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.
Talking dairy supply with the fluid milk team
On this remarkably bullish episode of The Milk Check, the Teds bring in T.C. Jacoby & Co’s fluid milk team to talk about the market from their perspective.
Gus Jacoby, president of fluid dairy ingredients and dairy support, leads the discussion with help from milk marketing manager Greg Scheer and fluid sales manager Jared Miklasz.
Discussion lingered on tightness in the market, which points to a Q4 where we are short on milk domestically and internationally. Ted Jr. suggests the market is underestimating its own upside potential after being spoiled by long milk for about ten years. Gus agrees, and T3 teases the topic of discussion for the podcast's 50th episode.
T3: Welcome to the Milk Check podcast. Today, we have our fluid group joining us. While my dad and I like to get on this podcast and just debate back and forth what we think markets are doing, picking out certain issues, it's Gus and Jared and Greg and Anna, who really are in the trenches, working with the dairy farmers in the different processors on the fluid side that we work with.
And we thought it would be a great idea to have them lead the discussion today. And so I'd like to welcome Greg Scheer, who leads our Milk team, Jared Miklasz, who leads our Cream and UF Milk team, and my brother, Gus, who runs our fluid group. And really just give us their analysis of what they're seeing in the market today. With that Gus, I'll just turn it over to you.
Gus: All right. Well, thank you, Teddy. We have a very interesting marketplace at this moment in time. A number of months now we've seen contraction, but with respect to milk production. But we've also seen some other areas, some manufactured liquids that have been pretty dynamic. And I guess, adverse for some of those folks who are looking for solids in one way, shape or form.
And then we have that dynamic of Class IV and Class III, where Class IV is hovering above Class III which presents some challenges as well as opportunities for folks within our industry. But just to start with, I think what we want to mention is that at this moment in time, we've all seen the most recent milk production report showing that April was down a percentage point in milk production. We had a year ago, nine and a half million cows in the US dairy herd.
And now we have 100,000 less cows in the US dairy herd. So that puts things in perspective for what we're dealing with and what we're looking at as we get out of this spring flush so to speak and into the second half of the year when folks, I think are a little bit more concerned about finding the solids they need to fill orders.
To begin with, I think the Eastern half of the country is tight milk. And in addition to tight milk, we also have a major cheese plant that has come online in Michigan that has soaked up a bunch of butter fat, and that presents a prospect for cream supplies as well.
And then you have the freight impact of traveling product throughout our country, whether it be farm milk and the impact on the producer there, whether it be manufactured liquids and the impact on folks trying to get solids from one part of the world to the other. I think there's a lot of good information we can get from our leadership team here. And I think the best place to start is with Greg in milk, and then we'll move into some other areas. Greg.
Greg Scheer: Thanks, Gus. Yeah. And like you said, milk production down 1%. If you would've told us that milk prices would be where they're at today and we'd have declining milk, you'd say you're crazy. But you have the high cost of feed, the high cost of inputs, limited heifer supply, all those factors.
In the trading room (part 2): noteworthy market trends
On this two-part edition of The Milk Check, the Jacoby team lets listeners in on a monthly mass balance and charting meeting. The meeting splits neatly into two episodes, one led by Global Strategy Director Don Street and the other led by Head of Risk Management and Trading Strategy Jacob Menge.
In part one, we evaluated milk production data and predicted what Q2 will look like in terms of overall milk production and class allocation.
In part two, we zoom out to talk inflation, interest rates and the macroeconomic factors impacting dairy markets. Jacob makes a strong case that farmers should continue investing in increasing their capacity despite an increasing nominal interest rate before presenting a bird’s eye view of various commodities markets and interesting trends to note in dairy and beyond.
T3: Hi everybody. And welcome to the milk check. This month, we recorded our monthly mass balance and charting meeting. It is a monthly meeting that we hold internally where our whole trading team gets together. We look at the milk production and cold storage reports, and we look at some of the technical charts and we share our opinions about what we think this data is telling us and what we think this data is predicting about what'll happen in the future.
We had some really interesting discussions this month. I think you'll really enjoy eavesdropping into these discussions. It was a long meeting. It was an hour long, but it was a really good meeting. So what we've decided to do this month is split it into two parts. And the second part is what we call our charting meeting led by Jacob Menge, our risk manager and trading strategy director, who talked about some of the technical charts and what they're telling us about our dairy markets and even other markets such as the interest rate markets. It was a great discussion, I hope you enjoy it. Thanks for listening in.
Jacob: So I'm going to start kind of outside of dairy and move rapidly into dairy here, but there's kind of a common theme at ADPI in before. And a lot of it was surrounding the dairy farmer and kind of the tough headwinds they're facing here. You've got rising interest rates, you've got rising input costs. And at first glance, you're going to say, "Hey, if I'm a dairy farmer that maybe is getting close to retirement, maybe now is the time to just get out." And again, at first glance that passes the sniff test. The problem is there's interest rates and then there's real interest rates. And while interest rates have been rising, which is our little black line right here as has inflation, which is our red line, real interest rates have been dropping. And I'll zoom back out a little bit more here.
We have not been at these kinds of levels since the inflation eras in the late seventies and early eighties, we are actually lower on real interest rate terms than we were back then. And so in these real interest rate environments, you tend to want to continue to invest. If you're a business, that is telling you just keep pouring money into buying machines. In the economics textbooks, they always frame it as machines, buy the machine to produce the output. And that output is making you more money than you are not making by just capitalizing on interest rates. Opportunity costs pretty basic there, those economics should apply to farms as well. You have a machine. It just happens to be a living, breathing machine called a cow, but you're facing kind of this classic economics example of real interest rates are telling us, invest in your machine to make your product.
And a really good example of that right now is happening over in crude oil. So we have the crack spread here and it's a traditional 3:2:1 crack spread where they're basically sayi...
In the trading room (part 1): predicting Q2 production
On this two-part edition of The Milk Check, the Jacoby team lets listeners in on a monthly mass balance meeting. The meeting splits neatly into two episodes, one led by Global Strategy Director Don Street and the other led by Head of Risk Management and Trading Strategy Jacob Menge.
In part one, we evaluate milk production data and forecast what Q2 will look like in terms of overall milk production and class allocation. Ted disagrees with Don about supply-side expectations moving forward, and Don puts forward a modification to his predictive model.
In part two, we will zoom out to talk inflation, interest rates and the macroeconomic factors impacting dairy markets. Jacob presents a bird’s eye view of various commodities markets and interesting trends to note in dairy and beyond.
T3: Hi everybody, and welcome to the Milk Check. This month, we recorded our monthly mass balance and charting meeting. It is a monthly meeting that we hold internally where our whole trading team gets together. We look at the milk production and cold storage reports, and we look at some of the technical charts and we share our opinions about what we think this data is telling us and what we think this data is predicting about what'll happen in the future.
We had some really interesting discussions this month. I think you'll really enjoy eavesdropping into these discussions. It was a long meeting but it was a really good meeting. So, what we've decided to do this month is split it into two parts. The first part is Don leading the discussion about the mass balance. What we think is happening in Class I milk, Class II milk, Class III milk, and Class IV milk. It was a great discussion. I hope you enjoy it. Thanks for listening in.
Don Street: All right. You should see the PowerPoint for Mass Balance, April 2022. At this point, not completely, but all the data for Q1 that really counts we have. We'll get more early next week with dairy products. But we have it and now we're really at the point of what will Q2 hold. And I'm going to walk you through a couple of scenarios on that, and then we'll look for your guys' input.
So again, Q1s in the book, down 9/10ths of a percent on milk for the quarter. But clearly a steady progression towards trying to get to zero change year over year on milk. January was the big down, February less, March even less. We still have this reality that Q2 of last year was up 4% on average. And I think that's going to be difficult to be positive over it. It's just a question of how much negative under that will be.
But nonetheless, with these improving milk numbers, my projection is getting stronger. So, a month ago I thought we'd be down 1.7% for the quarter. Now I'm at 1.4% negative. You could argue, well, it's all in the same ballpark and I would concede that point. But nonetheless, two months ago I think I was talking over that we would have a reduction of over 2%.
So, when you add two months together, the second quarters not looking as dire as I once thought, but I still don't think the market's anticipating this very well. And to maybe add that, had several people tell me in Chicago this week that they thought we'd be even on milk production year over year by the end of the quarter. I just don't think that's possible. And mainly it's because of cow numbers.
Now, USDA really threw a curve when they restated the February numbers last week, adding about 10,000 cows that apparently shouldn't have been taken out of the herd. But I've now taken this forward projection and trying to listen to all the voices that will not see a strong change in cow numbers, but we should be past bottom. So,
How will demand react to high dairy prices? And are they as high as they seem?
The crew comes back to the mic to predict how demand will respond to milk prices approaching record highs across the market.
Between widespread inflation and rising interest rates, the economy hasn’t been in a remotely similar situation since at least the 80s. The discussion touches on potential for a European recession, how interest rate increases affect nonfat trade with Mexico, milk consumption expectations and the barriers to a rapid supply response to record-high prices.
The team comes up with potential answers and a few more good questions. Ted Jr. closes out by backing T3 into holding onto a bullish position.
T3: So, this week, joining my dad and I in the discussion is Don Street, our head of global strategy, Jacob Menge, our head of trading strategy and risk management, and Joshua White, our vice president of whey and feed ingredients, and we thought this podcast, the conversation that would be pretty appropriate would be, given the current economic environment we're in, dairy products are 50% higher in price than they were just six months ago, and interest rates are climbing. Are the combination of those two factors going to start stifling dairy demand, and if so, how is it going to play through the system?
The old adage has always been the cure for high prices is high prices, which means as dairy prices go up, there'll be pushback from those high prices, and ultimately, demand will go down and it'll correct itself. Meanwhile, producers are making more money at higher prices, so they increase supply at the same time. The increase in supply, the decrease in demand tend to start getting prices to adjust. But we're in a very different environment this time around. The kind of inflation that we're experiencing is unlike anything I think we've seen in this country since the 1980s, and the interest rate response by the Fed is going to be probably unlike anything we've seen since the '80s, and I think as demand will adjust this time, it's not going to be like anything we've seen in the last 10 to 15 years, so I think it's worth bearing a discussion. Jacob, how do you think high dairy prices are going to affect demand from your point of view?
Jacob Menge: I think the first and most important thing to address is, are these prices high? What is a high price? I think that's an important part of the question to address because you said the old adage is the cure for high prices is high prices, but I think there's a lot baked into that statement. Part of that is historically when prices are high, that's an indication that suppliers probably have good margin baked into that number because their costs didn't really increase that much. So, when these prices really increase, suddenly they've got a lot of margin. That's an environment that can't really stick around. I would maybe push back and say prices aren't even that high, quote-unquote, anymore because we've really had the inputs increase so much, and I think that's really an important thing to address here, is you just need to reframe what the definition of a high price is and reframe the market overall in your head. Let's just run with it, though. The consumer's still going to push back with the higher number. You add to the overall prices, you're going to get pushback from consumers.
I don't think we're there yet. Consumers are pretty flush still with cash, just looking at consumer sentiment numbers, looking at all the numbers that we could get. We have a very good economy still, as much as it might not seem like it to the average household. You hear your good costs twice as much, but at the end of the day, if the consumer has the cash to pay for the goods, it's pretty unlikely that they change their buying habits. So, taking this one step further,
What will the invasion of Ukraine mean for dairy? – with special guest Norman Oldmeadow
The Teds assemble a full crew to approach the primary question on the milk market’s mind: What does a war in Europe mean for the dairy industry? To help answer that question, they’ve enlisted Norman Oldmeadow, a dairy industry veteran and current managing director of Oldmeadow Consulting.
Norman fields questions about Russia’s commercial relationship to the EU – as well as Ukraine’s – what happens to freight, and how Ukraine’s position as one of the world largest grain exporters signals more trouble ahead for milk production numbers.
Along the way, Norman discusses some of the UK’s dairy issues that hit close to home for US farmers as well.
T3: Welcome everybody to our March podcast. We have a guest speaker today. His name is Norman Oldmeadow. I'll give Norm, in a second, a chance to introduce himself. We also have a bigger group today than our usual suspects of myself, my dad and Anna. Jacob Menge, our risk management and trading strategy director is on the line with us, Gus Jacoby, president of our fluid group; Don Street, our director of global strategy, as well as Norm have all joined us. And our topic today is: How is the conflict in the Ukraine going to affect dairy prices? Norm, why don't you lead us off? Tell us a little about yourself.
Norman Oldmeadow: Okay. Well, I first came across Don a long, long time ago. I got involved in the food industry in the seventies when I joined what you know as M&Ms, but in the UK it's called Mars. And that got me involved in the milk and dairy industry amongst other things, sugar and cocoa and so on. But once I left Mars, I got involved in the dairy trading world and subsequently ended up starting a business in 1992, which was called Meadow Foods. And Meadow Foods was started by me doing the trading. And I was financed by two guys, a chap called John Kerr who may be known to some of you with his company called Fairfield. And my immediate partner then was a chap called Simon Chantler, who I think at the time was milking about two and a half thousand cows on three farms. And I stayed with that business, running it for 17 years before I retired.
However, once I retired, the people that I'd been working with in various manufacturers and traders and the European market asked me if I'd like to set up a consultancy and do some additional work, which is basically what I have been doing since about the mid – well, I was 65 then, so 10 years really – and I'm trying to stop, but they keep asking me to carry on. I think I just get very interested in the topic. So that's me. I'm doing consultancy now. So I'm in everybody's pocket learning as much as I can and trying not to confuse too many people.
But I mean, the topic about Ukraine, the first thing you would say in Europe is: Ukraine, now, what do they do in the dairy industry? And you have to go back to the way in which the European Union is set up in the sense that nothing gets in unless they want it in and anything can get out that they can move. And for a long time, business with Ukraine was quite small, but over the last few years, the cheese business has improved, mainly from Poland and partly from Germany. And I think at the last count, they were importing about 50,000 tons. Not much else, a bit of whey probably, and I think some butter.
But in terms of absolute trade between Europe and Ukraine that's more or less it. There are much, much bigger fish to fry with dairy, of course, than there would be there. Now, I mean, you've got to remember that Ukraine is a huge agriculture-based country. I didn't realize until the other day that it's even bigger than France, and France is quite a big place when you look at it on a map. And they are probably one or two of the biggest wheat and grain exporters ...
What will milk markets look like in 2022?
With milk production low and showing no sign of turning anytime soon, the dairy industry is bullish about 2022.
What type of bull market are we in for? That’s up for debate. Inflation and continued logistics issues have roles to play.
Ted and T3 agree on the strength of Class IV milk and the shock buyers are in for next year. They disagree on most everything else, including the proper way to do math.
In the end, Ted enlists Anna as reinforcement.
Ted Jr: I'm not sure what the right approach is. Sort of a rerun of what we had the other day with regard to the potential, the upside potential of the markets right now might be useful. We've got a dichotomy between hedgers and actual market demand, I think, which is useful to note.
T3: I would agree with that.
Ted Jr: I don't want to profess to be an expert of the hedging side of the issue, but the other side of the issue is the overall world marketplace is very strong. We have a continuing decline in milk production because of a number of factors, but primarily high feed costs worldwide. Barring some economic, call it black swan or whatever you want to call it, the market for dairy products is going to be a heck of a lot higher than it is right now. It could be a lot higher than the current world market price. I know interest rates right now are low, but we have dairymen basically getting out of the business, and when interest rates go back up, it's going to be that much harder for them to get back in. At the expense of sounding too bullish, my position right now is very bullish.
If we look at the gross returns on the GDT and the world markets and the continuing decline in production in Europe, $27, $28 of gross, not net. That transflates to the dairy farmer in the $22, $23 range. Right now, the futures market is two and three and four dollars lower than that. Now, we've got a couple of cycles to go through before we get to anything, but we're in the middle of, or actually, at the end of stocking for Christmas and Super Bowl. We're supposedly going to see some sort of a decline after those markets are fully satiated. Whether we see it or not I guess remains to be seen. Months later, we have the flush right before us, and whether or not that's going to actually amount to anything, that remains to be seen, too.
But we have a scenario which is extremely strong as far as the future is concerned, and even if we do have some blips in there, for the reasons that I just described, odds are we're going to look at pretty strong markets the second half of next year. A lot of things can go wrong: economic collapse, stock market collapse, a resurgence of the virus. I mean, all of those things are threats, but from my perspective I think those threats are pretty distant. Tell me about it from the standpoint of the futures market, which is considerably lower than that.
T3: So, I would look at it this way, and I've been pretty consistent on this topic. I think you can make the case that we could touch $25 cwt for Class IV milk at some point next year. Now, I'm not going to say it's the second half of the year because I think markets can be anticipatory, and so they often tend to find their peak before the real problem occurs, but I do think it's possible when you're talking about butter and you're talking about nonfat dry milk, you can plausibly create a market scenario where we've got milk in the $25 cwt. At the same time, though, I struggle with math that would bring Class III milk over $20 cwt. I'm just not as bullish Class III as I am Class IV, for a number of different reasons.
My approach to looking at next year is that just because the demand is in the second half ...
I miss the farm
A city dude.