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 saying, "If you buy three barrels of crude and turned it into two barrels of gasoline and one barrel of diesel, how much money are you making?" And the answer is basically more money than ever before.