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

Our team is (mostly) bearish right now. We’re seeing signs that recent Class III price rises aren’t supported by demand, and the lack of Asian demand for powders continues.







In the August episode of The Milk Check, we discuss a recent LinkedIn post Ted made and whether there’s any strong case against bearishness when looking at dairy prices.







Butter continues to feel like an exception, and Joe Maixner wants to go “on the record” with a bullish outlook for the rest of the year but also into 2024. The international outlook, according to Diego Carvallo, couldn’t get much more bearish.























Ted: Welcome everybody to the August version of the Milk Check. Today we're going to have an old fashioned market discussion. We have with us, Josh White, Diego Carvallo, Joe Maxster, Jacob Menge, and I. So guys, I thought I'd start this conversation simply by mentioning the post that I just put on LinkedIn and you guys can tell me what you think of the post and if you think you agree with me or maybe where I'm wrong.







So it's the middle of August, it's hot outside, you're seeing 100 degree temperatures all over the country. The milk supply is tightening as a result, schools will start up soon. So demand has picked up a little bit. The cheese market has popped, improving class three prices. And most of our other markets are starting to look like the bottoms are in. Does that mean the remainder of the year will be positive for dairy farmers?







My hunch is that domestic demand will not be good enough to sustain decent milk prices. I see subtle signs everywhere. Very few of our domestic customers are giving us glowing sales reports. Most are using descriptions like average at best or slightly under budget. And while Mexico continues to be optimistic, our Asian customers are using words like depressing and even horrific to describe their sales.







So even though milk production may turn negative year over year in the coming months, I just don't see enough positive demand to be bullish milk prices between now and the first half of 2024. Guys, am I being too bearish? Josh, what do you think?







Josh: Just talking to different people I would echo what you mentioned. I had a few calls where people have said to date their overall demand has been lackluster. Their coverage going forward is taking into consideration some of that uncertainty about their demand, but we're starting to notice a few more transactional type, a little bit more transactional type business happening in the recent weeks that leads me to believe that the forward coverage isn't as strong as everyone thought from these type of companies.







Ted: So what you mean by that is maybe the spot purchasing needs of some of the big buyers out there domestically between now and the end of the year may actually be a little bit stronger than it has been so far?







Josh: I don't know that I'm predicting it, but I think there's a real opportunity for that.







Jacob: The thing that I think is a bit of a black box still to this conversation is US demand, and I think you mentioned it in your LinkedIn post, Ted, but I think that's really the key here is that US demand piece. Because if you look at equity markets, for example, the US seems to be the favored child in the world right now where our markets are humming along, we're having the soft landing. Meanwhile, Europe specifically the UK, seemed to be on the brink or in a recession. And so again, will this kind of fiscal strength we've seen on the equity sides carry over into our household purchasing and as such mean we have good demand in the US. I think it remains to be seen.







We've seen a number of arguments be made that the...

On June 12, we brought a group together to share perspectives on the dairy markets, along with thoughts on what we might expect moving forward.







And there wasn’t a strong consensus. Josh thinks supply-side factors point to a relatively quick supply-side response playing out over months that produces some price upticks to offer some cover in the short term.







Ted Jr. thinks price recovery will be slow and has his own counterarguments against the expectation of further production slowdowns.







Jake feels bullish about spot prices on every product right now, but bearish in relation to current futures prices. Gus thinks dairy prices would need to climb above current futures prices to $19 or $20 milk before dairy farmers started feeling good again.







And T3 worries that any recovery in the second half of 2023 will act as a “head fake” leading into fallout from macroeconomic weakness in 2024.























T3: Welcome everybody to The Milk Check. Today we're recording this Milk Check on June 12th. The reason I'm giving you the date is because we're going to have an old-fashioned market discussion today. I've asked Jacob Menge, our director of trading strategy and risk management, to join us. My brother Gus, president of our fluid milk group, my dad, and Josh White, our vice president of dairy ingredients, to join us.







In all of those markets, prices are low. I think probably the number one question dairy farmers are asking right now is, okay, these prices are really low. Are these prices going to stay down here for a long time? What are we dealing with?







Jake, I'm going to ask you the first question. Where did demand go? Are these prices low because we're having a demand problem? If so, how'd we get here?







Jake: I think pretty indisputably it is a demand problem, or at least that's a significant contributing factor. There's lots of little data points that support that, some anecdotal, some not. I know internally I've tossed a few of these out before. But exports out of China, way down. You look at foot traffic in stores like Target, that is significantly off. Those are things that are hinting at poor demand. I mean you can go as far as to look at the amount of cardboard boxes produced in the US, and it's a number that is significantly down year on year.







Demand is notoriously hard to measure, but it's kind of like a black hole. You can't measure a black hole by looking at it directly, but you can measure it by looking at what it's doing to things around it. So looking at the things surrounding demand, they're not good. They're trending in the wrong direction, I'll say that.







T3: How long do you think these demand issues have been happening? Has it just been 2023? Has it been the last couple of months?







Jake: It's interesting. I think it's probably actually started in 2022, and it's something that just takes a long time to feel on the supply side here. When you have a push on one side of the market, it takes a while to feel that on the other side of the market.







So my feeling is it probably actually started last year. We saw the stock market have a really negative year last year, and, so far, especially over the last two months in 2023, we've seen the stock market go gangbusters a little bit, and we haven't necessarily felt that bullish on the commodity side yet. So it's just got a long tail.







T3: So even though we have a demand problem, unemployment's still pretty good. It's still quite low. Sounds like the Fed is still talking a more ... That it's more likely going to raise interest rates next than lower interest rates next.

On Episode 57 of The Milk Check, Tara Vander Dussen joins us to talk about sustainable agriculture. She is an environmental scientist and fifth-generation dairy farmer known online as the New Mexico Milkmaid.







We celebrate some of the regenerative agricultural practices that people often take for granted, and Tara walks us through some of progress she’s seeing in New Mexico dairies today.







We discuss dairy’s image problem and the steps folks can take to help consumers see dairy in a greener light. Our favorite quote from Tara: “Agriculture sees a waste in their stream, they’re going to find a way to make it a value.”























T3: Welcome, everybody, to The Milk Check, where we talk about things that are relevant to dairy farmers. I'm really excited about the podcast that we're putting together today. We have a special guest. Her name is Tara Vander Dussen.







But before I introduce Tara, I want to tell you who else is on the podcast with us today. Joining my father and I, we have Tristan Suellentrop. Tristan is in our sales and marketing department. And we have Josh White. Josh heads up our dairy ingredients division.







Tara, better known online as the New Mexico Milkmaid, she is a fifth generation dairy farmer, a farm wife, environmental scientist, mom to two girls, and a New Mexico native. She is a dairy advocate, a whiskey drinker, I like that, a fast talker, a lover of all things Southwest, and an avid boho braid enthusiast. Tara, I want to start off the podcast by asking what in the world is an avid boho braid enthusiast?







Tara Vander Dussen: I know. I'm kind of surprised I don't have a braid in this morning. I almost put one in. No, I love braiding hair. Actually, when I first started sharing online, it was one of the things I shared about, and it was a great way to connect with people actually outside of agriculture and kind of bring them into the dairy fold.







T3: Awesome. Thank you. So what we want to talk about today is sustainability and how sustainability is relevant to the dairy farmer. From my perspective, we work with a lot of dairy farmers in this industry, and the idea that dairy farming as an industry is not considered sustainable, it just strikes me as something so counter to all of the dairy farmers that I know.







Dairy farmers work outside with nature. They care deeply about nature, they care deeply about animals. So when some of the things that I hear in the press about sustainability, about carbon emissions, and about dairy farming, more than anything else, what strikes me is if there's one thing I fully expect dairy farmers to do is to resolve this, is to attack this issue and say it's not just an economic issue, it's deeply personal to the dairy farmers that I know. The last thing that the dairy farmers I know ever want to be considered is somehow anti-environment, anti-sustainable.







So my question to start this conversation off is what are the dairy farmers that you know, what are they doing, what is the industry doing to become more sustainable? You're an environmental scientist. I'm sure you know the background there. And then once we become a sustainable industry, how do we go back to the media and the general public and convince them and send the message that it's no longer relevant to consider the dairy industry unsustainable?







Tara: Yeah, so many good questions in there. I'll start by saying I completely agree with you. That's kind of how I started sharing online as I was working as an environmental consultant on dairies throughout New Mexico. And then at the same time, I was seeing so much misinformation online, and it was like if people could just see what I see every day,

You don’t need technical analysis to tell you that dairy prices are low right now. But stocks are still high, which suggests demand is weak.







The questions are: What gives? And when?







In this episode of The Milk Check, we talk through the feeling that our current bearishness points to a strong price rebound later in 2022 or early 2023. But not before Trading Strategy Director Jacob Menge takes us through technical charts on dairy products and macroeconomic indicators like copper and the dollar index.







In the end, Jake suggests that a “max pain” moment would be necessary to kick off a violent upward price swing, and the team talks through what “max pain” might look like for different products.























Jake: I'm going to start just with one thing. For those of you that were on the call last Friday with Alan, that ITR economics presentation, we actually had talked about this exact graph, the consumer loans and how it's a pretty eye popping number. He basically said it's nothing. It's really irrelevant. It's more or less on trend, and I agree completely. That's what we had been saying for months now, that this is showing up in a lot of newspapers, ignore it. The one thing I do have to add that I've actually learned in the past couple months, just talking around, that there is something to pay attention to on the consumer loan side, that is just not in this graph at all, and I had no idea about, frankly. It is buy now, pay later. Buy now, pay later was a 2 billion market in 2019. Anybody want to guess what it was last year? Any brave soul going to stick a number out?







Joe: 5 billion.







Don: 50.







T3: 30. 30 billion, isn't it...?







Jake: Ted's closest. Ted's closest. It's like 25. Okay, so we went about 10 x on the buy now pay later market, and it's still going up. And here's the rub. Of all buy now pay later users, about 10% have a credit card, the other 90% don't. And that tells you they probably have such poor credit, they can't even access the formal credit lending market with protections on it. And so, this is the exact kind of thing that preceded 08, where they basically had not enough checks and balances on a certain credit lending market, and eventually, it got overworked. And you know the rest of the story. So that's the kind of thing to pay attention to. There are things in the background that are kind of sketchy. There's a million apps that you can do buy now pay later on literally anything now. So it's kind of interesting.







Now, it's 25 billion. You look at total revolving credit here, which is 900 to a trillion. We're not talking a huge percent, just call it two to 3%. Okay? Not huge, but still, it could be a domino, that starts some ugliness. Because the valuation of these buy now pay later companies is massive. The regulations around it are basically nothing. It does not show up on credit reports. So literally, you could have $2,000 a month in buy now pay later and go apply for a home loan or go apply for a credit card, and everyone pulling your credit report has no idea that you have these other bills outstanding. So that's the kind of thing that, even though officially credit cards don't look risky right now, how much else is tied up here? This is not the big one or anything to me, but it's just something that I thought was kind of interesting and kind of indicative of the economy as a whole, that people are starting to really ramp up use of products like that. Over to the fun stuff here.







Going to start with cheese. We talked about this. We haven't done one of these charting meetings in a while, but we talked about this buck 93 level, which I think, in Class III, was... What was it? Like 1980?

The USDA’s milk production report for December surprised us and sparked some interesting discussion in a recent mass balance and charting meeting. We thought it made sense to pull back the curtain and share some of that discussion on the podcast.







What does the USDA revision of cow numbers tell us? Should we worry about falling Texas cow numbers with cheese plants coming online this year?







Director of Global Strategy Don Street talks through his expectations for Q1 milk production in the wake of recent numbers, which leads to some back-and-forth about the adverse economics facing producers now.























Don: All right. Do you want to get rolling?







T3: Yeah, let's go ahead and get rolling.







Don: Okay. I've struggled to come up with a title. I finally settled on, Once You Count the Cows Before the Barn Door is Opened, which I realize doesn't make any sense. But USDA is having some difficulties on cows. So, November production was revised lower by three-tenths of a percent. And to do that, USDA reduced cow numbers by 9000 head, kind of spread over a whole bunch of states.







Nobody more than 2000 down a couple, or even a 1000 or 2000 up. And milk per cow was down 0.2%. So, given where margins are, not much excitement on pushing cows to really produce more milk. December, production was reported as up 0.9. Again, this is 24 states. I was at 1.7. So clearly, an overshoot because I was two-tenths of a percent off on number of cows at the end of the day. And then about again, a half percent off on milk per cow.







So, even though December of '21 was weaker on milk production, it didn't translate into a bump in December. The other interesting thing to note is that USDA dropped the herd 5000 head in Texas in December. And we continue, well, we, me, continue to think that Texas cow numbers have to go up. But there again, counting cows is more of an art than a science, apparently.







All of this leads to thinking the milk supply will be more limited going into '23. So, we're at the end of January tomorrow. We'll have January milk numbers in three weeks after that. But my projections now, down to 1.7. I think at one time, I even threw out the number it could be up 2.5 in January. That just simply isn't going to happen with the downward pressure on milk per cow. Stated differently, the lack of growth in milk per cow.







Q1 2023, I'm now at up 1.1%. I think originally when we first started to look at this, I was at just over two. So, this is much less surplus milk in Q1 than I was expecting. And the next step from that is looking at Q2, not a lot of change. I think we're going to be stuck for some months in about 1% overall growth in milk production, probably for the first-half of the year. January continuing to be the exception because it was down so heavily.







There will be a little bit of a bounce just from the math of that reality. If you assume, and this is where we ended 2022, 24 states, 8,918,000 cows, and just hold that steady for the whole year. You can see in January we're up a half percent less than February. And then we're just kind of even with the prior year, a tenth percent up down a little bit, up barely. So, without more cows coming into the system, all the growth after February is going to be dependent on milk per cow. And we already know that's pretty minimal.







So, earlier this month, because of the delay in Christmas, we did talk about that you could expect 100,000 cows added to the herd for the two plants that are coming online in Q1 and Q2. If you actually had a 100,000 cows coming in, then your growth in number of cows would contribute much more significantly to overall milk production growth.

T3 and Ted Jr. got together to talk next year’s milk pricing, and they made pretty quick work of the topic. Both have bearish outlooks to start the year. After Q1, their predictions start to diverge.







How far down will milk prices go? Will they jump back up above $20 next year? When? How will the market respond to recession? The duo works through Class III and Class IV supply and demand to come up with some answers.







T3 expects macroeconomics to stifle demand, and Ted Jr. puts his faith in butter to maintain its position as a staple spread. They skim the surface of an exports discussion, with China in lockdown but looming. Fifteen minutes and a friendly wager later, they settle on a confident outlook for most of next year.























T3: Alright. So, Dad, you tend to be bullish, especially compared to me, but lately it seems to me that you've been a little bit more bearish than me. So since we're sitting here in the middle of November, what do you think markets are going to be like in 2023? What are your thoughts right now?







Ted Jr: Well, I think it's rather scary that I'm the bearish one right now and evidently you're not.







T3: I'm not saying that I'm not bearish. I'm just saying I'm not as bearish as you are.







Ted Jr: First of all, let's look at the overall marketplace. We've got production now on the upside in the US. Cow numbers are up. Production’s up over 1%. We're heading into a recession. I think that's generally an accepted dogma. But the international environment is also changing. The European production is starting to mosey up a little bit. And evidently, feed is moving out of the Ukraine and feed prices are not on an upward trajectory anymore. I'm not saying that the feed prices are going to go down. I guess, the point that I'm trying to make is that the dichotomy has ratcheted up to a little bit lower level.







So if we go back a couple of years, pulling numbers from the air, the lower level was probably Class III somewhere around $15. And today with the corn price doubling or more, I'm going to argue that the lower level is probably somewhere around $19 on the Class III. That translates to cheese prices around a $1.90 and it translates to for whey prices to be somewhat higher than they are now, which my suspicion is even though China's got their own ration economic problems, they're still going to need to feed pigs.







And then the butter market is going to be stronger than normal, but it's certainly not going to be $3. So that also would translate to a Class IV price somewhere in the $19 range. So look at where we are. We're up limit today and evidently people are buying cheese and I don't really get the feeling that cheese is all that short. I think filling the pipelines for Christmas is more than likely still the reason it's going up. But with butter and with cheese and other dairy products, when we get to Christmas time, as far as I can see, it's over. So I'm not arguing that the bottom is going to drop out and we're going to get down into the lower teens, but I'm arguing that the market is going to settle to what I consider a lower ratchet level in the $19 range. So that's the extent of my bearishness.







There's obviously other things that could happen. I mean, you have a war going on in Europe and maybe the feed price situation changes and maybe a lot of cows expire and so on.







T3: And actually I would agree with you. I think we'll be right about in there too. So, Dad, here's my question for you. I've got my Class III and Class IV calculator spreadsheet out. So what do you think the butter market's going to be in the first quarter?







Ted Jr: I'm going to say $2.