The Ever.Ag Podcast by Ever.Ag

September 19, 2024 Parlor to Plate – September 18, 2024

In the latest edition of the Parlor to Plate dairy podcast from Ever.Ag Insights, our all-star panel discusses recent bullish runs. Class III prices are pressing higher – how should producers respond? How is new plant capacity supporting Class IV markets? Will we see a change of trajectory in grain markets soon?

Join host Kathleen Wolfley and panelists Brian Fletcher, Tiffany LaMendola and Brandon Weigel for a spirited discussion.

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

Show Transcript

(Transcript auto-generated)

00;00;00;10 – 00;00;08;18

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;31;16

Hello, welcome to Parler to Play, a weekly podcast from Brag Insights, dedicated to offering listeners enlightening discussion and actionable intelligence about dairy markets. I’m 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. Let’s timestamp today’s recording. It is Wednesday, September 18th, around 1 p.m. central time.

00;00;31;17 – 00;00;52;25

Here’s a quick rundown of the markets. See Me Black Cheddar closed at 225, down 7/10 on the week. Exciting news in the barrel market. We hit new record highs today, reaching $2.62, up $0.24 on the week. Spot butter moved lower. Spot butter closed at 301 $0.17 down on the week and then not vet. Dairy Milk Market closed at a $1.38.

00;00;52;25 – 00;01;16;29

Down a penny and a half. Now for the grain market. December corn is trading around 412 per bushel. November soybeans at 1012 per bushel, and the December soybean meal contract is trading around 321 per ton. It’s another week and yet another all star panel from the financial services team. Up first drumroll please. We have Tiffany Amendola. She is in California and helps dairy producers manage their risk.

00;01;16;29 – 00;01;30;09

Up next we have Brennan Weigel. He sits in Platteville and he helps producers manage their feed risk. And last but not least, we have Brian, Fletch Fletcher. He’s in our Chicago office and helps commercial clients manage their risk team. Thanks for joining me today.

00;01;30;14 – 00;01;31;28

Thanks for having us, Kathleen.

00;01;32;05 – 00;01;50;25

Well, team, there’s been a tremendous amount of buzz in the dairy markets and I think in the feed markets as well in the last couple of weeks. And I’m kind of curious. We’ve been on this for the class right side of things, let’s say on a really bullish run in grains, we’ve seen a little bit of a tiptoe higher, particularly on the corn side of the market.

00;01;50;25 – 00;02;04;29

And in class force based. That powder market keeps moving higher. I’m just kind of curious what changes the trajectory. Kind of seems like we keep feeding the bull every day. What keeps those bulls going hungry? Tiffany, let’s start with you on the class risk side of things.

00;02;05;06 – 00;02;28;19

Yeah, our team’s been thinking about this a lot, right? We like to manage risk. So what risk lies out there. And I think it’s pretty obvious we’ve been in a supply driven rally here. So if I ask myself what could change the trajectory, which would mean the market turns lower. My first thought is, okay, well if production comes up a little bit more, then maybe anticipated, right?

00;02;28;19 – 00;02;52;22

I mean, we are seeing on paper some of the best margins for dairy producers in some time out looking forward historically, that would incentivize a lot more milk. But we know we are short on cows, and it’s not easy to see those big gains materialize without the cows to make that happen. So we know that most likely folks are left to, you know, push milk production with what they have.

00;02;52;23 – 00;03;18;17

And I guess that’s where a little surprise could come in. As you know, I think our entire team, one of the mottos we live by is to not bet against the U.S. dairy producer and being good at their job. So that’s one thing on our minds. The other thing is that if it becomes a scenario where demand takes center stage and we stop worrying as much about supply, when we start thinking about what’s happening on the demand front, and if there’s anything startling there.

00;03;18;17 – 00;03;38;21

I mean, I think right now we fairly solid footing and that we might even be competitive in the export market, but that certainly can all shift depending on what happens around the globe. I also am kind of thinking, as we get past you know, the holiday demand push, do we see that typical seasonal lull beyond that? Obviously we know there is incrementally more cheese coming.

00;03;38;23 – 00;03;54;17

You know, the debate around all the new cheese capacity remains and where the milk’s going to come from. But certainly some of those plants are ready to fire up in a phased in approach, and that will mean more cheese. So those are the kind of things on my mind. And then I’ll pile on, see if my colleagues have anything to add.

00;03;54;17 – 00;04;05;09

I don’t have a whole lot insight here other than to say it is a presidential election year, and things can come from that. Changes in policies that we don’t know. So those are the things I’m thinking a lot about right now.

00;04;05;10 – 00;04;19;26

But I guess from a class four perspective, Tiffany’s comment around we have new plant capacity coming on line in the class three or in the cheese space. Does that maybe add on to this more bullish tone in the powder space going into 2025, perhaps?

00;04;19;26 – 00;04;42;15

I think so. Over the course of the medium to longer term. Absolutely. But within that, I would say in the near term it’s been pretty interesting because if you look at the US, nonfat market has been trading at a relative premium to the global skim milk powder price, as well as the European price, which is not a normal situation for that market to be in.

00;04;42;18 – 00;05;03;07

And then if you look at the butter side of the equation, we’re actually trading about a dollar discount relative to Europe right now and in line with New Zealand and what that can mean. And in terms of we have been on a pretty steady trajectory in terms of class for pricing. The forward curve, I guess, has moved higher a little bit because of the nonfat forward curve.

00;05;03;07 – 00;05;28;03

But on a spot price basis, it has really been consolidating at this higher price tier for quite some time. So I guess the question is, do we continue to consolidated the price tier that we’re at? And I think in terms of that, we’ve seen both the spot butter pull back about $0.15 give or take, over the last five trading days, which I would say is going against what the general expectation is of that market.

00;05;28;03 – 00;05;47;04

And also, again, some seasonal standards that that market sees as well. What I can say with that is surveying the general market and some industry context. The cream market for this time of year is actually on a year over year basis, trading at lower multiples right now. And it doesn’t mean that we’re in a surplus mode by any stretch.

00;05;47;04 – 00;06;15;26

But there is available supplies. We’re not seeing the same general price level that we would see this time of year, especially in the southwest and western United States. And so it’s kind of an interesting one as we approach. It doesn’t mean that we won’t see another rally this fall, but in general, we’ve made a pullback that I would say the general market wasn’t anticipating with that said, there is a lot more product in the warehouse this year than there was this time last year.

00;06;15;26 – 00;06;39;00

And so within that, I just don’t know that there’s the same fundamental argument to say that we need to go much higher and butter right now, even with Europe at $4, when we were having some conversations earlier today about, does that put the US at the forefront of the export market? You know, looking at that price spread, which we’re often referencing, generally we’d say, absolutely.

00;06;39;00 – 00;07;05;01

The problem with that right now is you can get lower competing sources of that actually out of New Zealand. So it’s not a runaway clear cut answer. Yes. I think to certain regions like Mexico and our neighboring countries, of course, we’ll be able to service them and export fat. But at this point in time, I don’t know that that’s a material amount, enough to really kind of change the near-term trend that we’ve seen in that overall market.

00;07;05;01 – 00;07;31;28

So long story short, Kathleen, if we think about the market 6 or 9 months from now, absolutely, with more cheese capacity coming online, milk supply is still not growing at historic growth rates. That will likely constrain the amount of milk going into balancing plants or powder and butter right here today. We still have several months in most instances where that new capacity is online.

00;07;31;28 – 00;07;53;22

So right here today, it feels like the US market’s generally pretty well supplied on the class four side. And so in terms of thinking about the next say three months, I personally look at the US nonfat price relative to the international price and looking at that saying it’s hard for us to maintain that premium. So if anything, we’ve already seen the butter market pullback.

00;07;53;22 – 00;08;03;18

We’ve hinted that the gas might be running out on the nonfat side. And so I personally wouldn’t be all that surprised to see more downside in the nonfat over the coming weeks.

00;08;03;20 – 00;08;25;21

Historically, when we think about the dairy market takes a long time to turn the bolt or bull markets have long tails or whatever other idiom you want to use, right? And to some extent, it almost seems like the class free market is maybe starting to make that turn of the boat that we’re starting to see some waves ahead, a little bit of challenges and making some initial attempts to to shift the rudder.

00;08;25;21 – 00;08;38;02

But on the class force side of things, maybe a little bit of cool off possible a little bit of a shift in trajectory lower. But 2025 could have a little bit more of a bullish tone, particularly as we get those class re plants up and running.

00;08;38;02 – 00;09;04;29

Yeah, I would agree with that. It does seem like even back to Tiffany’s points on the class three side right now. It feels like the problem at hand today on the class three side, on the commercial aspect anyway, is we’re at a near record level of an inverted block viral spread. And so what that means for the industry is think of a processed cheese manufacturer, where you can buy various types of cheeses to make processed cheese.

00;09;04;29 – 00;09;29;23

The most notable ingredient for that would typically be barrel cheese. But when you have a near 40 cent premium in the barrel market relative to block, a lot of effort will go into saying rather than buying, barrels are there other dairy ingredients that I can put into my my manufacturing to make a similar product? And there’s a lot of that going on right now.

00;09;29;23 – 00;09;49;16

So it’s saying barrels are so high, what can I what other dairy ingredient mix can I put in? Over time, I would imagine that will have an influence on correcting the spread that we have. So that’s in the near term, say two weeks to month time period, which in theory should bring barrels down in block, maybe blocks up to a certain degree.

00;09;49;16 – 00;10;14;02

The other aspect that’s really change, though, is the European price is trading on a forward curve basis, actually trading a premium to the U.S.. So it doesn’t mean that we don’t have some downside potential immediately, but it probably means that the floor or the sell off that we might face is probably higher than what we would have thought it could have been 3 or 4 months ago.

00;10;14;02 – 00;10;34;19

Something like a $2 price might really garner some attention in the export market, whereas 4 or 5 months ago that wouldn’t be cheap enough to. So it is one of those things in the near-term, probably running into some headwinds in the medium to longer term, probably looking at much higher floors with with the general market, at least from our perspective.

00;10;34;23 – 00;10;53;23

Brandon, don’t worry. I haven’t forgotten about you. Talk to me about the grain market. I was looking at the December corn price earlier this week and hey, we’re kind of trading above this 410 mark and have been there for the better part of a week, maybe a little bit longer than that. What do you think is happening? Do you think that there’s a change in trajectory coming in the corn or even the bean market?

00;10;53;23 – 00;11;12;03

So that’s a really good question, Kathleen. We’ve been getting that a lot. I don’t think that this near-term uptick in prices is going to lead to a longer term change in trajectory. I mean, the fundamentals really remain unchanged. The fact of the matter is, we have very abundant supplies, both in our corn sector and in our protein sector.

00;11;12;03 – 00;11;32;21

And as harvest starts to heat up through the Midwest, here, initial yield results have been very favorable. People are finding yields to be in line with expectations or better than expectations in a lot of cases. So a lot of this buying pressure over the last few weeks has been driven by a few things. First off, managed money. The speculators in our market have been very active buyers.

00;11;32;21 – 00;11;50;11

They have carried a very large short position all year. As we move into harvest, as we move into South America’s growing season, they are taking some gains on their short positions and moving to a more neutral stance to kind of go alongside of that. If we look back to the beginning of September, our corn and bean prices were the cheapest in the world.

00;11;50;11 – 00;12;11;16

So naturally, when we see our prices more competitive than that of South America, we attract a lot of export commitments and we also attract a lot of domestic buyers. When we have prices, getting to a spot that makes sense in the margins, especially late against these high milk prices and high beef prices. You know, long story short, I don’t foresee much of a long term change in trajectory here.

00;12;11;16 – 00;12;17;22

This market is still going to have bearish headwinds to it that are likely to prolong, you know, out into 2025.

00;12;17;23 – 00;12;37;12

What about from a macro perspective? We were chatting before we hit record on this call that the fed cut interest rates by a half point here this afternoon. Does that change anything from a grain market perspective, whether it be demand or how excited folks might be about storing little corner beans over the winter? What are your thoughts there?

00;12;37;12 – 00;12;58;27

Yeah, you know, I don’t think it’s going to have a major impact. I don’t foresee it changing things in in a way that’s going to meaningfully move the needle in terms of price action. Could it come into the conversation more from a producer standpoint about storing grain? Yes, because that cost to carry then is cheaper. But from a market participant standpoint, I think these interest rate cuts have been priced into this market for a while.

00;12;58;27 – 00;13;16;04

Everyone was expecting them to come at some point. The question was how much? I suppose as we work into year end, if we continue to see the fed cut rates, maybe that changes things and it brings more participants back into the commodity sector. But here so far for the near term, it doesn’t feel like it’ll have much of an impact flat.

00;13;16;04 – 00;13;30;10

I’m curious about your perspective on the dollar. We’ve been kind of flirting with a resistance line or a longer term resistance line. Do you think that a weaker dollar could help stir up a little bit more export opportunities, particularly in light of the European high price situation?

00;13;30;14 – 00;13;54;12

Yeah, I would say even had an influence on a week over week basis. The euro to US dollar went up about one point. That only amplifies the premium on the US product relative to premium EU product to the US. So for example, last week we were hearing of Q for mozzarella trading activity take place right around that 245 area.

00;13;54;12 – 00;14;21;14

This week we’re hearing a slight increase. And then you add on the currency conversion and it puts their price closer to 250. So on a week over week basis about a five cent increase. That has a pretty direct influence on US market. I think the hard part, if you look at the currency trends over the last say, month or two, is that the Mexican imports have been very strong all year long, especially on the cheese side of the equation.

00;14;21;14 – 00;14;48;06

And now with the weaker Mexican peso and higher commodity prices, it puts whether or not that type of volume can persist moving forward, mainly because the buying power has taken a significant shift down over the last, say, couple of months. So relative to Europe, it seems like we’re at a pretty comparative advantage. I think in general, on a nominal degree, it’s definitely having an influence on the US market given.

00;14;48;06 – 00;15;02;19

The dynamics in the market. I’m curious, what’s your approach for your clients on risk management? Tiffany, you work a lot with producers watch work with commercial clients. Brandon, you work with folks all across the board. Talk to me about your risk management approach in this uncertain time.

00;15;02;24 – 00;15;21;06

I’ll kick it off. I’ve learned a phrase from the team is buy floors and be bullish. I guess that’s a pretty good one for our dairy producers right now. For the most part, guys are feeling fairly optimistic and that’s okay, but I think we have been urging them hard to not take their sights off 2025. And you know, the latter part here of 2024.

00;15;21;06 – 00;15;38;19

There are some really good ways to take downside risk off the table. And so it’s okay to feel optimistic about the markets but don’t lose sight of that. Get some of that stuff in place and then hope these markets stay high. But if some of these things shift, as we’ve been talking about, then at least you have some protection in place.

00;15;38;21 – 00;16;03;11

Yeah. Tiffany’s talking about introducing optionality and also removing risk. And I say a similar approach on the commercial side right now, if we’re looking at 2025 right now and the current price structure almost across the board, in some cases we’re seeing the highest forward curve ever. And it doesn’t mean that there aren’t factors that could happen to mean that forward curve could move higher.

00;16;03;11 – 00;16;30;17

There’s some pretty big risks, I would say, between whether or not China comes back, whether this milk production situation gets worse instead of better. There’s a few factors that can paint a continuation of the bullish run that we’ve had. With that said, we’re already at an extremely high price, and so we have been really stressing as coverage is being taken, make sure that you have optionality for the opportunity in case prices do come down.

00;16;30;17 – 00;16;54;01

So rather than looking at fixed price, looking at call options or a risk reversal, if you’re on the buy side of the equation is really what we’ve been stressing under this environment. For other players that might be operating around the cash position than in the cheese market right now, the spot relative to the forward curve is at a huge premium, especially on the barrel side of the equation.

00;16;54;01 – 00;17;16;02

So our conversations become less focused about what tool to use, and it’s more signaling. Now is a great time to be unwinding inventory if you have it. So rather than looking at the forward curve, considering that and selling your inventory, because there’s really not much of an incentive to be holding on to that product right now. How about you, Brandon?

00;17;16;07 – 00;17;45;08

Yeah, I would say on the feed side of things for dairy producers here, and we’ve encouraged ownership from the futures standpoint around contract lows. So any time we get December corn futures working around 390, any time we get December soybean futures working around $300 a ton, it feels like a really solid spot to step into physical ownership. There are certain parts of the country specifically if you get out West and Southwest, that basis values are really not attractive yet on either of the protein products.

00;17;45;08 – 00;18;08;26

With soybean meal or canola or corn. So, you know, for folks that are wanting to maintain some patience to see if we get some slippage in those basis values as we work through harvest, just encouraging folks to look at some sort of a topside protection strategy with call options. So at least we can manage this futures price. Well, it lays down here, especially as we walk into South America’s growing season that naturally built some added risk premium back into this feed market.

00;18;08;29 – 00;18;13;13

So definitely kind of approaching things very proactively knowing where margins sit right now.

00;18;13;13 – 00;18;32;21

Well team really appreciate you joining me on today’s episode and sharing your insights with our listener. A big 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, please contact us at insights at Ever.ag.

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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