Cody Koster and Jon Spainhour take a deep dive into this week’s GDT report.

Questions or comments? Contact Jon at [email protected], Cody at [email protected], or give us a call at (312) 492-4200.

(Transcript auto-generated)

Future trading involves risk and is not suitable for all investors. Content provided in this segment is meant for educational purposes and is not a solicitation to buy or sell commodities.

00;00;08;20 – 00;00;16;14

Hello everybody. Welcome to another GDC Tuesday. I am your host, Cody Koster, with me from Chicago, Mr. John Spain. How are John? How are you doing today?

00;00;16;15 – 00;00;20;03

Doing so great, Cody. And as always, I am excited to be here.

00;00;20;04 – 00;00;32;29

We are happy to have you here, my friend, especially to give us a little insight on the global dairy trade that happened today. First off of the bat lower GTI, the first actual lower auction in about six auctions.

00;00;32;29 – 00;00;46;21

Now that is correct. We were just a smidge lower. If you want to refer to it, is that at a -0.5% on the overall index, and that is the first lower auction in the last six.

00;00;46;21 – 00;00;48;25

So they call bucking the trend right there.

00;00;48;26 – 00;00;50;26

Yeah, we slowed it down at least.

00;00;51;03 – 00;01;09;08

That’s right. Like it’s kind of jumping into the auction itself. We were talking beforehand about full milk powder. Now the pulse last week the pulse was suggesting the whole milk powder was going to be a little bit lower. But the actual GDP event today kind of went along with a little bit, but not as low as they thought it was going to be.

00;01;09;09 – 00;01;32;27

It was a weird auction. If we go with whole milk powder and say, what was the pulse suggesting? Right. Remember, for everybody who’s newer to the pulse, I guess we all are. But people that might be unfamiliar, we would say the pulse is an auction that takes place every other week, that the big auction doesn’t take place, and it has some probably a smaller degree of participants in there.

00;01;32;27 – 00;01;56;19

So liquidity is a little bit lighter, but we’re certainly happy to have it. It gives us a good indication a lot of times on the directionality of price. It doesn’t always necessarily nail the actual flat price where we end up on the big auction. However, when we look at this one, we’re going to say that the pulse this week was predicting that powder would be down 3.2%.

00;01;56;22 – 00;02;27;25

And indeed we did come in at -2.4%. So if we’re looking at it through the lens of where was the pulse suggesting we were going to go, suggested we were going to go lower, we just didn’t go quite as low. So you can look at that and say, hey, that’s exceeded expectations. If we go over to where the SGX home powder futures were trading during that time or last night, at least they were suggesting that we were going to move lower by about 7 or 8%.

00;02;28;01 – 00;02;52;15

So, you know, the GDP actually came in negative two and a half versus that 7 to 8% decrease. I’m going to call that what really exceeding expectations at least on the powder side. The skim milk powder side was probably the most interesting of the overall auction though it is going to come out according to our stats here. Skim milk powder is going to come out at 1.6% higher.

00;02;52;21 – 00;03;18;23

There’s a few things that stand out. First of all, the pulse was suggesting that we were going to be about 2.2% lower. So we exceeded expectations definitely there and ended the day higher on the aggregate weighted average and futures. We’re looking for a little bit lower as well, right around where the pulse was. However, when we get into the details of the auction, that’s where things get a little bit more interesting.

00;03;18;29 – 00;03;43;22

We can look at it first of all and say on the GDP contract two, which is probably our most important contract, was down 2.7% on the aggregate contract three was down 0.9%. But then when we get to contracts four, five and six, which is och Nov and B’s, those were up an average of about 9.5%. So the front end contracts all sank.

00;03;43;22 – 00;04;08;16

The back end contracts made it not only increase in value, but really increase in value by about 10%. Now, I do want to point out that volumes that are offered, especially the further out we go, are pretty light. So it’s easy for someone to have a bit of an outsized influence in those contracts in terms of doesn’t take much volume to really get the ball rolling out there.

00;04;08;17 – 00;04;29;09

I would also point out that the S&P there in the auction felt like we were pretty much done. On about round six, skim milk powder demand went to 1.25. And then I thought, well, we’re done here at about 4% lower. And then that just kind of ticked on and on and on. And I think we got out to round 17 or around 18.

00;04;29;09 – 00;04;51;26

I can’t remember Cody, but we really extended this thing and just trickled by trickle. We went up and ended those fourth quarter contracts again at 10% higher. In contrast to that, I do think it’s important to point out, though, that European medium heat and low heat, but specifically the European medium heat contract, which there’s not a ton of liquidity on here.

00;04;51;26 – 00;05;19;16

But if you’re really chasing product, you can certainly look at the product that’s being offered out of Europe. We came in at about $1.13 on this. So a huge price discrepancy between the European price, the US price as it currently stands at one 1950 on the CME and the New Zealand weighted average price across skim milk powder. Finally, digging into the fat side of things here, AMF was down 1.3%.

00;05;19;19 – 00;05;43;20

But butter a big star of the show here, up 7.1% on an 82% fat adjusted. We’re coming in at $3.33. That is getting there close to about $3.20 here on an 80% basis. Back here in the US. Again, these are extremely high prices. It was probably the highest price I’ve seen on the butter side in a long time.

00;05;43;20 – 00;06;06;22

So just interesting to see the butter price here on the GDP take off. And then finally on the cheddar side we came in at 1% lower. It’s going to be about $1.91 there on the cheddar side. So again skim milk powder up AMF was down. Cheddar was down. Butter was up. But that whole milk powder price was down at 2.4%.

00;06;06;28 – 00;06;17;01

Whole milk powder just makes up such a huge portion of the index that that is going to cause it to be negative, half a percent lower on the total index.

00;06;17;01 – 00;06;34;18

John. Shifting to the volume sold by region. And it kind of seems like we’ve talked about this the last I’d say 3 or 4 auctions maybe as China not back in the buying seat by any stretch of the imagination today. But other countries and regions kind of picking up in place of, you know, I want to see where they might be.

00;06;34;18 – 00;06;58;02

But still, on the volume side, in this auction, it was Southeast Asia and Oceania countries up 53%. Do you think that will continue? Not asking if China will be back or if they will not be back, but with them not being in these auctions, do you see the uptick from other countries being there to kind of keep us afloat in some of these auctions and say.

00;06;58;04 – 00;07;22;28

Well, you’re right when you say that China was relatively absent, they weren’t just relatively absent. This was their second lowest auction performance since 2011. You have to go all the way back to May of this year to find a similar volume. But before that, we have never seen them in so long in recent history. Have such a little buying interest here on the GDP.

00;07;23;05 – 00;07;42;08

And again, as we’ve stated, if you talk to the people that are China facing specifically in the New Zealand area, I don’t get the sense that they feel like China’s going to come back right around the corner. Right. There seems to be a kind of we’re moving on phase going on. And that’s, you know, you say okay, we’ll fine.

00;07;42;08 – 00;08;02;24

They’re going to move on. Where are those dairy sellers going to go? And to your point, Cody, right now they are finding a home in different areas, specifically Southeast Asia. Their volume on this was up 50% as it relates to the last auction. It’s down 1% as a, on a year over year. But they’ve really become an outsized buyer.

00;08;03;01 – 00;08;29;15

And if you can imagine a world where they continue to buy like this as we go into the New Zealand season, I can make an argument that says, well, that’s pretty supportive. I don’t know that I’m going to call it bullish, but I’ll call it definitely supportive. I just question their ability to continue buying like this. This is quite a bit of product for them, and I think we’re going to continue to see China stay off the market again.

00;08;29;15 – 00;08;48;25

We can go back to that argument that says, what if China shows back up and if China shows back up, then we are in for a rally here. But again, I don’t want to predict whether that will or won’t happen. But the sentiment from people that I think are far more familiar with China and their demand would suggest to you, hey, they’re not coming back anytime soon.

00;08;49;02 – 00;08;55;03

Yeah, it seems like we’ve been talking about that for months now is and I think again, I know nobody wants to predict when they’re going to come back to you.

00;08;55;04 – 00;08;57;14

I feel like I’ve been talking about it for years.

00;08;57;16 – 00;09;03;07

I mean, very true. Well, on this auction, John, is there anything else that we did not hit on that really stood out to you?

00;09;03;09 – 00;09;20;16

You know, I know I sound like a broken record, but I guess I continue to come back to the idea that volumes are extremely light right now, just seasonally, we expect them to be light. And when you’ve got somebody that’s showing up and buying like this again, they have a bit of an outsized effect. There’s other players in there.

00;09;20;16 – 00;09;40;26

The market’s getting deeper. It’s not just centered around China. That gives us all somebody new to understand. Right. understand what Southeast Asia is up to. Why are they buying so much? Can we continue to expect to see them buy like this, or is this kind of a flash in the pan and we see them step back down as volume start to increase on the GDP?

00;09;41;01 – 00;10;04;18

We’ll see if they’re still there. I would say, though, that stepping outside of the GDP and looking back into the European space, European product seems to be on offer right now across the entire product category. We’ve seen prices pull back over there. I think there’s a little bit more milk in the system in Europe right now than what people expected.

00;10;04;22 – 00;10;28;21

And the reason I bring that up in this context is I think that’s one of the reasons why people may have had a more bearish attitude towards this auction and the auction result than what it might seem, just based on what the futures were saying. Right. Futures are saying we’re going to be really down. I think that was people looking at that, maybe not expecting Southeast Asia to show up.

00;10;28;27 – 00;10;53;01

So and then when you look at this result, I think you could say, well, we were only down 0.5 percent. That’s pretty bullish. You can say that and maybe it will be. But I tend to look at this and say, European product at 113. And what are starting to come down over there? I think that’s ultimately going to weigh on world prices, and that is going to weigh at some point in time on the US price.

00;10;53;01 – 00;10;58;05

So maybe not a bearish result, but certainly not one that I’m going to get very bullish about either.

00;10;58;05 – 00;11;16;03

Well, John, we appreciate your insights into this GT auction. The next one that we have coming up is going to be the 2nd of July. So two weeks from today is going to be the next global dairy trade. John will be back with you for that auction. I’m actually going to be off that day. So I will see you in four weeks.

00;11;16;03 – 00;11;20;13

But until then, everyone have a great week and even better weekend. We’ll see you at the beginning of July.

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