In the latest edition of the Parlor to Plate dairy podcast from Ever.Ag Insights, our all-star panel discusses the third quarter. Could milk production – both globally and domestically – improve in the next three months? Will we see more US cheese move overseas in the upcoming quarter? And what is our grain team monitoring heading into growing season?

Join host Kathleen Wolfley and panelists Jon Spainhour and Britt O’Connell for a spirited discussion.

Questions or comments? Topics you’d like to hear us discuss? Contact us at [email protected].

(Transcript auto-generated)

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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.

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Hello and welcome to Parlor to Plate, a weekly podcast from Ever AG Insights, dedicated to offering listeners enlightening discussion and actionable intelligence about dairy market. I am your host, Kathleen Wolf Lee. We are excited to have you along. And if you like what you hear, please like us. Subscribe and tell a friend or two. All right, let’s timestamp the episode.

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It is Wednesday, June 12th, around noon central time. Here’s a quick rundown. CME Block cheddar closed at $1.94, up $0.08 on the week. Barrels finished at two on one per pound, up $0.07. Spot butter closed at 311, up a penny on the week. And the nonfat dairy milk market finish at a $1.20 a penny lower. And now for the grain market.

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July corn is trading at 451 per bushel, up $0.12 on the week. July soybeans at 1179 per bushel, $0.02 higher. And the July soybean meal contract is trading at 361 per ton, a buck higher from last week. It’s a new week and another all star panel from the AG Financial services team in Platteville. We have director of foundations and the ultimate team motivator, Brett O’Connell.

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Brant, welcome to the show.

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Happy to be on the show. Thanks, Kathleen.

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And from Chicago we have my favorite blazer donning dairy commodity trader John speaking Howard.

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Good to be here Kathleen. And unfortunately or fortunately, whichever way you want to look at it is so hard today. I left the blazer at home.

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Yeah, I was a little disappointed when we turned on the cameras and it was a vest. Not a, not a blazer. And from the dairy producer risk management team, you get me Kathleen Wolf Lee, resident upstate New Yorker and someone who desperately needs to mow their lawn. Not while it’s raining.

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I’m not that.

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Well, Team June is flying by, which means that we are that much closer to closing the door on first half 2024 and opening up the first chapter of the second half. I’m curious, what’s everybody watching, waiting for or even losing sleep over? Brit, let’s start with you on the grain side of things.

00;02;09;17 – 00;02;35;05

I think everybody in the grain world is really watching, whether it’s that time of year where the crops are growing, they’re mostly planted. And so we’re going to be moving into this really key time frame where weather patterns are going to be monitored closely in the market, is going to, you know, largely be responding to that. Obviously, we’ll also continue to watch crop conditions scores to see how this crop is progressing across the country.

00;02;35;07 – 00;02;52;22

Something we’re not watching right now though is the Drought Monitor. There is virtually no drought across the US. As a matter of fact, we’ve got plenty of moisture in virtually every growing region. And so the Drought Monitor is not something that we’re going to be watching here, likely moving forward. Well, that’s.

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An exciting change of pace. I mean, we tend to try to kill the crop at least a couple times. Do you think that there’s risk here as we get into the summer months that it could get hot? Corn could get a little crispy? Yeah.

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I think you always have that risk, Kathleen. And I think that’s why we see these markets still maintaining some degree of risk premium. One could argue, especially if we do start to realize the crop that is projected, that would push ending stocks, you know, into some pretty burdensome categories for both corn and beans and would allude to further price pressure on those commodities.

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But to your point, you know, we’ve got this crop in the ground. And yes, it is it is off to the races in good shape. But a lot can change. And so weather will absolutely still be the focal point of this conversation in the green space.

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I’m just kind of curious on the grain producer side of things, are folks starting to feel a little bit more pressure with prices coming down?

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Absolutely. It’s, you know, been the case here for a number of months. We know that the old crop corn that’s in the bin, whatever it is that’s left out there, will likely be sold at less than the cost of production from last year’s crop. last year was the most expensive corn crop that most folks had put in in their lifetime.

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This year’s cost of production was down a little bit. But we certainly have producers feeling more on edge as they get that crop in the ground and as they look at their crop and are pleased with where it’s at this time of year, you can sense that some of them are very worried that continued down pressure may be nearly inevitable, and that’s that’s a change from just, you know, 30 days ago where the crop wasn’t in the ground and folks still carried an extra measure of reservation about what kind of risk we had, and that that is absolutely increased as our crop has gotten off to a good start.

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But that’s going to be something that can vacillate with weather as well. Producers are really prone to getting a little bit of what we like to call backyard itis, which means I’m looking at the crop in my own backyard, and as a direct reflection of that, that’s how I feel about the markets and how they should trade, and obviously we caution folks on that.

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It seems like from a dairy producer community, there’s a little bit of that backyard I noticed as well as it relates to milk production, I know that almost every producer that I talk to, if you don’t talk about heifer numbers and lack of cattle availability, the dairy producer has not actually picked up the phone. It just kind of seems like that is a lot of the conversation.

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And to their credit, markets have been moving higher pretty swiftly over the course of the last six, eight weeks, particularly in the class Ree space. Milk production has been lighter in the most recent USDA milk production reports. Cattle numbers are a little lighter as well. I think as we go into Q3. Our second half of the year, there is a lot of uncertainty as it relates to milk production here in the U.S. and I think globally as well.

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But as it relates to the US marketplace, are there going to be enough cows around to satisfy the new plant capacity that’s coming online? And if we continue to see some push toward growth in domestic demand or better domestic demand, if exports continue to hold up. Is there going to be enough milk to satisfy that, particularly if we have a hot summer, which it gets hot every year or so?

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I wouldn’t be surprised if we hear of one spot or another that has some impact from summer heat, but that’s one of the things that I guess I’m watching pretty closely is what’s happening on the milk production side of things. John, what about for you?

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You know, it’s hard to believe that, third quarter is only, 18 days away. And I think that has really snuck up on people. But I think it’s also, you know, in discussions when you have with with people, they’ll say, well, that’s not going to be until the third quarter. And it’s like, well, we’re here, right? And so here we are in the third quarter.

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And I guess looking forward, I think something that we’ve all got our eyes on are U.S. exports. The U.S. export community, if you will, has done a tremendous job during 2024. And it’s specifically on the cheese side. We’ve seen record exports of cheese in March, not in April, but very high numbers in April. And I suspect May is going to be another a little bit of a step down, but it’s still going to be a very impressive number.

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That was probably a lot easier to accomplish when we were at $1.42, $1.50 in the cheese market, and the rest of the world was at 175. We’ve made a move, obviously from one 4150, and here we are right just south of $2 on the block barrel average. Right. I think it’s going to be a little bit harder to export that product.

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And as we look towards Q3, what we’ve heard out of Europe and some people that are familiar with the export world is we don’t have nearly the exports on for Q3 that we had on for Q1 and Q2, and I think that’s going to put some cheese product back in the domestic market, maybe looking for a home. And I think that that’s probably going to temper the cheese market excitement in here one way or another.

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However, you mentioned earlier, domestic demand. You know, we keeping an eye on that. It’s improved, right. And specifically on cheese. And we haven’t heard anything like that. It seems like in forever right. And so the export market is so important and we’ve got our eyes on it. And if we lose that export market, there’s certainly going to be cheese.

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And the U.S. looking for a home. But if the domestic demand front is in fairly good shape or improves a little bit, you know, it dwarfs the export market. And if it needs a few extra million pounds here or there, it can really make up for a loss in exports. So really keeping an eye on that domestic demand as well as those exports, if we do find ourselves in a situation where we continue to have exports on the books for cheese and we have domestic demand, why that’s really, cooking with gas, in my opinion.

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I don’t think that’s going to be the situation, but it’s certainly something that we want to keep our eye out for.

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Yeah. Just to kind of put those numbers into context or at least load the export discussion into context. I ran some numbers yesterday looking at, okay, volume in Chicago and the CME spot market for blocks and barrels. We had 12 million pounds fewer trading in Chicago Jan one through yesterday, June 11th, 2024 versus 2023. We’ve had a significant increase in exports.

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I think it was something like 60 or 70 million pound difference year to date. So that’s through April on US cheese exports. So obviously there’s a big difference in there. But if those exports hadn’t moved in 2024 would we have seen more cheese moving to Chicago? We always talk about how it takes money to move prices at the CME higher.

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It takes actual product to move at lower. So if we do start to see those exports back up in the country and do we start to see more cheese flowing to Chicago and putting a little bit more pressure on those CME spot prices?

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That’s exactly the way I look at it. That’s for sure. Kathleen. And that’s exactly the way we’ll be monitoring if we do continue to see big exports right then that’s really something. But one has to think that our ability to get those exports off when we were at $2 on the rest of the world is at 190, you know, it’s a lot harder.

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And I think we did lose some of those exports.

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Yeah, it’s a bit of an uphill battle. John. One thing that I’ve been watching here in the last couple of days is the Mexican peso. We ship a lot of product internationally, so think on the topic of exports. We ship a lot of products into Mexico. The peso has come down limits of their spending power or change their spending power.

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How do you think that ultimately influences the pipeline of U.S. product into our biggest trading partner?

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Well, let me start by saying, at least when it comes to dairy and I assume the rest of agriculture as well. But when it comes to dairy, Mexico is our biggest trading partner. They have been and they will continue to be so. But in the last year or so, we saw a few things happen. One is that cheese prices came down from that 180 to $2 level and got into the one 40s, one 50s.

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And as well the peso increased in value quite a bit. So to use the applauds phrase, cheese was on sale two times in Mexico and, you know, at least on sale one time for nonfat. We’ve seen two things happen. A the flat price of cheese is no longer at one 4150. We’re back up here at $2. That’s going to slow demand down no matter what in some capacity.

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But as well, the peso in just the last a week, week and a half or so since the most recent Mexican elections took place, the peso was broken over 8%. And it’s really broken even more so if we go back from its highs. So if we were going to say that, hey, the peso was a big contributing factor in the increase in exports as the peso got stronger, I think we at least have to acknowledge that the peso getting this much weaker, at the very least, isn’t going to continue to help and in fact will probably hurt exports.

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We’ve already heard of some suppliers that ship in New Mexico saying payments have started to slow down, coming back across the border as end users or customers down there saying, I’m going to wait for the peso to regain some value before I pay the invoice side of things, you know? And once that starts to happen, that slows down new orders, and it just kind of slows the overall traffic down.

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And slowing the overall traffic down probably leads to lower prices right now when it comes to nonfat.

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Brit, I’m curious from your perspective or from the grain markets perspective, is there any potentially influence on trade with currency shifts in Mexico?

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Yeah, I think that’s always something that we’re watching, and particularly with Mexico, because they’ve been such a great trade partner, obviously on the dairy side, but also in the grains here as of late. And and certainly they’re always one of our key trade partners. But we’ve seen their purchasing go up substantially the last couple of years. And so that’s absolutely something that’s going to be on the forefront of our mind when we’re thinking about an already kind of, you know, burdensome balance sheet on corn.

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Now, if they do decide to slow down some of those purchases, you know, that could create a compounding issue. Whereas we see, again, more.

00;13;13;14 – 00;13;33;20

Pressure on the corn markets. So if I were going to distill our discussion so far, it’s whether milk production demand Mexico. So four key points that we’ve talked through with some of this uncertainty in mind as we go into the third quarter, I’m curious, how are you advising people manage their risk? Brett, let’s start with you.

00;13;33;23 – 00;14;06;27

So for guys who are sellers of grain, we have been shouting from the mountaintops, and we’ll continue to do so about managing the downside risk this year. And so it’s a combination of aggressive sales and options strategies to wrap around that for feed buyers. We have said let’s be patient on purchases, but we have started to come to a place now where some of these dairy men are able to lock in breakeven, maybe even some profit for the coming year.

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So kind of that Q4, Q1, Q2 timeframe moving forward. And so in those cases, we’ve really been leaning into producers to say, hey, let’s still be patient, but we really do need to protect against higher prices because that is always a risk, especially as we move through the growing season here. So let’s very cost effectively manage that upside risk, knowing that if prices don’t move higher and they only go lower, you are absolutely going to be making good margins in the coming year.

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So I think that’s one thing that’s maybe changed on the feed side with our conversations is, that folks are in a spot now where they are looking at being able to hedge some gains. So let’s carefully manage that.

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I guess the stick on the producer side of things, from my perspective, I’ve been kind of in this buy puts and be bullish mindset of these are some of the highest prices that producers have been able to set floors on in quite some time. On Q3 in particular. I mean, we’re up close to life of contract highs in third quarter class three prices.

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Q3 class four is still very, very elevated relative to history. So if there’s opportunity for prices to to move higher for for producers, that’s that’s great news ultimately. And something that would be welcomed amongst the, the dairy producer community.

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And I think Kathleen that that I’m going to double down on the comment that I just made for dairymen because the statement you made is really powerful. Buy puts and be bullish, right. Make sure that you’ve got a floor underneath milk. You’ve got all the upside in the world. We want to do the same thing and feed only the opposite.

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We want to buy calls and be really bearish on feed. And so we’re in this spot where a dairy man’s got the opportunity to really secure himself moving forward into the coming year with, again, breakeven or potentially some profit. You have to be all over that because things change, especially when you’re talking out multiple quarters. A lot of things can change.

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And so I think there’s a golden opportunity right now in front of dairymen to be doing something to protect milk and doing something to protect their feed costs.

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Yeah, that’s a great point, John. How about for you on the commercial side?

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Well, if we were to look at it from a historical price perspective, right, I would say a lot of these dairy products, nonfat excluded, I would probably put them at the higher end of their historical territory. And so from an end user standpoint, I would look at this and say, you’ll probably never call me and have me say, well, prices seem high.

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You shouldn’t hedge, right? I’m going to look at it and say, prices seem high. What type of hedge do we want to have on? Do we want to own calls? Do we want to own calls so that we’ve got upside coverage in case things keep moving higher and then get to participate in all the downside? Or do we want to own futures?

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I would say that when we’re in the lower end of historical territory, we look at it and say we want to get in there and own futures, because there’s probably not a whole lot of historical downside and a lot of upside that we want to make sure that we get covered, and vice versa. When we’re at the top of the historical pricing, we want to buy calls.

00;17;23;01 – 00;17;47;20

Right? You know, I can’t ever say that, hey, prices are high. They won’t go higher. We’ve seen that so many times before where $3 butter turns into 350 butter or $2 cheese, 225 cheese turns into $3 cheese. So we want to get covered. And I think at the highs up here or these historical highs, we want to buy calls or buy calls and sell puts given ourselves some sort of optionality.

00;17;47;20 – 00;18;12;06

Because when I do look across the board here again, take nonfat out of it butter up here. I don’t know that when we’ve ever seen butter at 313 or 315 here, you know, in June. Right. Looking out across the deck. It’s just such a high price. When we look at class three, some of these are historically high prices, way at a high end of the tier cheese and again nonfat kind of in that mid tier on most of these contracts.

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So I guess I want to look at it to say Owen calls out here on most of the stuff.

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All right. Well big thank you to Britton John for joining me on today’s episode and for sharing your insights with our listeners. Thank you. As always, to our media team for mixing and mastering. And thank you to you, the listener, for joining us today. If you like what you hear, subscribe on your favorite app. If you’d like to learn more about how we help people manage risk, contact us at [email protected].

Disclaimer: TRADING FUTURES AND OPTIONS ON FUTURES INVOLVES SIGNIFICANT RISK OF LOSS AND MAY NOT BE SUITABLE FOR EVERYONE. THEREFORE, CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THE INFORMATION AND COMMENTS CONTAINED HEREIN ARE PROVIDED BY EVER.AG AS GENERAL COMMENTARY OF MARKET CONDITIONS. THIS INFORMATION SHOULD NOT BE INTERPRETED AS TRADING ADVICE OR RECOMMENDATION WITHOUT FURTHER DISCUSSION WITH YOUR EVER.AG ADVISOR. THIS IS A MATTER OF SOLICITATION.

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