In the latest edition of the Parlor to Plate dairy podcast from Ever.Ag Insights, our all-star panel delves into the current state of the dairy markets. How will expanding cheese processing capacity impact supply? What challenges are producers facing. How might lower feed costs affect future milk production? Our panelists discuss this and much more.

Join host Kathleen Wolfley and panelists Natalie McCarty, Ryan Yonkman and Brian Fletcher for a spirited discussion.

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

(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;25 – 00;00;32;00

Hello! Welcome to Parler to Play, a weekly podcast from Ever AG Insights, dedicated to offering listeners enlightening discussion and actionable intelligence about dairy markets. I’m your host, Kathleen Wolf. We are excited to have you along. If you like what you hear, please like us. Subscribe and tell a friend or two to timestamp today’s recording. It is Wednesday, October 9th around 1 p.m. central time.

00;00;32;03 – 00;00;54;28

Here’s a quick rundown in the markets CME block cheddar closed at $1.93, down $0.10 on the week, or finish at $1.88, down $0.27. Spot butter closed at 265 $0.03 lower, and the nonfat dry milk market finish at $1.36, unchanged on the week. Now for the grain markets. December corn is trading around 421 per bushel. November soybeans at 1021 per bushel.

00;00;54;28 – 00;01;17;08

And the December soybean meal contract is trading around 321 per ton. It’s a new week, and another star studded panel from the ever AG Financial Services team, helping commercial clients manage risk out of our Chicago office. We have Brian Fletch Fletcher. He’s a Michigan dairyman based in the heart of Chicago. Ryan Jackman works with dairy producers across the country to manage milk price risk and for the real treat.

00;01;17;09 – 00;01;27;05

We have a longtime listener, first time caller today with us, Natalie McCarty. Natalie is based out of California and works with livestock producers to manage feed risk. Hey, how are we today?

00;01;27;09 – 00;01;29;24

I’m great. Kathleen. All right. How are you?

00;01;29;25 – 00;01;49;27

I’m doing okay. I actually have a question for you guys. It’s getting a little chilly here in Western New York. And as I’m sitting here in my home office, freezing, very cold hands. I’m just curious, what is the over under on when to turn the heat on in your house? Is it 60 degrees? Is it 55 degrees? Is it when you notice that your children’s teeth are chattering?

00;01;49;28 – 00;02;07;15

Well, from my perspective, I’m probably the wrong person to ask because I prolong the AC as long as we can. So I, you know, I would say well, under 60 degrees outside before you even think about it. I don’t turn the heat until we run out of blankets. Kathleen.

00;02;07;17 – 00;02;17;02

Oh, yeah. I’m in the same camp too, as to why my hands are frozen. Natalie, you’re in California, so you probably don’t even have to worry about 60 degrees or 55 degrees outside.

00;02;17;04 – 00;02;20;14

We’re just excited we’ve broken the triple digits here. Finally, this.

00;02;20;14 – 00;02;38;13

Week, we’ll send some of that heat. This way I could just use a little smidge more of that heat. All right, well, let’s get into it today. Guys. We are rounding the corner toward 2025. And I’m just kind of curious what’s everybody’s take on the state of the dairy economy? Let’s start with you. How are the commercials feeling right now?

00;02;38;15 – 00;03;00;03

Well, I’ll get into kind of the overall demeanor, if you will, in a second. But first element I want to touch on is the state of the processing community is the tipping point of a new era of expansion. At the end of this month, there’s a notable brand new plant that is supposed to be running water, and then later milk.

00;03;00;03 – 00;03;29;14

That’s going to be bringing more cheese into the US market by the end of this year. There’s another expansion going on, and then the first quarter of next year there’s another brand new plant running additional mozzarella. So I think we’ve been alluding to this growth for all year long. And now we’re finally here. I think over the course of the next several months or years of, say, six months or so, we’re going to be adding close to 6% more cheese capacity into the system.

00;03;29;14 – 00;03;56;19

So we’re here and it’s happening. I think we’re kind of going to the demeanor or the state of the processor, if you will, for cheese processors over the course of this year, with most cheese being priced off of the block market and the bloc market trading a discount to the barrel market most of this year, that really means that the input cost of cheese manufacturing relative to the revenue, has been upside down the majority of the year.

00;03;56;19 – 00;04;21;05

So I don’t know that, at least at the processing community, people are looking at 2024 as necessarily a good year at all. I think there’s another element that’s pending, and that’s a new federal order system that eliminates the barrel. So we’re 3 to 4 weeks away from from seeing the final recommendation there. That can really change the dynamics of that underlying price risk.

00;04;21;05 – 00;04;46;14

So to take it away and sum it up, I’d say that we’re really crossing into all this new processing capacity coming online and also at a big transition, just in terms of the underlying federal order infrastructure. So definitely growing, which is great and really good to see. But we’re also at a state of regulatory change to adopt. The market should be operating in within the next few months.

00;04;46;20 – 00;05;02;03

So amidst that change, particularly as we look at the new processing capacity side of things, one big question I know we’ve been talking about a lot is what’s happening at the farm level. And Ryan, I guess I’ll kick it to you to talk about how are producers feeling right now.

00;05;02;09 – 00;05;20;08

Yeah, and kind of decent timing for this. I just got back from kind of a peer group meeting where we had some lenders, accountants, dairymen in the room. And I think the best set up kind of come to you on this is, look, 2022 is a banner year for most dairies, probably the best year in their history. But 2023 last year was breakeven or lose a pretty good show.

00;05;20;09 – 00;05;37;11

So you get to this year, right? As we wind up in the first half, a lot of dairies continue to lose money. We’ve talked a lot in our segments about, you know, did you have class for exposure or not? You know, at least half this country’s milk typically does not. So you’re talking about an 18 month stretch there where guys were surviving, treading water off 22 gains.

00;05;37;11 – 00;05;55;19

Right. And so I sit here today and say, where’s the state of the industry? I think you’ve got a chunk of the industry in the last two years is has a nice run. But I think the lion’s share, 50% or so is just kind of in that space of comfortability. Like it’s okay the way this year’s closing, it’s going to help, but it’s not like we’re coming off a banner year.

00;05;55;19 – 00;06;15;08

And so then you get back to your like cheese plant. In the milk production conversations, we sat around the table and with the cost of money still being high barrier entry, talk about cost of building still very high. I think the headwinds for massive expansion alongside yes, heifers are tight. Even if heifers weren’t tight. I guess my takeaway is there wasn’t a strong feeling.

00;06;15;08 – 00;06;29;09

There’s a huge appetite to see dairies below and go here with Greenfield sites, and we clearly know today we’re not seeing a ton of that anyway. So I think the proof is in the pudding, but I don’t think it’s just because heifers are expensive. As you said, the health of the economy here for dairies. I think we’re in this okay spot.

00;06;29;09 – 00;06;36;28

And naturally that has led to, you know, not on a lot of new greenfield sites being built, even though we’ve got three new big plants coming at us.

00;06;36;28 – 00;06;48;16

One, I guess you talked about headwinds. One thing that I see as a potential tailwind is the fact that feed costs are pretty low by historical standards. Natalie, you want to talk a little bit about what’s going on in the feed side?

00;06;48;20 – 00;07;08;15

Yeah, I think you hit the nail on the head there when you said, you know, that prices are at historical low prices, so it’s a good time on the feed side of things. We have seen a run up in the futures over the course of the last couple of weeks, but we have started to take some of those gains back.

00;07;08;15 – 00;07;34;09

The run up was based on dryness in South America, and another key component to the rally was the managed money or the speculators in the market buying back their short positions. They just don’t like to be short when there’s a lot of uncertainty out there, like the weather in Brazil, like an upcoming election. So they did buy back in those positions and definitely have become less short.

00;07;34;15 – 00;07;47;26

So that’s the run up. It’s nice to finally see the break backs coming. I think it’s important for dairymen to work with your feed advisor and get targets in place and working with suppliers because the market is moving fast.

00;07;47;29 – 00;07;58;02

So from a bases standpoint, certainly we’ve seen futures come down, but his base is coming down right alongside or his base is staying relatively high as we’re kind of in the midst of harvest right now.

00;07;58;02 – 00;08;23;20

So harvest right now. On Monday, the government reported that we’re at 30% harvested on corn and 47% harvested on soybeans. We have started with especially on the beans side of things. With that harvest progress, we’ve seen basis come down. Corn as well has seen some slight reductions. I think as harvest continues to ramp up and should be a good week for harvest this week, I think we’ll continue to see pressure there.

00;08;23;20 – 00;08;43;00

So we’re seeing the pressure in the Midwest that hasn’t 100% transposed to the far reaches of the market. The rail markets like California, for example. You know, it takes a little while to go from the Midwest to either coast or down to Texas or Arizona. So we’re hoping for those basis breaks to translate over.

00;08;43;05 – 00;09;12;10

So I guess, Ryan, to circle back to you, thinking about, okay, feed prices are lower. Obviously, you talked about several different headwinds ahead. Do you think that feed situation, the higher milk prices okay, maybe stalls out on some of the potential for greenfield expansion. But do you think that there’s a potential that we could see producers take the possible revenues on the table as we go into late 2024 and invest that into cow comfort in 2025, and that helps to grow some milk production along the edge.

00;09;12;12 – 00;09;32;00

Yeah, I think that’s probably the obvious call out. And I would take that to be true. Right? I mean, we can look back at history and we have and when we get a milk to feed relationship set up the way it is, milk always follows. So even though yes, the heifer situation things very real barrier of entry is very high, I do think that probably puts the focus back into the dairy.

00;09;32;00 – 00;09;48;14

You’ve got, you know, whether it’s building another small barn or a wing or as you mentioned, cow comfort. I’d like to think dairies. We’re looking at that all the time anyway. So maybe there’s a little extra focus on that this go round because at the moment, right. We’re not about to see a probably a bunch of big new dairies try to get built as we head into winter across most of this country.

00;09;48;14 – 00;10;00;25

So that seems to be the obvious spot, right? We know we’re walking hopefully out of avian for a lot of the country. There’s, I think, obvious room for growth there just in recovering from this virus, which we know has got a pretty long tail on it. After you’ve gone through that.

00;10;00;25 – 00;10;18;07

So to tie it back to you, Fletch. Okay, maybe we don’t get big greenfield investments. Maybe we see a little bit of growth in milk production on some some weaker year over year comps in some of those gains in milk supply along the edges. Or how does that impact the commercials as we go into 2025? What if the milk just isn’t out there?

00;10;18;14 – 00;10;53;05

Yeah. Well, I think looking back at this year, we’re trying to answer those questions even for this year. For example, if you look back at this year’s cream market in general, this would be considered a tight milk supply. We had year over year growth in negative for the longest consecutive stretch. It’s been over a year, I believe. And however, if you look at the components of the milk that we’re still seeing, you know, continual growth with components and protein and also fat, and I think it’s been really interesting to see look at the cream market, considering the low milk production growth that we’re in.

00;10;53;05 – 00;11;19;04

And it’s been trading in the West and also Midwest, either at par or lower than where we were last year. So it is one of those things that even though milk supply in general has been at lower growth rates, we are seeing components have an influence on the market. I would imagine that trend continues. But with that said, I think that general takeaway is right now we can’t expect a rapid growth rate and really alluded to that.

00;11;19;04 – 00;11;50;03

I think the heifer supply situation is real, absolutely broader than that. We’re seeing relative dairy prices and supply regions larger than the U.S. trade at higher prices than the US. So as long as Europe is trading a premium, then that simply raises the floor of US dairy prices in general. And if for whatever reason, the US market goes to an extreme discount to Europe, then we’re likely to export so much that we could run into a domestic shortage down the road.

00;11;50;03 – 00;12;03;07

So I think we are at a situation as we approach next year where we’re looking at higher relative prices, at least for now, unless we see a big dynamic change across the pond in Europe and see a large correction over there.

00;12;03;10 – 00;12;17;12

It sure seems like there’s tremendous amount of uncertainty going into next year, just given all the variables. And I would say that these are arguably some pretty massive variables compared to what we’ve seen in the last couple of years. And I’d say the same is true on the feed side.

00;12;17;12 – 00;12;43;27

Absolutely. And I think, you know, the uncertainty that Ryan and Fletch have talked about, you know, it’s important to manage that risk. And I think that’s what the average team brings to the table, is managing that risk, both on the dairy side and now we have our feed side as well. So we have a feed foundations program, which is the group that I’m where where we can help you do some of the same great things you’ve been doing to manage risk on dairy, to manage your feed side as well.

00;12;43;27 – 00;12;45;21

We’d love to talk with you about it. Well, a.

00;12;45;21 – 00;13;07;04

Huge thanks to Natalie, Fletch, and Ryan for joining me on today’s episode and 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. And if you’d like to learn more about how we help people manage risk, contact us at insights at Evercore AG.

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