I think they're up by, I saw, I've seen a number of different reports but anywhere from 1% to 3%.

    T3: Oh, I think it's more than that. I think most assumptions right now, they may be up 1% to 3% in the current week. But I think, you know, since let's say April 1st, most of the numbers I see are within, let's say 3 or 4 percentage points of 10%.

    Ted: Retail.

    T3: Retail. And there's an offset obviously on the foodservice side.

    Ted: Yeah. Well, the question that I wanted to raise, even though I don't recall 10% but the question that I wanted to raise is, will we lose that going forward? And I'm beginning to come down on the side that we won't, I don't think it'll sustain necessarily that level of increase but I doubt if it's going to go back to where it was before the pandemic. People started using cheese and eating cheese and became more accustomed to cheese. And I've several times used the example of my cheese counter at one of the stores I shop at that specializes in organic and really good specialty cheeses, and sometimes their cheese counter, which is relatively small but really well-stocked, is so crowded. I can hardly get at it. I have to elbow my way in and they stock a lot of artisan cheese and foreign cheeses and so on. Especially cheeses with cranberries and chives and all sorts of stuff.

    I think the increase in sales of cheese are locked in. Now, is that going to translate to increases in cheddar block or barrels? Well, that's another question, isn't it? And I don't know whether it will or won't. I tend to think that we may see this vertical integration sort of come to a halt and we see more diversification in cheese manufacturing towards different styles of cheese. In the last—Teddy correct me if I'm wrong—10, 20, 30 years. We've seen vertical integration where people have gone huge plants to mot the cheddar blocks to cheddar barrels, in some cases to parmesan, and they basically chew up milk at a commodity sale cheese.

    I think we're heading more towards specialty kinds of pieces. I think of Emmy as a good example. They produce a lot of different styles and they market them. I get this one website called The Deli Markets or something like that, that I happened to be on the email list for and all those different styles of cheeses, Carr Valley, Cowgirl Creamery, and all those different styles of cheese are on display at these cheese counters now. And people are picking up these little pieces and trying them. I think it tended to go in that direction.

    • 21 min
    Why the Federal Orders curtail competition and squeeze America’s dairy farmers

    Why the Federal Orders curtail competition and squeeze America’s dairy farmers

    We're no strangers to criticizing the Federal Order system. We find a way to do it almost every episode.

    But this month, we're devoting the entire conversation to the fact that the regulatory framework in the dairy industry has hurt producers' bottom lines more than helped.

    It's a phenomenon we've noted in bits and pieces in previous episodes, including near the end of our conversation last month. But in this episode, we examine the lack of competition and innovation in the industry with an eye toward its earliest source—the Capper-Volstead Act of 1922.

    Ted shares an idea for how to fix the problem. It might seem backward—but only at first.

    T3: What do we want to talk about?

    Ted: Well, one thing as Anna can testify we've gotten some emails from mostly dairy farmers who express a lot of paranoia with regard to the federal order system and the regulatory system and where the money is going and so on. I think we had part of that discussion last time, didn't we? Didn't we shelf part of it?

    Anna: I know we started that conversation.

    Ted: Yeah. We beat it a lot. And we've also danced around it a lot. The tenor of the emails that we got was paranoid. You know, somebody's going south with the money, the co-ops are no good, they're stealing the cash, and that isn't what's happening and that's not the problem.

    Anna: You know, even some of our producers have had a little bit of paranoia, and not about the co-ops or us, but about the Federal Order system in general. Because when everybody has money taken out of their check, they don't understand that somebody is getting it. It looks like, you know, the MA office is keeping it or something, when really it's not that. It's that it gets distributed to the co-ops and everything, especially the ones who are using, you know, lower price utilization.

    Ted: You know, if we want to go back to square one and the Capper-Volstead Act, and then regulation that developed not at the same time but eight or ten years later, the Capper-Volstead Act gave the co-ops power to collective bargaining similar to a labor union. Well, let's take a look at the results of that. In the '30s, when the Capper-Volstead Act came in, we had basically fluid dairies, bottling plants, were 70% or 80% of the market in cheese, and it was a balancing item similar to what powder is today.

    It was not a good retail product in the '30s. And the collective bargaining was mostly targeted towards the fluid end of the industry. Look at the results. The fluid end of the industry has been destroyed. So, how do we solve that problem? The problem is not necessarily the fault of cooperatives. The problem basically goes back to the structure and the fact that we've eliminated competition for the milk. Now, that, of course, that gets back to, well, what's competition? Is it collective bargaining or is it handlers bidding for the supply?

    So that's a discussion, I think, that probably needs to be had but it needs to be had in the vein of not being anti-cooperative because that's not the right way to do it. There's some very good cooperatives in the United States and in the world actually. But generally speaking, they don't do a good job on the marketing side of the business. And that's where 50% of the price on the retail shelf is. It's in marketing. The dairyman winds up lucky, 20%, 25% of the retail price. So, obviously, to my mind, there's something wrong. And I think it comes back to the fact that you don't have the competition for the milk, and that's a regulatory issue. I'm not sure how you solve it. Clipping the wings of the cooperative a little bit.

    • 33 min
    From the outhouse to the penthouse and back again

    From the outhouse to the penthouse and back again

    You'd only need one look at recent history on the CME to see the rollercoaster that has been spot cheddar prices.

    In this episode, T3 notes the collision of around a half-dozen contributing factors to explain why it's happening. Ted discusses why the Federal Order system is hurting the situation more than it's helping.

    Anna: Welcome to "The Milk Check," a podcast from T.C. Jacoby & Company, where we share market insights and analysis with dairy farmers in mind.

    Ted: What should we talk about? Markets have gone from the penthouse to the outhouse.

    T3: Well, I would say the markets went from a fair price to the outhouse to the penthouse back to the outhouse, and I actually think we're gonna probably end up back in the penthouse in about a month. It's a roller coaster.

    Ted: And it's chaos on the milk side. I visited with our milk group today a little bit and depending on what you're making and what you're selling and what your orders are, you've got the Class III for August right now at $19-something, and I think probably around $19.50 or so. And you've got the Class III for September probably around $17 maybe?

    T3: Yeah $16.80 or so right now, $17.

    Ted: Something like that. So they could have as much as a $3 per hundredweight gap. So here we are trying to sell milk for delivery at this point in time and people are trying to figure out what price they're gonna wind up having to absorb to put the milk into cheese and then what they're gonna be able to sell the cheese for. So the futures market, at least in my view, is rather inadequate to solve that particular problem. And I think that accounts for a lot of the issues right now because, Teddy, and you correct me, you're in cheese, but the inventories are not burdensome and the sales haven't been that bad. In some cases, depending on the style and so on, they've been pretty darn good. And yet the milk, we wind up with some people unwilling to pay the going rate for milk because of the violence in the market at this point in time.

    T3: Exactly. And I think the biggest problem that we have right now in the marketplace isn't necessarily the price as much as it is the volatility of the price. Why don't I start by explaining, kind of, what's causing this volatility? What has the journey been since, let's say, the end of March and what it's doing farther down the food distribution channel and how people at the supermarket level and at the restaurant level are reacting to it, and then we can talk about how that feeds all the way back to the milk price and what's causing this rollercoaster that is creating stress for everybody in the pipeline?

    When the pandemic started and restaurants started closing and food distributors started canceling cheese orders, the price started to drop. And by the end of March, the price had almost gone all the way down to $1 a pound. But two things happened while we were that low. The first thing that happened was supermarkets started seeing huge increases in sales. And the first part to keep your head around is cheddar, which is how we price all of our cheese and ultimately our milk, is really a market that's skewed to retail. We sell more cheddar marginally in retail and more mozzarella, for example, in food service. And all you have to do is think about it when you're in a supermarket and you look at all the shredded cheeses on all the pegs in the dairy case, you'll see a lot more cheddar packages than you will mozzarella packages. Whereas if you're thinking about it from a foodservice perspective and you think about all the pizzas and lasagna and Italian food and everything you eat, they actually sell a lot more mozzarella in that direction.

    • 31 min
    “A couple of weird months” ahead for dairy markets

    “A couple of weird months” ahead for dairy markets

    The last few weeks have been some of the strangest for an industry in the midst of its weirdest year in memory.

    Listen as Ted, T3 and Anna get to the bottom of why spot cheddar prices maintain a steady hold on improbably high prices and why the Federal Order system appears to be doing the opposite of what it was meant for.

    T3: So here's where we're at. It's July 8. Today, cheddar blocks on the CME spot market are trading at $2.7375 a pound, barrels are trading at $2.40 a pound, nonfat is trading at a dollar three and a quarter, butter is trading at $1.68 and three quarters. You have over a $10 difference between where July, Class III milk will probably come in and where July, Class IV milk will probably come in, which is really about as big a disparity as I've ever seen in my 25 years of trading cheese and powder in the United States. It's amazing. Talking a little bit about the markets and what we expect going forward, starting with cheese, there has been for the month of June a genuine tightness in cheese specifically in cheddar blocks and cheddar barrels. We talked about this in the last podcast, you have a unique situation where retail sales continue to be much stronger than normal because of the pandemic. At the same time, the anticipation of the world opening back up, restaurants opening back up was causing food service distributors to order in large quantities to refill their pipelines, and you had the USDA's purchasing program and Food Box Program on top of all of that. And that created kind of a perfect storm of all the usual demand for cheeses across the whole Food Industry, whether it's restaurant-based, whether it's supermarket-based or whether it's government-based were all ordering it levels much higher than they normally do, which caused the shortage on cheddar and drove the market up to, you know, prices at $2.50 or higher.

    You know, the question everybody's been asking already for a month is how sustainable are we up here? And the answer that I think I would give everybody is we are not going to be at $2.50 for the rest of the year, but we've been at $2.50 for over a month now and it is not out of the realm of possibility that we stay here for another two to four weeks. Furthermore, if we do drop off these lofty levels, I'm not sure we're dropping, let's say to $1.50 or to $1.75. There is enough underlying demand, that that probably that first place where you drop to is still probably above $2 a pound. And the reason I say that is all of the converters out there, those who buy the cheese and shredded or chunk it or slice it and put it into the packages for retail or restaurant demand, they're telling us that their inventories of cheddar block and cheddar barrel, if you're a processed cheese manufacturer, are on the low end of where they like them to be at this time of the year. Keep in mind that usually right around the end of June beginning of July is when cheese inventories peak. And then as we get through the second half of the year and demand picks up for the holidays, and milk production decreases because of the heat of the summer, you start seeing cheese inventories dropped back down. Well, at least by the tone that I'm hearing from a lot of our customers, you're actually at a place where people are very uncomfortable with how much cheese they have in inventory. And they're inclined to say "We don't have enough and we're concerned about having enough cheese for the remainder of the year."

    Now, the flip side of that is they will also say in the same conversation, "We have absolutely no idea what to expect when it comes to demand." We would expect that it's possible the food service distributors have over-ordered in terms of the restaurants opening back up, because everything we're hearing about restaurants is they're running it,

    • 25 min
    The dairy industry chases its tail

    The dairy industry chases its tail

    Volatility continues to permeate the dairy industry as the world economy contemplates a return to "normal."

    CME spot cheddar is the most pronounced example, having rocketed up to $2.40 at the time this recording.

    Why? T3 explains how it's a symptom of an environment where the entire industry is guessing.

    Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind.

    Ted: Maybe we ought to start the discussion by someone telling us why the cheese market is doing what it's doing.

    T3: Okay.

    Anna: Good luck.

    T3: I'm assuming you mean me.

    Ted: Yeah.

    T3: So, how about we use the analogy of we're on a roller coaster and we just went down the big hill and now we're going up the big hill.

    Ted: It's gotten much higher than I thought it would ever go. I thought the thing would be ready to crash at $1.90.

    T3: Yeah. I think everybody's kind of in the same boat. To me, it's a combination of factors all hitting at the same time. You still have retail sales running at 20% to 30% above normal, you now have foodservice distributors refilling the pipeline that emptied out when COVID-19 started. Well, now, restaurants are starting to open back up and they're trying to refill the pipeline in preparation for everything going back to normal. And I just talked to one of the big cheese mozzarella manufacturers here late last week who told me his foodservice orders are running at 120% of what they normally would this time of the year. In addition to that, you have the food box program, the USDA Food Box Program, which is quickly becoming a debacle because a number of the winners of the program did not properly calculate or hedge the cheese and butter portion of their purchases to put the program together to deliver to, you know, the charities. So, when they bid that price, they bid it at a fixed price. Now, there was an interview with one of the larger regional foodservice distributors about a week ago, I'm going to paraphrase here.

    But basically, what this owner said was that they bid on the Food Box Program and they were told their bid was too high. And what he said was he goes, he believed the winners of many of the bids did not have their head around what the true costs were to put the whole program together. And that they may have been underestimating what the cost of some of the products were, specifically cheese and butter on the dairy side of things. And his comment was U.S. Foodservice, Sysco, Performance Food Group, all bid on the program and all were told their bids were too high because there's no way that some of the winners of this program could possibly put together some of these boxes at some of the costs that they bid if they won the program and these guys didn't. So, that has to be very concerning. And that was before the cheese price raised to what is now $2.40. But you add that demand on top of foodservice distribution demand running at a 120% of normal because they're refilling the pipeline on top of retail demand, that's still running at about 120% of normal. And that's the recipe for cheese market that is raised from $1.01 to $2.40 in the span of a little more than three weeks and is likely to keep going higher before it comes back down.

    One of the things that I think also plays into this is the fact that production planning, distribution planning, you know, all of these big companies, whether you're a foodservice distributor or a restaurant group, restaurant chains, or cheese manufacturers, they all have planning departments. So,

    • 28 min
    Is USDA’s proposed COVID-19 dairy assistance enough?

    Is USDA’s proposed COVID-19 dairy assistance enough?

    Help is on the way for dairy farmers who were forced to dump milk as COVID-19 continues to jostle the industry.

    But does the USDA's proposed assistance go far enough? And, is Washington relying on outdated methods to solve a uniquely 21st century problem?

    Ted, T3 and Anna discuss the proposal and offer predictions on the timetable for a return to "normal." Ted's dogs Henry and Ralphie offer their analysis.

    Anna: Welcome to "The Milk Check," a podcast from T. C. Jacoby & Company, where we share market insights and analysis with dairy farmers in mind.

    T3: So last week the USDA finally announced their plans to help the dairy industry and they came out with a package to help dairy farmers and then they also came out with a package to, what they called the food box package that included some food service distributors to get money to food banks and also some bid programs to buy some cheese and butter and other dairy products. The program to help dairy farmers I think I'd start by saying was probably underwhelming for most people in the industry. It probably helped smaller producers more than larger producers because it capped the compensation at $125,000 for the one program, and if it included some of the help they put on grains and others, I think it was capped at $250,000. For large farmers, that is really a drop in the bucket, and some of the numbers I've heard out there probably doesn't help some of those larger farmers by more than, 15, 16, 17 cents a hundredweight. Now for the smaller producers, that can potentially be very valuable. And if they're covering 85% of the losses and 85% of the drop in price from where they were in January to where they were by the middle of April, it probably is gonna end up being very helpful. But for the industry as a whole, these days over 70%, 75% of the milk comes from larger producers. And so you ended up with a program that probably did not help the majority of producers, at least from a milk perspective in the industry.

    The other thing it did not include, it didn't include anything that would incentivize reducing the milk supply because it was a direct payment program. And so the USDA will pay farmers directly, which means that it can't be used to incentivize producing less milk so that we can avoid dumping milk. But that also is, the third issue is there was nothing in the announcement at all to help with paying for the milk that was dumped, because so many processors had lost enough food service sales that they simply were not in a position to take milk and so they had to push back on their contracts and simply not take the milk. And in many cases, there were force majeure declarations, or in some cases, they didn't even take it that far. They just said, "We can't take it." And the Co-ops had no choice but to dump the milk because they had nowhere else to go with it. So that USDA program I would say has been underwhelming. And I don't know, Dad, do you have any other thoughts as to what you're hearing about how farmers are reacting to the program?

    Ted: Well, I haven't really heard how they're reacting. I don't think we're far enough into it. At this point all these programs are simply discussion. Nothing at this point has been written in stone. The problem would be with regard to the $125,000 you're right, it is a drop in the bucket and it addresses 20% or 25% of the milk supply and leaves the other 70% or so out, so they don't participate in that program at all. It strikes me, and then they're talking about purchasing programs and then the Secretary actually vocalized an aversion to any remuneration for dumped milk with the theory that ,"Oh no, we're not gonna do that. We're gonna buy products and we're gonna distribute it to the poor.

    • 34 min

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