Today’s dairy market is global. In our latest episode of The Milk Check, we dive into the New Zealand and Oceania markets to understand how they may impact the U.S. dairy market. Join Jacoby and our two special guests Jo Bills, ag market analyst and director of global Insights at Ever.Ag, and Steve Spencer, managing Director at Ever.Ag as we dive into dairy.

And lots more information on the global dairy market and our predictions 2025. We have a positive outlook for dairy in 2025, but cheese may be our wild card.

Get the market scoop from the Jacoby team, including Ted Jacoby, III, CEO & President, Cheese, Butter & Dry Ingredients; Josh White, Vice President, Dairy Ingredients; and Diego Carvallo, Director of Dry Dairy Ingredient Trading.

Intro (with music):

Welcome to The Milk Check, a T.C. Jacoby & Company podcast where we share market insights and analysis with dairy farmers in mind.

Ted Jacoby, III (T3)

Hello, everybody, and welcome to The Milk Check. This month, we are excited to welcome special guests Joanne Bills and Steve Spencer from Freshagenda to share their thoughts on milk production and dairy demand in Asia, Oceania, and internationally for 2025. Joining us from the Jacoby team are Josh White and Diego Carvallo from our dairy ingredients team. Welcome, everybody, and thank you for joining us today.

Steve Spencer:

Thank you, Ted. It’s great to be here. We enjoy these. We’ve done a few of these, so it’s always good fun.

T3:

We’re about to enter year two of China’s tariff changes regarding New Zealand dairy products and how they are imported into China. For our audience, many of whom are dairy farmers here in the U.S., why don’t you give us a quick overview of those changes? Then, we can discuss what that has meant for dairy markets in that region and how it affects dairy prices.

Steve:

In basic terms, New Zealand has tariff-free access to the Chinese market. That was preset for an extended period. They were on a slow rundown of tariffs over a long haul. A few years before that was due, they had a review, and it seemed to be that that was just a little period to push it out a bit longer, and that’s in the rearview now. So, we’re in a very tariff-free environment for New Zealand exports, which you’d think has freed them up to go wild. The only trouble is China’s not a market that is allowing many people to go wild right now because that’s come at the same time as China hitting a phase of the second wave after Covid; the second wave lockdowns were much harsher, much longer, much more damaging to the economy and so that’s crippled demand for dairy in many parts of the market because spending, consumer spending has been depressed and many things are contributing to that right now and that’s still a happening thing.

So, that has freed New Zealand up to grow its share of the market in skim milk, powder, cheese, and butterfat and they’ve certainly done that at a time when the import volumes are a lot lower. So, we’ve got to sit back and look at the overall trends in China. We think they’re just off the bottom regarding those import trends, but New Zealand has certainly picked up share, and their exports to China are falling.

You could take the story of product by product because the products that China isn’t producing or doesn’t produce, skim milk, powder, butterfat, cheese, a small production of those, really the trade is probably following the pattern of demand we’re seeing in that market. There have been some false starts, and some volumes pick up and go in slow again, so they’re seeing lots of volatility in the trade over time and whole milk powder; it’s about how much of a balance China’s got, how much they’re producing internally, what’s happening to their milk use across all categories, and then what role do imports play in that. That’s still a sad story. We have seen the whole milk powder trade over the last six months, but it is still 28% down year-on-year. New Zealand is exporting, and New Zealand has the dominant share of that.

T3:

Do you expect what’s happening in China with their import volume? Is this a new normal? Do you think we will stay down here or end up closer to where we were four or five years ago or somewhere in the middle? What should our expectations be going forward for China?

Joanne Bills:

Yeah, I think, Ted, it will depend a lot on what happens with their internal production. We have seen good growth in milk production over several years, but more recently, that growth has stalled. Raw milk prices are well down, and there have been rumors talk of the government starting to take action to reduce cow numbers. They certainly did that in the pig herd. We haven’t seen any follow-through in the dairy industry, but they’re very focused on getting that internal Chinese dairy supply chain rebalanced and aligned with demand.

You would have to think that they’ll still have some demand for, particularly as Steve said, the things that they don’t produce internally. Butter demand has been surprisingly good, given what prices have done, and there’s also been fairly steady growth in cheese. It’s really hard with China I think, Ted, to know what normal is because we’ve had all these levels of normal over the years that there’ve been such a dominant force in dairy, but we probably won’t get back to where we were in terms of whole milk powder demand and that’s probably why Fonterra is very much about diversifying into other markets and products.

T3:

And that was where I was going when I was asking that question. We’re dealing with a new normal when it comes to China and we’re going to be exporting less to China globally, which means New Zealand may be increasing their market share, but they’re increasing market share of a shrinking or at least a smaller market.

Joanne:

That’s spot on.

T3:

New Zealand’s dealing with this smaller import market in China for their products, even though they’re increasing market share, they’ve got to find new places for their product.

Steve:

I think they’re doing it with a brave face, Ted. I think they’ve done a good job. They’ve had some help. So, when the whole milk powder demand plummeted and charts and that are spectacular, I think they had to pivot towards skim and butter and hopefully build their cheese trade. That didn’t happen in cheese, but so they’ve had to put that milk in a different uses. Around the same time, we had a few problems in South America, so their whole milk powder trade was helped. They were able to push things into markets, push product into markets where the South Americans couldn’t supply, but now I think we’re seeing a adjustment to say, “Yep, that’s a market that isn’t going to grow much from where it is in terms of our whole milk powder requirements.” And now the focus for them is very much on protein, milk protein, high functional evaluating in that respect to use up skim solids.

Josh White:

Is that fair to say that during peak production there’s a certain amount of whole milk powder that always has to be made? It’s a shrinking amount it seems like every year, and we should expect it to continue to as we go into 2025, giving them more versatility as to where they can allocate the raw milk to in New Zealand. That being said, if China demands whole milk powder, they’ll be quick and the obvious ones to respond.

Steve:

Yeah, they can flex, Josh. I think they can divert tankers literally. It’s just which plant do they send certain tankers to when it really matters. I think the flex is still there. The hint about how they’re going in terms of their total book and what they’ve got in front of them is the annual GDT forecasts they put out of their total almond powder trade on GDT is usually a good sign for where their overall production and demand is in their book, and that hasn’t shifted much in this year. It shifted down a little. We think it’s probably a little bit up on last year even, but the peak is much stronger this year and we’ll come to that I’m sure, but that’s a different dimension they happened to manage.

Josh:

So, before we shift to talk about supply across the board, maybe touch on a couple other interesting data points on the demand situation. How would you describe the rest of Southeast Asia and then you mentioned a bit more about South America. Are we forecasting or expecting South American situation to change from a demand standpoint much or is that really all supply driven?

Steve:

Yeah, let’s start there first. So, the issues is how the America were about supply out of Argentina and Uruguay where their milk production really tanked down 10 or so percent for a period of time. The economies down there aren’t great either, so their domestic consumption has been impaired. Looked okay for a while, but that’s now coming back. So, they are putting more into whole milk powder now, but the whole economy is trashed. Input costs are very high for farmers, they were having to struggle through on very thin margins and difficult cash flow, different currency situation. I think it’s improving now. Production is back on par, year-on-year, so that is starting to ride itself. We talked about the China demand thing first. We talked about the supply side, supply chain balance, but the demand side and China’s still got, we think, a long way to go, Josh, in getting back to some sense of growth.

We’re certainly seeing it in a few little sectors, but consumer spending has been knocked around by the impact on housing. Household incomes or household wealth has been damaged by the property market being oversupplied, prices crashing. So, consumer confidence has been impacted by that. So, discretionary spending, dairy catches quite a lot of that discretionary spending, people doing impulse buying through convenience, gifting milk, there’s a whole lot of things where dairy is a prize product or a prize category that is damaged by the fact that people have less money and they’re less confident in spending money and they’re trying to rebuild wealth. So, that’s going to take a while to come back. I think retail sales are showing some improvements, but the last quarter of milk sales reported by the two big milk companies, they’re still down six or 8% year-on-year in volume, which is, that’s a lot of milk in anyone’s terms, so that’s got to go somewhere.

Those companies are talking about their use of milk is still good, they’re still processing more milk. I think what they’re becoming very good at is filling warehouses again with UHD containers. They reckon demand is coming back, they’re seeing resale sales pick up, so maybe the buds of growth are starting to return. So, that balance thing is really important. Cheese trades picked up a little, so fast food is probably catching more spend, because it’s cheaper. People are going out a bit, perhaps more. It’s a lower meal cost. Southeast Asia. Jo, what do you reckon we’ve got?

Joanne:

I think Southeast Asia, a lot of those economies were really quite badly damaged by COVID even though in some senses they were really good at controlling the spread of the virus. There wasn’t a lot of financial support provided in some of those key importing in Southeast Asian countries, so it has been disruptive to those economies. We’re starting to see them come back now. The tourism trade is certainly picking up in a lot of those regions and that’s really helping to support a bit more of a rebound in demand.

So, certainly at GDT events in the last couple of months we have seen them in and out, quite active in some auctions and then stepping back in others. We think we are starting to see that recovery in terms of demand, not just restocking supply chains, but actually a bit more demand pull through just as those economic conditions pick up a little bit, but it’s certainly taken a while just to get over that disruption of the pandemic, arguably a bit longer than in some of the developed markets.

T3:

What product are we seeing a pick-up in demand? Is it skim milk powder, whole milk powder or is it maybe some of the others like cheese or whey or butter?

Steve:

Whole milk powder came first. I think that certainly picked up in the last 12 months. Whole milk powder trade into the whole region’s up 13% year-on-year, and that’s starting to tail off now. I think a bit of price sensitivity might be coming into it, because we’re seeing quite strong prices again. Skim milk powder was really knocked around badly, but it is also back up or it’s trending back up. It’s not back to where it was. The two powders have improved quite a bit.

We’re seeing that different patterns in different regions, so some markets have been far more price sensitive due to spending. Philippines and Indonesia have taken quite a while to get back on their feet spending wise, but some other economies have been much stronger coming out of the blocks. Cheese is pretty good generally. So, cheese is a good reflection of some of that tourism fast food, more of that trade I guess, but cheese has continued on. It’s been reasonably steady. Butter’s been patchy and butter will be price sensitive and we’re seeing very giddy prices now, but surprisingly the last 12 months, even though where butter’s been and it’s only been the last few months where we’ve really picked up the effect of those higher prices, butter trade’s been flat in the Southeast Asia in the last 12 months. It’s a mixed story, Ted.

T3:

Steve, it sounds to me that the powders, year over year in Southeast Asia, it sounds like the imports have been strong versus last year we’re seeing a steady increase in cheese demand across the board we have for quite some time, and it looks like that steady increasing trend continues, but then butter is relatively flat. Is that a good way to sum it up?

Steve:

It is, yes. Yeah.

Josh:

When we think about that on a milk solids basis, is 2024 better than 2023?

Steve:

I’ve got an answer on that. It is up. Last 12 months, milk solids up 8%. A lot of that’s the powders. Whole milk powder is a big driver of that cheese also, obviously because of the full fat and protein impacts of that. Where it was down quite low, Southeast Asia, we missed them as well as China in terms of total trade. Yeah.

Josh:

The reason I bring it up is a year ago I think we were starting to feel confident that 2024 would be better than 2023 and 2023 was the low, but at least in this conversation thus far and listening to you speak about the climate in the markets, Jo speak about it, it feels like we’re gaining momentum on the demand side as we look ahead to 2025 and of course as us in the balancing of dairy products space and then looking at it from a global scale, you’ve got your milk solids, your milk production, more specifically the actual component value of that milk. You’ve got the demand by product and then of course you’ve got the processing product mix. And as we go into 2025, that can be a bit volatile in the U.S. with the cheese factories coming online, the general view on what U.S. milk production looks like, what the actual component value of that milk looks like and where that milk gets processed.

We’re expecting a lot of curveballs as we move into 2025. Feels like we’re going to be experiencing that at the same time that we’re experiencing a little bit of a rebound or gaining momentum in terms of global demand for dairy products. Is it safe to say that, I hear you say earlier that right now New Zealand is at least experiencing better than last year milk production or a strong peak or how are you viewing the climate out of New Zealand and then last year Australia was a bit of a story coming together with additional product. How’s that looking?

Steve:

Okay, which one do you want to take?

Joanne:

I’ll go New Zealand first.

Steve:

Mm-hmm. Yeah.

Joanne:

If that’s okay. New Zealand’s having an absolute, as they would say, cracker of a season. They had ideal calving conditions coming into this season. So, we saw the first few months up double digits and up very high year-on-year and that’s really continuing, particularly in the North Island, conditions are really good. Lots of pasture, lots of conserved feed. South Island, there’s been a few areas where it’s been a little bit wet and perhaps a little bit cold, but really overall it’s been a fantastic season so far.

We don’t think there’s been any big change in cow numbers, but just the yield per cow is going to be really strong through this year. Just in terms of, we said earlier that Fonterra was putting on a bit of a brave base. I thought it was interesting. They just increased their forecast for the payout to $9.50, so we’re getting up close to $10 New Zealand per kilogram milk solids in terms of the payout for this current season, which is really positive for Kiwi farmers, but they also sounded a little bit of a note of caution.

They did the usual, “We’ll be watching global supply and demand, but also the supply out of New Zealand in the second half of the year.” So, I think there’s a note of caution there in terms of if we actually have too much product, this forecast is going to come under a little bit of pressure in the second half of this season, because they are looking at placing that product very carefully. As we said earlier, just managing that whole milk powder supply and demand, trying to get a bit of that butter action, limiting skim milk powder. They’re putting a lot more into NPCs and some of that’s winding up in the states. So, it’s a real balancing act I think from here, from New Zealand, that they are going to have a really strong season and they’re going to be managing that product mix really carefully over the next few months.

Josh:

Do you believe that there’s any way that the increase above expectations or the current situation in New Zealand is enough to adequately fulfill the increased appetite for dairy products as we go into the first half of next year?

Joanne:

It’s hard to say, Josh. They will have plenty of product and it’s just going to come down to that price sensitivity in some of those markets that I guess we see swinging and out from time to time in the Middle East and Southeast Asia where that price and price demand situation winds up. But I think there will be a lot of products out of New Zealand, given the seasonal conditions, and there doesn’t seem to be anything in the way in terms of increasing supply. So, the last reading we had on New Zealand, it was up 5% in September. It will probably keep that percentage increase. I don’t know what our forecast is at the moment, Steve, for New Zealand, but it’s pretty strong.

Steve:

Yeah, there’s two effects I think this year. You talked about the early calving that’s brought some production forward, so because they’re able to get their cows out earlier, got milk earlier, there’s a bit of an earlier flush. So, New Zealand’s all about the shape of the curve and that is pretty locked in, but they’ve also had a bump in the amount of feed they’ve got. So, there’s two effects. As we got through the peak, the year-on-year growth is shrinking, because there was freakish early conditions has brought that bit forward, but I think the strength of the North Island will counter the weakness in the south. We think over the peak, probably three to 4% as it crests, maybe a little higher than that, but as we go later, now we get into more difficult weather situations because the La Nina is not so assured.

So they’re getting into this area where in the peak of summer they can run into some difficult conditions. It can be hot and they lose feed, but they’ve got a lot of stored feed in front of them. The second half has got some weird comparatives to look at, so our forecast is I reckon two to 3% up, full season. The front half, different back half effects, so it is complicated, I guess. We’re not trying to make it up into a complicated story. There’s a lot of different moving parts. You asked a question about what that $9.50 price translates to. I think it’s about a $21.50 per 100 weight roughly, about that sort of number.

T3:

Stay tuned. The Milk Check will be right back. If you’re a dairy producer or a cooperative looking for a better market for your milk or you’re a food manufacturer hoping to strengthen your dairy procurement or risk management strategy, please reach out to T.C. Jacoby and Company. We’ve been building worldwide relationships with all sides of the dairy supply chain for over 75 years. Tap into our expertise for unlimited free consultive support and we’ll develop a sales or procurement strategy that hits all of your targets. Please visit us online at www.jacoby.com to get started. Thanks for listening to The Milk Check. Back to the show.

Josh:

You have the New Zealand situation, which is much more weather-dependent, et cetera, but there’s absolutely an incentive to push as much milk out of the animal as possible. The margins are good, but there’s a limitation on the of animals. Same situation, different reasons. In the U.S. right now, there’s a limitation on the number of animals. Genetically we continue to show amazing component growth, and right now margins promote the best feeding practices possible. I believe there’s quite a difference in view across the industry and what that translates to for 2025 in terms of U.S. milk production growth, but are we looking at a situation where both the New Zealand market and the U.S. market is really pumping out more than they did in 2024, in your opinion? And then we have to end the conversation on Europe. Probably the most important in the skim milk powder trade.

Steve:

Yeah, I think we’re definitely looking at both New Zealand and U.S. and our ever colleagues of course have bumped up recently their forecast. That’s certainly our collective view that we’re going to see more out of the U.S., much stronger growth, chasing that new cheese capacity, filling that new cheese capacity and even more on solids obviously. And New Zealand solids will also be impressive, Jo. They’re going to be bumping out much more, because the feed supply is quite good. Good quality. Yeah. Do we want to go into Europe?

Josh:

Maybe quickly, are there any thoughts as it relates to inhibitors to growth in the Northern Hemisphere? Both the bird flu and the bluetongue?

Steve:

We’re more versed the bluetongue effect. I think across the affected areas. The flu is going to take a winter break, hibernates or it goes into hold if you like. It did this the prior year, so it flared up in ’23 and ’24 has had a very strong run. It has not been eliminated and will go into hibernation during the winter. It’s also moved into new areas. So, it will come back when the weather is warm enough, but that may not be until May or June. I think this year we didn’t see it flare up until June. So, Europe’s got strong milk prices, got some limiting factors around environmental restrictions. Some regions are under increasing pressure to reduce numbers. Netherlands, Ireland, Denmark, because of environmental regs, despite what’s happening in the politics. So, there are going to be constraints as Europe goes into the new year.

Just again, whether, Josh, whether they have a decent spring, whether they get a decent bump there, they’ve certainly got the milk price incentive out there in front of suppliers and that’s not going to back off soon, because the butter market’s looking strong through Q2 at least, which will keep payouts pretty brisk. I think in a global balance sense we’ve got a real limitation in skim milk powder in terms of availability in the Northern Hemisphere, and if we do see demand, strength of demand in those developing markets, continue, skim powder’s on a run, we are seeing pretty tight situation.

I saw a presentation from New Zealand that the SGX event recently in Singapore where there was a bit of an outlook given by their head of risk, Dave McGowan, who talked about how they’re seeing this play out on them and they’re looking very optimistically at the skim milk powder market and the higher value protein solids because of that demand uptick they’re seeing that come through, but also they’ve got to believe that, right? They’ve got more to sell. So, I suppose that’s part of that story.

Joanne:

But I guess the other part, Josh, would be when you mentioned bird flu, where bird flu is most prevalent is in California at the moment, and that’s certainly limiting nonfat dry milk and skim in your part of the world. So, Europe’s tight, the U.S. is going to be tight. It’s going to be a lot more solids when they’re available going into that cheese area. So, skim’s an interesting one that it does have the opportunity to move up pretty quickly if demand picks up again.

Josh:

Yeah, we couldn’t agree more. I think anecdotally it’s important to note that we’re getting a lot of feedback that the November impact, at least in California as a result of bird flu is pretty significant. So, I think a lot of people reacted when the October numbers came out, but I think the November is going to be very… Or excuse me, when the September numbers came out, we think both October and November has a real potential in showing noteworthy challenges, at least in that part of the world.

T3:

I can’t help but play a little devil’s advocate. Is China going to import? Are their imports going to be up in 2025, do we think or are they going to be weaker? And will that be enough to take the bloom off the road, so to speak?

Steve:

Our forecast suggests they’re up a little bit on ’24.

T3:

Okay. Even though demand seems to be down right now?

Steve:

Well, demand is down, but I think demand will start to recover.

T3:

Okay.

Steve:

I think we’ll see a little bit of an improvement. When they throw things at the economy, China can throw a lot at the economy to try and stimulate. I think we were in the fifth or sixth tranche of stimulus, I’ve lost count, but they are working very hard at getting spending, getting confidence to kickstart and it will happen. Trickling down to households and making them feel better about their own situation, that’s always tough. You see that in the U.S. right now, but it’s a similar challenge everywhere really getting them to feel like they want to go out and spend money. They’ve tried coupons, they’re trying to alleviate housing costs, it’s all sorts coming at them, so it will show up.

Joanne:

Yeah, I think that’s going to be the big difference, Ted. Last year they held off on that economic stimulus for a really long time. I mean for most of 2024 they were saying, no, we’re not going to go there, and then all of a sudden they went there and as Steve said, they’re throwing everything at it.

T3:

No, I think that’s a really good point, because what I’m hearing is China’s imports should be pretty strong next year. Southeast Asia’s imports have been strong and should continue to be strong. Milk production may be up in the U.S., but it’ll be limited. Milk production in New Zealand will be up, Europe relatively flat, but production of skim milk powders will probably be limited. So, we could see strength in the skim milk powder, non-fat dry milk arena, with demand just exceeding the global supply.

Diego Carvallo:

Something that I read today that was very interesting is that I saw four charts that talked about China’s milk production and stocks. One chart was whole milk production. The other one skim milk production, and the other two were whole milk powder inventories and skim milk powder inventories. It’s a chart of the past five years. All of those four charts are at their historical lows in the past five years. So, their inventories for both products are the lowest they have been in five years, and their production for those two products are at the lowest they have been in five years. So, I think I agree with Steve and Joanne. I don’t see a way China’s imports next year can be lower. I just don’t see that happening.

Steve:

Diego, stocks are low, but the usage is low.

Diego:

Sure.

Steve:

So, I think what we’ve just seen the measure of stocks to use, and I know the charts you’re talking about, the stocks to use is probably back to pre-2020. It’s back to how they were managing things before this all went through great turbulence. So, about 2018 and 2019, if you look back to stocks to use back there, we’re about back to that. So, we’ve had a bit of a clean-out and got ourselves back to normal.

Josh:

I agree. Yeah. What else are we missing? What else stands out as you guys look at your modeling and just listen to the market anecdotally on a global basis? What stands out as unusual as we look ahead to 2025?

Steve:

Well, we have to say butterfat, Josh. The other half of the solids, just how long the European market holds it together at this very elevated level. We did a little comparison last week when we did our little weekly video, looking at the seasonality of the correction. When you get to the correction in butterfat, it happens like clockwork a bit earlier in the U.S. this year, but in Europe, it hasn’t happened yet, and it typically happened in the last five and 10 years average.

The 14th of November was the day that the cream market or the butter market crashed for the C2 contract. It shows no sign of doing that. Cream prices are still going up. We’re really close to Christmas, and there’s a cliff coming, but there doesn’t seem to be much expectation in that market that it will change a great deal. It might be a fraction down when Christmas demand and cream is satisfied, and we’ve got a lot more sloppiness, and then a bit more butter comes, but milk has only just moved off the bottom of the trough. The seasonal low occurs in November in France and Germany, and that’s just starting to move, and there are some headwinds.

I think the cheese market’s also helping keep the situation tight. This cheese prices have come off a bit, but demand seems reasonably steady, and there has been no significant pushback yet. But I still do not believe that’s been thoroughly tested with end users and consumers for longer. So, we may see some pushback there, but I think how long butterfat stays elevated, whether New Zealand impacts that market with the product going into Europe or not, we’ve been talking about that for months as well. Not much has happened yet, but it’s a bit early. Yeah, I think the strength of butterfat in Europe is playing at a cheese that’s creating some engaging scenarios for exports out of the U.S. next year. If those European prices stay elevated, does that help the U.S. out with this new production? To some extent, so, I think those dynamics are really important.

Josh:

Well, that makes me want to move to another important piece that we haven’t touched and we’ve been bouncing around the world on both supply and demand, but the Middle East and North Africa demand, it’s my understanding that they very much helped out the Oceania heavy production season a year ago, when China stepped away by buying a fair amount of product. The first that you would assume is when they capture that market share, that that comes at the expense of Europe, and then, of course, the U.S. in the third position, but as you’re looking ahead to the early part of next year, obviously we have an earlier Ramadan period than we certainly had a decade ago. How does that look? What does that demand scenario look like as we look ahead to 2025?

Steve:

Very interesting, Josh. Yes, I mean a very price sensitive mark. We went there a year ago, and it gave us a great insight. It was nothing like going to Gold Food and getting on the ground there. We’ve taken a long time to do that, to appreciate what the products are that are in front of consumers, what their attitude to buying is when they’re supplying essentially it’s a big cheese market, a big beverage market, how they buy, what they buy on, who they look at sourcing from. That’s a real eye-opener, and I think while we were in Dubai you’ve got Saudi there, but you got reasonable flavor elsewhere as well. They’ll still remain. I think they’ve taken great advantage of when the prices were low; they came strong, bought up, stocked up well, and now, when prices are high, they’re backing off a bit, so the trade has slowed.

They very much work on the value of fat, and when you get the difference between whole milk powder and the skim butter equivalent, they’ll move across the whole milk, and they’ve done that lately. So, butterfat is… Everything’s price-sensitive. Everything is a numbers game. Most of that trade is done that way, and I think cheese, we were there looking at some cheese markets, and that is fascinating, because it’s what they call cheese is something with pretty low dairy solids in it. So, they’re buying all these different dairy ingredients to partly feed that market as well as buy cheese to certain extent, from whoever is prepared to meet their price and spec. And I think that continues, but it’s certainly healthy that it’s reasonable income growth for consumers. I think the stability of the oil market certainly being part of that, I think Saudi Arabia is a very healthy economy, that’s showing up in the way that food trade is then backing into what their volumes look like.

Joanne:

Yeah, I think what was interesting when we were there earlier this year, Josh, was that they’re really keen to push tourism, particularly in Saudi and the UAE, obviously in Dubai, and so that’s going to help a lot of that food service demand that will pull through cheese. So, they’re certainly interested in U.S. cheese. At the moment it’s at a price, and as you said, Josh, probably the third ranked at the moment, but there was a lot of interest in the cheese that will be coming out of the U.S. because they see limitations certainly out of Europe, and it’s going to be that issue of meeting spec, because they do have a strong preference for the grass fed cheese, just the look of it and the taste. But there is definitely an opportunity there for the U.S. to get into that processed cheese market, which is huge, like massive. Just low milk solids, as Steve said, and price sensitive.

Steve:

I think that’s the other stunning facts we saw that food service growth in that market is astounding. It is going to stay double-digit for the next five to 10 years. Their lifestyles are changing. I mean, reform in Saudi Arabia has talked about a lot and you get a lot of that, but on the ground, when you hear the dairy companies talking about what it actually converts to and how you see behavior and spending change, that is a very healthy growth market. Sure, it might be keen, but there’s also opportunities for higher value going in there too, because it’s not all commodity. It’ll create segments and become more affluent in certain parts of it, so there’s a bit for everybody.

The other part of that puzzle is Algeria, which is a very important powder market and always difficult to read as to the way in which the government wishes to attempt to feed the population or ensure the population is happy and contented and paying reasonable prices for food, because that keeps the angst down, keeps civil unrest low and that’s a huge priority.

That market has been a bit patchy, and I think we haven’t seen the consistency of large tenders coming out of Algeria. That’s probably been a bit disappointing. The other markets might’ve picked up volume that market’s been a little bit lower and North Africa is over the year, whole milk powder trade is down. Nearly 10% down on a yearly basis. Skim is up. I mean, they traded to skim, which is interesting to understand given the different… That’s probably just an absolute price of the powder, but a lot that trade’s small, but holding up, yeah, they’ve seemed to have moved away from whole milk to some extent, which is a factor for the South Americans and the New Zealand, because Europe is still in there with a little bit of that, but it’s mostly south hemisphere trade.

Diego:

There’s also rumors that there’s going to be a tender coming for Algeria, so let’s see how that affects the stock market mainly in Europe, because Europe is still at a steep discount to the U.S., so that’s going to be interesting.

Josh:

For skim milk specifically you’re talking about, right?

Diego:

Yeah.

Josh:

Yeah.

Diego:

Correct.

Josh:

This was good. We covered a lot.

T3:

We covered a lot in a pretty condensed amount of time. And just to summarize it up as we start to wrap it up, it sounds like what we’re hearing is demand’s going to be good in Asia, demand’s going to be good in the Middle East. Production may be good in Oceania, production may be good in the U.S., but probably not necessarily as good as it needs to be on the powder side of the business, especially from the U.S. with the new cheese plants being built. And so we probably can expect pretty decent skim milk prices either in the form of skim milk powder or non-fat dry milk going forward into 2025, at least in the first half of the year, and probably even butter as well and I think the big wild card is what cheese will do, because we will have more cheese. Before we wrap it up, I think I’ll throw that one at you guys, Joe and Steve. With more cheese being made in the U.S., do we expect international cheese prices to stay up or is that maybe one weak spot in the horizon?

Steve:

Yeah, we think that’s a weak spot.

T3:

Okay.

Steve:

Yeah. It’s where the export volumes are going to be satisfied, I think, because New Zealand is certainly counting on more cheese exports as well. The U.S. will have more. Europe, depends on their overall balance, but Europe likes to export cheese to keep balancing that internal market as well, right? And mozzarella is very important there. They’re very good at it. But the contested markets where the U.S., New Zealand and Europe go head-to-head, that’s North Asia, Japan, Korea, you get in the Middle East, you get Australia. Those markets, the U.S. has lost some share to New Zealand. Europeans have been out of that a little bit. They’ve lost a bit of share as well. Australia’s picked up share, can you believe? But I think that contested zone is where those marginal volumes will go and that I think that will be bought at a lower price. So, we think the export trade will be, chief prices will be under pressure.

T3:

Okay. I would say we agree with you on that one.

Joanne:

A little bumpy as that cheese comes online, I think. As that finds a home, it will be bumpy for the first half of 2025, you would think.

T3:

I think I would’ve to agree with you.

Joanne:

Everyone’s bracing for it. Yeah.

T3:

But that’s the interesting thing about markets, isn’t it? When everybody’s expecting something, it doesn’t always manifest it that way because of the plans that everybody puts together. Well, I thought this was a fantastic conversation, a little bit of hope or at least Class IV prices coming out of the U.S., a little bit to be concerned about maybe for Class III prices coming out of the U.S., but overall, nothing for us to go hide in a hole and bury our head over.

Steve:

There’s never a reason to go and hide your head somewhere. There’s always plenty of color.

T3:

There always is.

Steve:

Yeah.

T3:

All right, guys, as always with dairy markets, it’s going to be another interesting year. Well, Steve, Jo, thank you so much for joining us today. This was a great conversation and we really appreciate it.

Steve:

Thank you for asking us. We’re really happy. It’s great to see you guys. Thanks for the opportunity.

T3:

Absolutely.

Joanne:

Thanks everyone.

Diego:

Nice to see you. Be well. Thank you guys. Appreciate it. Have a good one.

Outro (with music):

We welcome your participation in The Milk Check. If you have comments to share or questions you want answered, send an email to podcast at jacoby.com. Our theme music is composed and performed by Phil Keaggy. The Milk Check is a production of T.C. Jacoby and Company.

As summer fades, we’re moving into peak demand season for the U.S. dairy market. Keep on top of shifting trends with The Milk Check. Guest host Josh White and a panel of industry experts discuss the latest trends and projections for U.S. dairy as we approach this critical period.

💸 Blue tongue’s impact on European milk production.
🧈 Butterfat is bucking the trend with a strong inventory.
🍦 Cream prices have softened after a brief surge in the last few weeks.
🧀 Cheese markets set record-high prices this year, but is the tide turning?
🐄 Milk powder prices are on the rise as we head into peak demand season.

Plus, we’ll look ahead to 2025: What impact will the expanded cheese production capacity have on milk prices in the second half of the year?

Get the market scoop from Josh White and his team, including Diego Carvallo, director of dry dairy ingredient trading; Greg Scheer, manager of milk marketing; Jacob Menge, vice president of risk management & trade strategy; and Joe Maixner, national sales manager of dairy ingredients.

Intro (with music): Welcome to The Milk Check, a TC Jacoby and Company podcast where we share market insights and analysis with dairy farmers in mind.

Josh White: Hey, everyone. Welcome to The Milk Check. Today is Friday, September 20th. I am Josh White, filling in for Ted this week. We’ve entered that time of year when producers or processors, customers alike, we all put that summer fun behind us here in the Northern Hemisphere and focus a lot more attention on what’s happening in the market today, closing out the year and thinking about what could influence the next calendar year. As a result, we think it’s a great time to have what TC would call a good old classic market discussion.

Today, I’m joined by most of our traders here at TC Jacoby and Company, and I’ll lead that discussion in Ted’s absence. So I’ll do my best Ted impression and say, “Hey guys, where do we start?” Does anybody have a thought as to what we should cover at the beginning? I personally think it all starts with milk. Greg, I would love your opinion as to what’s happening today and the market as it relates to milk moving across the country and what your thoughts are looking ahead.

Greg Scheer: Thanks, Josh. Yes, we’ve seen tighter spot markets this summer and this spring compared to previous years. We have tighter milk supplies. We have a lack of replacement heifers. We have very expensive replacement cows. Producers have been holding back from culling as heavily as they usually do. We just don’t have the replacements to increase milk supply. So we have firm spot markets. We’ve seen that this summer. We expect to see that this fall, but we are setting up for 2025 to be a tighter year for milk supplies because of those reasons.

Now, that could be mitigated some. I’ve heard of very good harvests being put up, good quality, cheap feed, and producers will be able to feed those cows maybe a little better, but the fact of the matter is it’s going to be hard to get cow numbers up. They’ll probably decline, and the cost of any kind of replacement will be high.

Josh: So Greg, you’re talking through those dynamics and that doesn’t take into account what the industry has discussed a lot about all these new plants coming on a new capacity. We’ve got another plant firing up any day now, another large one in the southwest that will likely start early in 2025, and a few plant expansions in the upper Midwest. How do you think that that influences this tightening milk dynamic as we go into next year?

Greg: It will make the milk competition just that much stronger. For the producer, it should help get higher premiums for milk in those competition areas. Plants will have to plan ahead, and even in some regions where milk’s traditionally been very long and can get all the milk they want, it will be harder next year. It’s just more competition. It will maybe pull some milk from other plants, and some older, inefficient plants might have to shut down eventually. That’s on the horizon with these new big plants opening up.

Josh: The old model is always that you fill up Class I, you fill Class II seasonal demand, fill the cheese plant first, and then the rest gets balanced by Class IV. As we’re seeing milk pivot and shift around, we’re seeing new plants come on, at least some inhibitors to growth in the US. You already alluded to the biggest one, probably heifer supply—some other obstacles or headwinds to growing the herd with bird flu. [inaudible 00:03:27] Bird flu’s now talked about in California, but it’s pretty unclear what that impact will be. It’s a migratory time of year; we have to think that with the concentration of herds there, it will have a bit of an impact. Is it possible that we see less milk volume even during decent times go through cheese plants?

Greg: That’s a good question. The new plants are going to have contracted milk that’s going to come in there. They’re so expensive, they’re going to need to run those plants. But it could pull some from the margins, some of the other plants where they typically buy cheaper spot milk and maybe add a little cheese production to their runs; you might not see that. You could pull back some of that cheese made with opportunities surplus milk; I definitely see that happening.
As far as the three to four balance, that’s really a hard question just because of the cost of these plants, they’re going to try to run those full because they need every drop to go through to pay the expensive price for building these new big plants.

Josh: There are so many variables, and we got to spend some time talking about the demand side of the equation to get a real feel for that. But before we do, another significant topic on the supply side is what’s happening in Europe and Diego. There are a lot of headlines about bluetongue and its impact on the market. I don’t think we represent ourselves as experts on the European milk supply situation, but what do you hear?

Diego Carvallo: We had a fascinating discussion a couple of days ago with Josh, me, and some partners in Europe. Overall, the situation is impacting milk production. That impact is tricky to calculate, but by doing some basic numbers or estimates, we found that it could be around 0.3% of milk production impacted, so it’s a significant number. They are starting to vaccinate the cows, and the effects of winter and cold temperatures should somehow limit that impact. However, some regions like the Netherlands, Belgium, and other countries have been impacted. So, that number is probably higher in those regions, but if you look at the overall volume for the whole continent, for Europe, that’s a rough estimate of how much it’s impacted.

Josh: So, here are a couple of final notes on the supply before we shift to the different products, what the product mix looks like as a result of the milk supply, and then what the demand for those products is. Two other things that have been discussed quite a bit within the TC Jacoby Company that we focus on are the component value in milk. We’ve continued to see very strong solids and butterfat growth, more so butterfat than anything else. How much of that is offsetting some of the inhibitors and growing our milk supply through the number of milking cattle in the herd?
Another variable that we need to consider as it relates to milk production globally is that we are going into the Southern Hemisphere’s heavy milk production season. New Zealand will only continue to ramp up at this moment. And it’s very unclear how the New Zealand to China trade balance will look now. Lately, we’ve at least had better indications of Chinese participation and events like the GDT, but it’s very unclear if China is back, as you’ll hear people talk about it. Are they truly going to step back in and start buying those seasonal volumes coming out of New Zealand?
So, with that, let’s shift in and focus on the US market. I think there are impacts globally right now, but let’s talk about butterfat because butterfat seems to be trending a little differently than the rest of our products. Joe, what’s happening on the butterfat front today?

Joe Maixner: Yeah, thanks, Josh. Butter has been bucking the trends on all the other products all year, and we’re falling into that again recently here, with everything moving higher, and now butter is starting to cool off a little bit counter-seasonally. I think it’s a result of a lot of anticipatory buying for the thought that people would be caught short this time of year, just based on previous history. I think economics are finally coming into play here. We’ve been so high for so long that I think we’ve really just started pushing away any demand that isn’t necessary. Inventories have been built consistently throughout the year, and we’ve continued to see offers in areas that, historically, this time of year, we probably wouldn’t normally see.

The volume is out there. As you mentioned, the butterfat component remains strong even in reduced milk. It’s hard to tell because we’re entering the holiday demand season. We went through a period here a couple of weeks ago when everybody seemed to be back in front of their computers and had a, oh, no moment. I’m not covered, and we saw a little push then. It’s hard to believe we don’t see another slight push before the year ends. We’re not into peak demand season yet.

Josh: Joe, if we think about how butterfat in the US is consumed, ultimately, what’s in the milk that is sold at the retail shelf flows through to the Class II products, get into dips and products like that. There’s a lot of butterfat consumed obviously in cheese, and then the residual left either goes through food service, retail, and packaging or ends up in bulk salted. Where, at this moment, is that pushback on the demand front coming from, or is that unclear?

Joe: I think the fluid side would agree with us. We’re seeing some pushback on the Class II products because I believe many of these producers just don’t want to pay the high cream prices. We’ve seen cream loosen up in the past week or two, but retail numbers have been relatively flat. Food service demand has been down. It feels like things are starting to back up a little bit everywhere.

Josh: So cautious about continued weakness because we still have the holiday season in front of us, but as we look ahead to next year, is there any major trend change or shift that you would expect? The rest of the world remains pretty high on butterfat as well. It seems like fat consumption continues to rise in relation to dairy products. Are any significant shifts expected, or are you concerned about as we look ahead to 2025?

Joe: For 2025, my eyes are staying on where milk ends up because of this additional cheese capacity coming online. The milk, cream, and fat must come out of Class IV. If we do not add a large amount of milk production to compensate for the additional capacity, it would ultimately have to come out of the Class IV market. Now, with that said, farmers always find a way. We can’t discount the American farmer. I think that coming into 2025, we will have pretty ample supplies. It’s maybe the second half of 2025 that I would be more concerned about.

Josh: Before we go on, how about we take a quick break?

Center commercial (with music): If you’re a dairy producer or cooperative looking for a better market for your milk or a food manufacturer hoping to strengthen your dairy procurement or risk management strategy, please contact TC Jacoby and Company. We’ve been building worldwide relationships with all sides of the dairy supply chain for over 75 years. Tap into our expertise for unlimited free consultative support, and we’ll develop a sales or procurement strategy for all your targets. Please visit us online at www.jacoby.com to get started. Thanks for listening to The Milk Check. Back to the show.

Josh: Okay, welcome back. Let’s get right back into this discussion. Following down the product, the cheese market is… We’ve set record high prices in barrels recently, feels genuinely tight and we’re talking about all this cheese capacity coming on and we need to remind everyone that they don’t flip a switch. These plants don’t start producing cheese, which directly influences the CME price. Jake, what’s happening on the cheese side of things today, and what are we paying attention to as we look ahead?

Jacob Menge: We’ve got these elevated prices; as you said, we’ve got records being set. That being said, it seems like the tide’s turning a bit, at least in the short term here. I would imagine these prices have shut off certain export opportunities we might’ve had. I don’t think that’s a bad thing, though. I believe these prices made sense because our cheese prices in this country are based on 30-day-old cheddar cheese. That market specifically has been tight. There’s not a lot out there of cheddar, really, there’s not a lot out there of anything, so as you mentioned, plenty of plants are coming online. I think we need to be talking, though, specifically about our impact on cheddar since that’s what this country’s cheese is priced at.

Realistically, we probably stay tight through the end of the year. Maybe we get down into the lower twos from where we’re at. I think getting below two bucks might be challenging, but as some of these plants come online, as the prices pull back a little bit, and as time goes on, I think there will be more and more downward pressure. I think there’s a really interesting push-pull, though. For one, if it takes longer than we expect and our prices stay elevated, that will eventually flow through to the consumer, and I think the consumer has yet to see these prices. We’ve moved pretty high pretty quickly. If we stay here for a whole quarter, I would imagine, especially as contracts are being made for next year, the consumer will start feeling it, and I think there’s a demand response.

At the same time, off of the back of what Greg was saying as far as milk supply goes, the margins are excellent here, and there’s undoubtedly a heifer supply issue, but if margins stay as good as they are now, you would have to think that by the second half of 2025, something gets done. It’s a common saying. I firmly believe in not betting against the farmer when margins look like this. So there are many different factors on both sides, but I think everything points to prices, probably not being able to go higher from where we’re at, and probably finding some relief.

Josh: At these price levels, we could see some deteriorating demand on the domestic front. What’s the international market like for cheese?

Jake: International has been strong, whereas it is in the low $2 range. Even though that sounds intuitively pretty high, I think we can still get export business done at those levels. I think we probably can’t at the levels we’re at currently. Freight has not been our friend to most of these hotter export markets, and I’m just not an expert on that freight market. Let up. That could open a door for us there, too.

Josh: Continuing to move through the products, we’ve discussed that the milk situation feels slightly tighter in the US. Concerns about milk supply out of Europe ultimately flow through and impact our ability to produce products available for the international market, both from the US side of the pond and the European side. Our most commonly traded product in the global market is our milk powders, specifically nonfat dry milk. Diego, how was that market feeling today, and what are your thoughts as we go into next year? What are you paying attention to?

Diego: The nonfat market and skim have followed fundamentals in the past few months. Something that we believe was somehow disconnected during the previous month. Right now, we are in a new trading range. We think it is between one 30 and one 40 well sustained by several effects. One is that many international customers are still short. They have their buying tendency for this year, or the buying pattern has been very hand-to-mouth, and now that prices have increased, some of those customers are buying even less or out of budget and not buying or stocking as they usually did.

Then, Mexico’s demand has been strong, partly supported by their downed milk production and the higher price for cheese. At the time, the supply side is tight, and that’s also bringing support to the market. I believe that we have found that no trade range is 130 and 140. It does have the potential to move higher, and I think the potential to move lower and break that support of one 30 is not very likely.

I’m closely monitoring New Zealand meal production, which is so far up to a year, has had a great start of a season with numbers close to almost 10% off for a few months. We don’t expect that to maintain for the rest of the year, but we expect a growth of 1 to 3%. We are closely monitoring Mexican milk production and GDT performance by some of the big buyers like China and Southeast Asia. We are tracking the dollar strength versus the Euro and how competitive our product is versus other origins like New Zealand and Europe, which right now we are at a premium, but that’s a premium that is usually confirmed by Mexican buyers who need product and who are in the market and willing to pay a [inaudible 00:15:54].

Josh: So, to complete the product picture, let’s briefly discuss the whey products. Right now, the entire complex is pretty firm, and it feels, at least to me, that we have maybe found a reasonable parking spot for the rest of the year. Sweet whey powder, the only tradable one from a derivative standpoint, comfortably has moved into a 50 to 60-cent trading range, and every time we push the upper part of that range, we see a slight weakness, maybe some resistance. Every time we move much lower, it seems to be met with buyers. I think there’s a fundamental shortage of sweet whey powder in the market right now, but the global demand isn’t very exciting either, so it seems comfortable. It seems balanced for at least the rest of the year. As we look ahead to next year, people should pay attention to the sweet whey powder available on the market.

There is production coming online, but a lot of production has been lost to the higher WPC markets, and those markets continue to be very firm. WPC, for instance, is trading comfortably at the same price that it ended the prior quarter; it feels like it will remain firm through the fourth quarter, and isolates will remain very strong. A lot of consumer trends are being blamed, I guess, for just how tight that market is, but it doesn’t look like it’s going to change anytime soon. That being said, last time we tested some of the price levels we’re seeing in the higher-weight proteins, we saw demand deterioration, and the markets then were quite volatile and on a downward trend.

So I think we’re looking at it like everyone else is. We’re seeing dietary trends that support more protein consumption, but at the same time, we are reaching prices that the consumer has not yet seen and that, historically, consumers will push back at.

It’ll be interesting to see when we get the answer to that question. Likely, it won’t be very clear until the first quarter. So, for now, wrapping up the year relatively stable on the whey price seems like an accurate outlook. Additionally, we are hearing more and more international inquiries for products from all across the whey complex, starting with whey permeate, a carbohydrate-driven product, up to these WPC-AD and 90% isolates. The whey market feels, as mentioned, pretty comfortable wrapping up the rest of the year. And so, if we pull all of this together, what are some of the upside influencers that could push the entire dairy complex higher, and what are some of the things that we think dairy is at risk of underperforming the recent bullish sentiment in the market?

Jake: A potential bullish driver would be these rate drops. Seventeen years to the day, the last time the Fed eased rates. September 18th, ’07, they did it. The economy was not too happy starting about a month after that. So pay attention to the macro economy, but more directly, those rate drops are weakening the US dollar, and we’re seeing the US dollar test a really strong support level, a hundred on the US dollar index. If it breaks below that and that dollar weakens, you’d think that helps buoy that export market.

Josh: We have a pretty big election coming up and not so long here in the U.S. I think I put out in a prior marketing email some economic outlooks on different products and durables based on which party usually wins the election, not an expert in that area. How disruptive do we think the election can be, or at this moment, do we believe that it’s baked into our markets?

Jake: I’m not an expert either, but I’ll just throw in that unless Congress goes the way the president goes, which is unlikely, it seems like probably not all that much will materialize out of the election. Just my two cents.

Josh: And then I think the final variable we started with this, which we probably should end with, is the tug of war on milk production. Several of us have commented about not betting against the farmer. Don’t bet against the farmer. I want to be pretty straightforward, at least in my view, and be curious if others have a different base view; we have a real situation. It’s going to be difficult to grow our herd, and it’s not even just the biological portion of that through the entire supply chain; it’s challenging to continue to grow.

To add a new dairy in the US today underneath the new model is a challenging one. Everything from permitting to acquiring the animals to the financing, although rates might be coming down and some of the equipment that you would need to get perhaps becomes cheaper. That’s not influencing today’s decision making model.

Does anyone have a different view that we will be constrained in the US in our ability to grow milk with the exception of feeding better, having good genetics, and performing better with components in the milk? Is that the base view from our team at the moment?

Greg: Yeah, I think it will be hard for new producers to come online. Many producers want to expand if their permits are in place, so I think you’ll continue to see that trying to expand with good feed and strong components. We’ll make up some more components in the milk. We’ll make up some for maybe a little less milk, but it’ll be hard for those new producers to come online. Many producers still want to grow, and I wouldn’t bet against the farmer, as we’ve mentioned several times.

Josh: We appreciate everyone’s time. I think we covered a lot today. As with anything, these markets are dynamic. They’re changing every day, and we look forward to future podcasts. Thank you, everyone, for listening to The Milk Check.

Outro (with music): We welcome your participation in The Milk Check. If you have comments to share or questions you want answered, email [email protected]. Our theme music is composed and performed by Phil Keaggy. The Milk Check is a production of TC Jacoby and Company.

In today’s episode of The Milk Check, we’re joined by Tim the Dairy Farmer, a farmer, speaker and ag comedian. If you think dairy farming is no laughing matter, then you haven’t met Tim. Tune in for a special episode of the podcast, where Tim and the Jacoby team discuss:

Plus, learn how Tim got into the comedy biz and how he silences the hecklers.

Don’t miss this episode of The Milk Check with Tim the Dairy Farmer.

Intro audio (with music): Welcome to the Milk Check, a TC Jacoby & Co podcast where we share market insights and analysis with dairy farmers in mind.

Ted Jacoby II (T3): Welcome, everybody, to the Milk Check. This month we’ve got a very special episode, we have a special guest, Tim the Dairy Farmer is with us today. Tim is going to ask us what we think is going on with these dairy markets, and we’re going to do our best to give him an answer, and we’ll see where the conversation goes from there. Tim, why don’t you tell us a little bit about yourself?

Tim the Dairy Farmer: I’ve been in the dairy business for 30-something years, taken my licks, started doing standup comedy as Tim the Dairy Farmer about 22 years ago, and I speak at agriculture events. I’m a standup comedian, I’m not a motivational speaker. I’m horrible at marketing myself there, Ted. So basically I’m a dairy farmer that does standup comedy, and they hire me to come to meetings, to wake up after guys like you talk. And here’s another thing, this podcast is called the Milk Check, correct?

T3: Yes.

Tim: All right. This is how you know I’m a dairy farmer, y’all call it the Milk Check, I’m just happy my last milk check had a comma.

T3: Well, that’s why we call it the Milk Check, because we want to talk a little bit about markets and what’s affected dairy farmers’ milk checks. Hopefully most dairy farmers do have a comma right now because prices are halfway decent. But before we go to markets, Tim, I’ve got to ask, tell me about one of the most interesting agricultural events that you participated in. I’d love to hear a good story.

Tim: Oh, man. I’ve got so many. It’s not the good ones that you remember, it’s the horrible ones. There’s three shows, there’s the one you planned to do, the one you do, and the one you wish on the drive home that you would have done. I’ve had all kinds of stuff go wrong. No, for the most part they’re always fun.

T3: All right.

Josh White: So Tim, how often are you on the farm versus having to hit the road for comedy?

Tim: I probably go off and do 30, 35 shows a year. Normally I fly out the night before and I’m back the day after. My brother’s always been my biggest supporter, he covers while I’m gone. I couldn’t have made it this far doing comedy without my brother’s support, because we’re partners in the dairy and he’s always covered for me when I’m gone.

T3: Where is the dairy located, Tim?

Tim: Central Florida. We’re actually over between Fort Myers and Tampa, where all the elderly people go to pass away, you take a right and that’s where we’re at.

T3: When that hurricane came through Fort Myers last year, that affect you guys at all?

Tim: No, it affected a few of my buddies. Nobody lost any cows, but barns were just crinkled up like aluminum foil and tossed around. I think over the years I’ve lost three barns to hurricanes.

T3: Oh, really?

Tim: Yeah. They tell you how it’s rated for 80 mile an hour or whatever, and then when the tornado or the hurricane comes through it wads it up like a piece of paper and chucks it 100 yards. You’re like, “Well, that wasn’t rated right.” Anyway. Go ahead, this is your podcast.

T3: Tim, if you have a question to get the market discussion started, why don’t you go ahead and shoot?

Tim: I’m just wondering what things are doing. All my buddies, my relatives are all in the commercial side of it. And don’t lie to me, if it’s going to hurt, just rip the Band-Aid off.

T3: Well, I’ll tell you what we’re having right now is we’re having an internal discussion, my brother Gus is convinced that all this breeding the beef that’s going on is going to create a heifer shortage of such magnitude that we’re going to have $30 milk by the end of the year. Gus, would you agree with that?

Gus Jacoby: Not by the end of this year, although I think it is plausible. I would say that within the next year, and maybe it’s 12 to 14 months, we’re going to be in for it. I think the contraction on cows is going to be fairly significant enough, and then any uptick in demand will send the milk price spiraling upward, and $30 milk is certainly a plausible scenario under those conditions.

T3: And Josh, what would you say is happening on the demand side? Are we able to sell any nonfat right now?

Josh White: Internationally it’s not real great, Ted. It’s a broken record, same thing every time. We’ve come off of tough times before for the dairymen, margins looked a little bit better now, but the one black eye in the whole product market remains to be the milk powders. And every day we get maybe some optimism or some hope or something that looks like tomorrow could turn around, but it isn’t happening yet.

T3: Our friends in Asia, any indication yet that China’s coming back and is going to start buying a little bit more powdered than they have been?

Josh: No.

T3: I think everybody’s in agreement on that. I know the two blogs that I read this morning, including BCA and Ross Rant, both of them have China in the toilet, and not getting out any time soon. They say India is where it’s going to be, that’s going to be the next hotspot. Not necessarily as a market for dairy products, the overall economy.

Gus: Yeah. Economically I believe it. When it comes to dairy though, India is stable when it comes to milk. They rarely are major importers of dairy.

T2: I think Gus is right, but the economy is the other side of that coin.

T3: So I was listening to an economist last week who basically said it looks like we’re going to go into a very mild recession. The asterisk on his comment was everybody’s hoping that interest rates come down. Interest rates are not coming down five points.

T2: They’re going to do a quarter on general principles.

T3: Right. They’re going to come down from the 6% to 7% they are right now to maybe 5%. The next thing he said was that we may spend most of 2025 there, because then we’re going right back up, because they are going to achieve a soft landing, the recession we will probably have will be mild, and there’s still a lot of pent-up demand and it’s just going to accelerate right out of it, and then we’re going to be right back where we were. If you think about that from a dairy perspective, everybody’s breeding the beef, Tim’s breeding the beef. Tim, are your cousins breeding the beef?

Tim: Oh, yeah. This is even a year or so ago, I’m getting $2.25 a pound for that beef calf, whereas I’d only get, what, $.96, $.98 cents a pound for the milk? I would take milk out of my tank and feed black calves, it was better for me to just put it in a calf and raise the calf. So yeah, there’s a lot of guys doing it. So let me ask you guys this, because I don’t follow the market like you do, and I’ve been in this business for 30-something years. So you’re telling me now that powered milk is what sets the market these days? Is that what you’re saying?

T3: The cheese price is probably the biggest factor setting the market.

Tim: Okay.

T3: You’ve got cheese that has a big influence, butter has a big influence, but you’ve still got to do something with the powder as well.

Tim: It amazes me, because back in the day you’d get a little bump in money if you had a higher butter fat, they pay you on quality of course, and then the stuff that they’re making the powder at, we all would either feed that back to the cows or put in on the ground. And now, all of a sudden somebody took a trash product and it’s one of the … I’m just shooting from the hip, but I’ve been in it long enough to know that that used to go down the drain. It kind of amazes me.

Gus: Tim, we have a pretty unique set of circumstances in our industry now. So the last milk production report we can track at about 1%, we look at certain areas of the country that are starting to lose that milk, such as the Southwest, and in the same time as they lose that milk they have cheese plants being built in those regions, and fairly significant ones. So as you analyze that, if the milk’s not growing that means that milk’s got to come out of somewhere to fill those plants, so obviously it’s going to come out of class four. We’ve seen it come out of class four a little bit just on the current contraction, but as we move forward and these cheese plants come online and start building up their processing capacity, I think that’s where we start to wonder what this powder market is really going to do and just how tight it might get.

Tim: I’ve been in Florida all my life milking cows, and we’ve always been class one. Everybody always wanted to come into the Florida market, so we had Texas, Maryland, Virginia, they all wanted to come in. And now, it’s no secret, Walmart’s getting ready to build a big facility there in I think Macon, Georgia. The guys here in Florida, they’re a little worried because it could really crush the Florida market.

Gus: I think that’s a legitimate concern, as Walmart starts to make their own bottled milk, that’s got to come out of some of the guys that are co-packing that for Walmart right now down there.

Tim: Right.

Gus: Then you add in the fact that if you lose those facilities, now that milk’s going in there, and I believe most of the milk that’s intended for the new Walmart facility is going to be coming from cows on farms that intend to expand quite a bit.

Tim: Yeah. Even so, it opens up the ability for Walmart to buy milk from other states and ship it into Florida cheaper than what we’re doing.

Gus: I don’t know if there’s enough transportation credits and zone differentials to make that still work, with the freight, the way it costs these days. But there’s always that time of the year when you have to do it, in that fall timeframe it always gets tight enough down there, where if they want to get enough milk to fill the orders, you’ve got to bring it from the Mideast or somewhere up north.

Tim: I have another question.

T3: Just yell it out.

Gus:  I think you’ve got to yell it out.

Tim: Okay. So you guys are predicting $30 milk.

T3: Gus. Wait, Tim, Gus is predicting $30 milk.

Gus: But that’s, just so you know, I have an indefinite amount of time before we get there.

Tim: Okay. So now you’re a real consultant. Do you see heifer prices going through the roof then? Because they’re not too bad right now.

Gus: I can’t see how they wouldn’t. The beef market really is going to drive that, and it’s my understanding that the beef market doesn’t look to come down anytime soon, and yet the … Of any credible significance, I should say. And yet the dairy heifer supply continues to shorten. So under that scenario, I would say that means that certainly as milk price goes up, plenty of reason for the replacement heifers for dairy to continue to go up.

T3: And I’ll echo that. Tim, I believe dairy heifer prices are poised at some point in the next two years to go through the roof. Unless markets don’t work anymore, the market math says at some point we’re going to be really, really short of dairy heifers. The only other possibility is we don’t kill cows and we end up with 17-year-old cows.

T2:  Tim, let me ask you a question. At what price, at what milk price would you stop breeding for black calves?

Tim: I don’t know, I’ve never put a pencil to that. But right now selling raw, no, I’m going to keep selling it raw. It’s got a pet food label. I think every farm is different, because who’s got a mortgage? Who had rich parents? Who’s expanding? I think what’s going to happen, as soon as you say $30 milk, and trust me, I was one of them at one time, when dairy farmers start hearing high prices they’re going to mortgage everything to the hilt and they’re going to expand overnight, and then there goes your price because you’re going to be swamped again. I’m just telling you my opinion on what I’ve seen, and it’s tainted, but dairy farmers are, “Oh, god. We’re going to get high milk, let’s expand, let’s mortgage the wife’s car too and see what we can do.”

Gus: Tim, I think 100%, I get what you’re saying. I think the only caveat is the fact that we haven’t had this short of a replacement heifer supply for dairy in over a quarter of a century.

Tim: Yeah. I think this is something that we’ve never encountered before.

Gus:  And it doesn’t look like it’s going to end soon either. Right now the decisions that dairymen are making are the same as what they were a year ago, even under these circumstances, because there’s not enough there to influence them yet to change their decision process.

Tim: Yeah. Everybody’s a little gun shy because you don’t know what the economy’s going to do.

Gus: Yep.

Josh: So Tim, our job in the industry is to think about and pay attention to the things that Tim the Dairy Farmer, who is dairy farming and a comedian, doesn’t have time to pay attention to. And I can tell you there’s a lot of weird stuff. I sat on a webinar a week ago about Ozempic and how that’s driving dairy prices, and I guarantee that’s not something that’s probably on your radar. Ozempic, the weight loss drug, and how that’s driving whey protein consumption. Earlier in the conversation you mentioned the stuff we used to poor down the drain, and it’s driving whey prices right now to the point to where people in the US and even in Europe are talking about how the whey component price is as important as the cheese price.

Tim: That’s amazing. Maybe get some of this nut milk stuff out of the market.

Gus: Don’t get us started on-

T3:  Don’t get us started on nut milk. And by the way, nut milk is not milk.

Tim: Well, I’ve got a joke about soy milk that I tell. When I do clubs and I say, “How many of y’all are drinking soy milk?” There will be a bunch of people to raise their hand. I’ll be like, “Listen, I don’t know if you know this but soy milk is made from a soy bean, which is the same bean from which they make ethanol and biodiesel fuel, and I tried soy milk but every time I farted it would smell like WD-40. But at least the toilet seat doesn’t squeak anymore, so that’s the good side.”

T3: That’s good.

Tim: Hey, can you tell me where all my check money goes to for dairy?

Gus: No.

T3: Did you just answer that by saying, “No?”

Tim: I’m going to go down that rabbit hole with you guys and see what we can figure out. I don’t know the answer either. Oh, well.

T3: I will say this, Tim, some of that checkoff money does go to fund things like the US Dairy Export Council. I’ll defend the US Dairy Export Council because dairy exports have grown over the last 30 years from roughly 3% of our dairy production to almost 20%, and that has really been a big factor in driving increased milk production in this country. So some of the checkoff dollars, I think rightfully so, we need to question what it’s being used for, but the money that’s been given to the US Dairy Export Council has definitely been well-used.

Tim: Good recover there, Ted. Somebody’s getting invited to the meeting in Chicago, I guess.

T3: If you’re a dairy producer or a cooperative looking for a better market for your milk, or you’re a food manufacturer hoping to strengthen your dairy procurement or risk management strategy, please reach out to TC Jacoby & Co. We’ve been building worldwide relationships with all sides of the dairy supply chain for over 75 years. Tap into our expertise for unlimited free consultant support and we’ll develop a sales or procurement strategy that hits all of your targets. Please visit us online at www.Jacoby.com to get started. Thanks for listening to the Milk Check, back to the show.

We’re talking to Tim the Dairy Farmer today. Tim is an ag comedian, he owns a dairy farm in Florida, used to sell his milk to SMI and he’s currently selling grass-fed milk and is a standup comedian.

T2:  Well, good luck.

Tim: Thank you. So $30 milk, high heifer prices.

T3: Yeah. But Tim, I’m going to say this, everybody is breeding the beef, what is going to happen if they have to pay $7000 for a freshening heifer in order to rotate their herd?

Gus: That’s right.

Tim: They’re going to end up in the beef business, and then you’re going to have a shortage of milk, and then the prices are going to go higher.

Gus: Tim, I’ve been trying to tell my brother about that simple fact that you just mentioned for quite some time. I think you just got him to maybe believe it.

Tim:  I’m there, man. I don’t want you to think I’m some weirdo, but I remember I was at a co-op meeting here in Florida, this is 20 years ago, the dairy business used to be a circle. You’d have a couple bad years and it’d come back around, and then it just got to where it kept staying on the bottom, staying on the bottom. One guy brought up the idea, he’s like, “Well, if we’d all just dump our milk for two days, then there wouldn’t be so much milk.” And I was like, “Hey, that would work, but there’s going to be that one dairy farmer that ain’t going to dump his milk.” I’m not a market guy, y’all are the smart guys, I’m just out here telling jokes. That’s what I do. Well, what other else is going on in the market? Commodities going to go up? Feed prices going to go through the roof with this $30 milk, or what?

Gus: Well, it’s our understanding that the harvest is expected to be pretty good this year, and feed inputs would actually go down. Which in turn, if we can’t get the cows or can’t expand the herd or at least expand milk production to any degree, that means that the farm economics for what we have at least would be very, very strong over the next year or so. So we’re thinking the dairyman’s about to have some pretty good times, except that they just can’t expand like you insinuated earlier. If you can’t get ahold of the cows, what are you going to do? Even though you have a strong ambition to grow your herd.

Tim: Milk goats.

Gus: Yeah.

T3: I don’t think you’re going to be able to get 80 pounds of milk a day out of a goat.

Tim:  I ain’t milking no goat. I did the Virginia Holstein Association, their 100th anniversary years ago, and you probably heard this joke, but they had Holstein people there, but then they also had Guernsey people there and Jersey people there, and one guy was all proud of his Jersey. I said, “You know what they say about people that milk Jerseys? They’re too proud to milk a goat.” Of course, the Guernsey guys, I can’t think of her name, but she was a famous painter that paints cows, I’ve seen her stuff in museums and in Hoard’s Dairyman and whatnot, they were auctioning off this painting that she had, of course it had all the top Holstein cows from Select Sires and whatnot in this picture, and they had me trying to promote the artwork, and I said, “Y’all don’t know this but there’s actually two Guernseys in this picture. You can’t see it from where you’re sitting, but if you go out behind this red barn that’s painted here they’re on the dead pile. That’s where the Guernseys are at.”

T3:  What’s interesting, Tim, is we’ve had a lot more people milk Jerseys today than did 20 years ago. Maybe not in Florida, but in just about every other part of the country, because they give higher protein and higher butter fat. The cheese plants would rather have the Jersey milk than the Holstein milk.

Tim: Half my herd are Jersey cross.

Josh: So fortunately, our audience are people that get most of these jokes, but when you’re performing are you performing for agricultural people mostly? Or do you go around and actually perform in urban areas?

Tim: Oh, I do it all. When I do a club I have to dumb it down a little bit, explain it a little more. I don’t just talk about cows, I talk about family reunions and yard sales, whatever. Funny’s funny, I can talk to any group. I mainly specialize at agriculture companies or agriculture affiliate companies. I have noticed when I run into some of these ag organizations, it seems like some of these ag things you go to, they don’t want to laugh. Everything’s too serious. And I’m like, “You’re in the dairy business, you’ve got to laugh otherwise you’re going to be in the fetal position crying some days.”

I remember years ago they wanted me to put on a comedy show at the World Dairy Expo, the person that was in charge, he said that the dairy business was no laughing matter. And I was like, “Dude, you are so wrong.” Life can get so bad that you need to laugh, it’s good for you. That’s what I do is just help people forget about their problems for an hour.

T3: I’ll tell you, dairy markets, same thing. Everybody sees markets going up, so everybody does something just like the dairy farmers, they expand. And then they’re like, “Finally, I’ve got all the milk I need or I have all the cheese I need.” Well, guess what? They show up at the door ready to sell all that cheese, at the same time every one of their neighbors shows up at the door ready to sell their cheese, and what does the market do?

Tim: Crashes. And that’s the good thing about the dairy industry is you can milk the cow today and you’re not going to get a check for 45 days, and you don’t know what’s going to change between now and then, and you have really no idea what you’re going to get paid for it. Do you guys think, just like the hogs or chickens or anything, do you think you’re going to get to where dairy’s pretty much just contract?

T3: You mean at a flat price?

Tim: Yeah. I’d be milking cows for some big cheese conglomerate and I’m just getting paid to milk the cows, but I’m getting a fixed price. Do you think the dairy industry will ever go that way?

T3: Not as long as we have the Federal Orders system.

Tim: All right.

Ted: I’ll take it a step further, Tim. I think that’s a great question. I think the one thing that makes dairy different than whether you’re raising pigs or chickens or beef, or you’re growing crops, is those cows will give milk 365 days a year. Prices go up, they’re going to give the milk. Prices go down, they’re going to give the milk. And so you have this disconnect that always exists between how much supply is coming at you and what’s going on on the demand side. And if demand goes up it will be, as you said, 45 days, 45 days before that milk check goes up enough to give the signal to the dairy farmer to produce more milk. And of course, what does the dairy farmer need to do? They’re probably going to have to build a new barn, they’re going to have to buy another heifer, they’re going to have to maybe feed their cows a little bit different.

By the time that milk shows up it’s a good six months later minimum, because everybody’s milk’s showing up and now there’s too much milk and the market’s going back down. So this cycle of chasing your tail is ingrained into the market, and I think it will always be really difficult for a large percentage of the dairy industry to flat price their milk, because you get too much consistency in this-

Tim: Right. On the flip side, I’ve seen guys that go bankrupt damn near overnight because it’s 45 days before they figure out that they just lost their butt. It’s a fickle industry, I still like it.

T3: You like the adventure.

Tim:  I like the adventure, yes. I’ve done a lot of shows at casinos, people have their corporate events at a casino, and they’re like, “Aren’t you going to gamble?” I’m like, “Dude, I gamble every day. Why do I want to go down there and lose more money?” Hey, speaking of which, I don’t know if you guys follow farm equipment much, but there’s a new tractor out, it doesn’t have a seat or a steering wheel, it’s not one of those autonomous ones, it’s actually made for that lost his ass and doesn’t know where to turn.

T3: Well, Tristan, you’ve been a little bit quiet. Tim, Tristan is our youngest member of our trading team. Do you have any questions for Tim?

Tristan: I was wondering what do you find most rewarding about dairy farming and making people laugh?

Tim: I don’t know, I just like cows. I’ve always enjoyed cows. I would rather be around cows than people a lot of times. Sometimes it’s just the challenge. I guess I like stress. As far as making people laugh, I’m not going to lie to you, I get an adrenaline rush from it. But I enjoy it, it’s fun, but it’s also a chance to get people to forget about things in their life that they’re dealing with, physical, mental, financial, whatever, just a chance where they forget about those problems for a little while.

Tristan: When you’re writing your jokes, where do you generally get your material from? Is it on the farm?

Tim: A lot of on the farm, I get a lot of people come up to me after a show and tell me a story. Everyday life, it comes from everywhere.

T3: Is it something that’s just intuitive, or is there actually a process?

Tim: Listen, I’m 55, I’ve got the mentality of a 12-year-old. It might just come naturally to me that way. Then there’s sometimes there’s a joke where you have to try it several times to get the timing right, the ending right. Some jokes you’re like, “That’s a zinger.” But then other ones it might take you 10 times trying it out before you finally get it right.

T3: How did you get to the point where the thought went through your head, “I might actually be a halfway decent comedian?”

Tim: I grew up, I always liked comedy. My parents on the way to church and whatnot, we were always listening to Jerry Clower, and then as I got older, of course good Baptist kid, I had Eddie Murphy, I had Pryor, I had all that good Christian boy material there. My mom was dying of cancer, I’d stop and see her at the house, I’d stop by on my way to a farm, and she’s like, “Just tell me a joke. Tell me a joke.” So I’d tell her a joke and she encouraged me. Before she died she’s like, “Listen, there’s more to life than just milking cows, and I know you’ve always liked this standup thing, I want you to try it.” She passed away, about a month after her passing I actually went to a comedy club where they had a “How To Do Standup” class. So took this class, I was horrible.

Tristan: Tim, what is the funniest thing that’s ever happened on your farm? Or one of the funniest things.

Tim: Now, this is how I actually became Tim the Dairy Farmer I think, because I used to just go under my name Tim Moffett, but I always would tell some stories about the farm. A buddy of mine had a farm down the road and his employees planted some marijuana plants in a wooded area on the other side of the fence, and these heifers had got in there and ate all the buds and the tops off these plants. These cows were stoned out of their mind. It was the funniest thing I’d ever seen I think. So then I wrote the joke about “My cows ate a field of marijuana, we had to sell it as organic though. Because it was really high in … Hell, it was just high.”

T3: Is that when you got into grass-fed dairy?

Tim: Yeah.

Tristan: This one’s a fun question, but if you could have any animal, real or fictional, as part of your farm, what would it be and why?

Tim:  Fainting goats.

Tristan: Fainting goats?

Tim: Fainting goats, they’re hilarious. They have a defense mechanism, they stiffen up and they just fall over. But I would love to have fainting goats on the farm.

Tristan: Would you milk them?

Tim: No, I’d just laugh my ass off at them. They’re fun. I don’t know, $30 milk, I might start milking them.

T3: Fainting goats eating the marijuana.

Tim: I could have tours.

Tristan: Could you tell us about your background in dairy farming? How’d you get started?

Tim: I lost a bet is how I got started. No. My brother and I grew up in the heifer replacement business, our dad was in the dairy heifer replacement, and my brother and I had both figured out when we were pretty young that we couldn’t work with our dad. I love my dad to death, have all the respect in the world for him, but sometimes working with family is tough. So my brother and I actually started out, we borrowed some money from my uncle, we bought 100 cows, a guy that wanted to go out of business, we rented the crappiest dairy in the state of Florida. I think it was an old stanchion barn, and that’s how we got started. 100 cows and a flat barn, and then we were milking … I think we were milking 400 before we ever hired our first employee. The most we ever got up to was about 750.

T3: How long ago was that, Tim?

Tim: 1992?

T3: 750 cows in 1992 is a pretty big farm.

Tim: Yeah. 18 years ago we downsized, because it seemed like all my money was going to feed companies and everybody but us. I was bringing in a lot of money, I just wasn’t keeping any of it. We were not doing well, so we decided to go to all grass, and when we did that we downsized to what our farm and property could sustain. Right now I’m cutting grass silage, everybody’s putting up corn silage right now, we’re bagging grass. We went to all grass and we just started milking them once a day.

T3: Oh, wow. Okay.

Tim: That sounds sacrilegious to a lot of guys, but when I quit feeding the grain I didn’t have the production that I used to have, but I have no overhead now. I can literally take a cow to 11 pounds and still make money on her right now. It’s not what you make, it’s what you keep. That’s what we did for us, we’ve only milked our cows once a day for the last 15 years. I know people milk them four times a day, and you’ll wear a cow out in about four years. You talked about a cow with a 17-year lactation, I’ve got several of those right now. I have a geriatric herd is what I’m telling you. They should be getting Social Security checks.

T3: Tim, I’ve got a question for you. You’ve got to settle a bet between my brother and I.

Tim: Okay.

T3: The average number of lactations for a dairy cow in this country is what, two, two and a half?

Tim: Something like that.

T3: So one of the things we know is going to happen as everybody’s breeding the beef is people are going to have to keep cows longer if they want to produce milk. So you’re going to have that third lactation, that fourth lactation, that fifth lactation. In your experience, if you’ve got 17-year-old cows, let’s say that cow is on his fifth or sixth lactation, are they just as healthy as the young cow on his second lactation?

Tim: It all depends on the cow. But yeah, they’re just as healthy. Listen, what I do is so against the grain, people think I’m smoking weed. When I quit feeding such a high-powered grain, my herd health problems went away. I don’t have the blown out feet, I don’t have the retained afterbirth. My Jerseys, especially older Jerseys, they will still get milk fever, that’s just part of their genetics. I’ve got cows that are 13, 14 lactation that are just as strong as my heifers. They might move a little slower, but they give just as much milk as they always have. That’s me. I don’t know if I answered your question or not, but I hope we convinced your brother.

Gus: I’m not so sure, not so sure.

Tim: Well, what’s your opinion, smart guy?

Gus: I look at this more from a statistical analysis, I guess. This heifer shortage has been going on for a little while now, and we have slaughtered much less cows over the last year, a little bit more now, and my perspective is that we’re going to obviously slowly age the herd as a whole, and at some point we’re going to start incurring more illness or more health related issues, and when that happens we can’t avoid the culling, right? It’s just going to start cropping up again. What I struggle with when I discuss this with Ted is that when that threshold occurs, whenever that is, I think it’s going to hit us fairly heavy, and I don’t think that we’re going to have an ability to slaughter less before this heifer issue is resolved. So therefore, at some point I think we contract the herd size at a more significant tick than what we have already, just because we have to.

Tim: I think with high cull prices guys are getting rid of cows that they should have been getting rid of, so naturally when you cull part of your herd the rest of the herd, they’re not fighting for bunk space, they’re not fighting for free stall space. The help actually sees a sick cow now because there might be less cows and I think naturally the cows that are still there are going to be healthier. That’s just my opinion. I’m a cow guy, not a numbers guy.

Gus: You can’t argue with it.

Tim: But then again, you know what opinions are.

T3: All right, before we wrap it up, Tristan, do you have any more questions?

Tristan: Yes. Do you get a lot of hecklers at your shows?

Tim: I don’t get a lot of hecklers. There’s always at least one. People ask me, “Do you go after people in the crowd?” And I’m like, “No, I do not.” There’s always somebody in the audience, I don’t know why they do it, but they decide they want to be part of the show and they’ll say something stupid, and I’ll be nice, and then they’ll say something stupid again and then I’ll embarrass the hell out of them. It just happens. Normally that part of the evening, after these corporate events they’ve sat around and had a few drinks, and they’re like, “Well, I’m funnier than he is, and he’s going to hear about it.” Okay. But no, I don’t get a lot of hecklers, I get drunk people.

Gus: Yeah, I can see that.

T3: Well, all right, it’s time for us to wrap this up. Tim?

Tim: Yes.

T3: If our listeners want to know where to find you and find out where your next show is, where do they go?

Tim: Just to go TimTheDairyFarmer.com, you can find out everything you need to about me. I have social media, but I post just enough to let people know I’m still alive. Go to TimTheDairyFarmer.com, I’ve got a special on YouTube called Milking It, I’ve got a couple albums out produced by Larry the Cable Guy’s Git-R-Done Records. One of them is called Farm Raised, the other one’s called Corncobs & Chaos. Just go to TimTheDairyFarmer.com.

T3: Tim, we really appreciate you joining us today. Thank you very much.

Tim: I had fun. Thank you, guys.

Tristan: Thank you.

Gus: … appreciate it, thank you.

Exit Audio (with music): We welcome your participation in The Milk Check. If you have comments to share or questions you want answered, email [email protected]. Our theme music is composed and performed by Phil Keagy. The Milk Check is a production of TC Jacoby & Co.

Today, we share Part 2 of a special two-part episode celebrating TC Jacoby & Co’s 75th anniversary. We’ll talk about the milk industry from the ’90s to the dairy world of the future. Join Ted Jacoby II, Gus Jacoby, and Ted Jacoby III for the conclusion of our special 2-part episode as we discuss:

We love the dairy industry and look forward to what the future will bring. So, raise your glass of milk, and let’s celebrate TC Jacoby’s 75 wonderful years in the U.S. dairy industry.

Intro audio (with music): Welcome to the Milk Check, a TC Jacoby & Co podcast where we share market insights and analysis with dairy farmers in mind.

Ted Jacoby III (T3): Hello, everyone, and welcome to The Milk Check. Today, we have a special edition of our monthly podcast because this year, 2024, TC Jacoby & Co celebrates 75 years of serving the dairy industry. In honor of this special anniversary, we are publishing a two-episode edition where, in the first part, my father, my brother Gus, and I discuss and – in my father’s case – tell tales of the first 50 years of our history. In part two, we share the more recent 25 years as well as our thoughts on what the future of the industry may hold. Welcome to part two.

There are a lot of other things that were going on in the 90s. I mean, that all started in the 90s. We started our office in Mexico in the 90s. When I came to work for TC Jacoby & Co. in 1996, I spent about four or five months in St. Louis, and then I moved down to Mexico to help us start that office. That was quite the experience, living for a year in Mexico. Ironically, trying to move cheese to Mexico led me back to the States, and starting to sell it in the States. Eventually, I worked with risk management.

At the time, we were moving nonfat dry milk into Mexico. We had a company in Mexico then, so we were TC Jacoby & Co in the U.S. selling to TC Jacoby & Co in Mexico. We were warehousing the product in a warehouse in Mexico, selling whey powder, nonfat dry milk, and various other powders to multiple distributors in the area, but then also moving a little bit of cheese. I had one of my suppliers, the cheddar cheese, cancel on me, and so I was calling around looking for cheddar cheese, and another supplier said, “Not only do I have a load of cheddar for you to ship to Mexico, but I also have about 50 other loads of cheese. You should call the guy who canceled on you and see if he needs any extra.”

Next thing I know, I’m moving more cheese back and forth in the U.S. than I’m moving to Mexico. And that was when I called you and said, “Dad, I think I’m going to move back to the States, and I’m going to start up a cheese desk.” That was in 1997, and that’s how we started trading cheese.

We went through the 50s, 60s, 70s, and 80s, and just about everything you, Uncle Bill, and Uncle Tom moved was mainly fluid. Then, in the 90s, we started moving powder. Bill, I think in the 80s, had begun moving powder and butter in the U.S.

Ted Jacoby II (T2): Billy used to move a lot of cream from California to the Midwest.

Gus Jacoby: Well, remember that was a big time for us because his development of California and the cost to move fluid product at that time was economically feasible in making cream and condensed products supplied by the California Central Valley and delivered on an annualized contractual basis to places as far as the upper Midwest and even into the Mideastern U.S. at time. Understanding the CDFA and the arbitrage between that and the Federal Orders was another thing we took advantage of for a few decades. So that was a big and successful time for us from a trading standpoint of fluid products.

T3: And then he was moving non-fat to many of the mozzarella guys in the Midwest when the mozzarella industry was in its infancy; that was when it was just the beginning of the pizza industry blowing up and becoming what it is today. These mozzarella manufacturers could extend their yields because of low moisture parts; skim mozzarella means less butter fat relative to protein. So, adding non-fat dry milk to the vat could increase the plant’s throughput. And then, on the butter side, he would ship bulk butter out of California and out of the Northwest into the Midwest. These butter manufacturers in the Midwest would microfix that bulk butter into quarters, one-pound solids, and even whipped butter. That was when we got into the dry side of the product, which was probably Bill, who started doing it more than anything else in the ‘80s.

In the 1990s, we expanded into Mexico, and that was when we started doing things internationally. In the late 1990s, I started trading cheese and shipping it to many converters.

Then, it was probably right around 1999 or 2000, right in there, when these converters started asking me if I could figure out a way to stabilize their cheese price because the restaurant chains they were selling the cheese to wanted to commit to one price for the year rather than have this cheese market move all over on them. That’s when we started our risk management department and we grew from there.

Meanwhile, in the early 90s, a 2,000-head dairy farm was a massive operation. By 2005, 2006, and 2007, these farms had grown to 5,000 or 8,000 heads.

Gus: Nowadays, 10,000, and I’ve heard permits of 25,000. Yep. Yeah, they’re getting much larger.

Our aptitude on the international scene since 95 grew quite a bit. We figured out loopholes. We moved UF milk under different tariff codes to Canada for a while. We added the Class VI and a Class VII pricing mechanism for handling their surplus solids to compete with what surplus we were putting up there, as well as our ability to develop markets in Southeast Asia and the Middle East – all over the last 20 years. We’ve come a long way.

T3: Yeah, we exported 3% of our milk solids in 1995, and this year, there’s an outside chance we export 20% of our milk solids, so that’s a lot of milk that now leaves the U.S. border and moves internationally.

Gus: You can make a case, Ted, considering the issues with Europe and a lack of development of other milk sheds worldwide, that the U.S. will probably increase that number from a trend standpoint over time. We have some hurdles at the moment with heifer supplies and so on, but I still think the opportunity will grow.

T3: Well, I’ll tell you, I was talking to someone just yesterday, and I was telling him how one of our biggest frustrations continues to be as a cheese exporter that we’re not in the market 12 months out of the year, that sometimes we have the best price. Sometimes Europe has the best price, sometimes Oceania has the best price, and our inability to consistently be the best price in the market makes it difficult to be a consistent exporter.

Their belief is that within the next five years, the U.S. will emerge as the dominant exporter of cheese in the world, and that we will be in that market 12 months a year because we’ll be in a position to have the most competitive price every day, every month of the year if we want it.

Gus: Yeah. I’m of the impression – I don’t know if it’s five years or six or seven – that that notion is accurate. I can’t see how that won’t materialize unless there’s some developing milk shed that we’re not aware of that will have significant supplies to export here at some point in the near term.

T3: No, I think you’re right.

T2: I think you’re right, too. I think you’ve got two years on the futures market. There’s no reason why. If you’ve got any liquidity, you can’t book cheese for at least a year or more at a flat price and hedge it out.

Speaker 2: I would agree.

Speaker 3: I don’t think you have the liquidity to do that right now, but I think it’s coming, too.

Speaker 2: I think it is. I believe that as the exports grow, the market will continue to develop, and even though it’s bound not just by export markets but domestic markets as well, stability becomes more and more critical over time.

Center Commercial: If you’re a dairy producer or a cooperative looking for a better market for your milk, or you’re a food manufacturer hoping to strengthen your dairy procurement or risk management strategy, please reach out to TC Jacoby & Co. We’ve been building worldwide relationships with all sides of the dairy supply chain for over 75 years. Tap into our expertise for unlimited free consultive support, and we’ll develop a sales or procurement strategy that meets all your targets. Please visit us online at www.jacoby.com to get started. Thanks for listening to The Milk Check. Back to the show.

T3: And that brings us to an exciting part of the conversation. We started talking about the 50s and 60s into the 70s and 80s, a lot of changes in the 90s into the early 2000s when the risk management markets continued to evolve. Our ability to export products continued to grow through the 2000s and the 2010s, and now we’re in mid-2024.

We talked a bit about some things we see as we look forward 10, 15, and 20 years and what the industry might be like at the 100th anniversary of TC Jacoby & Co. We just mentioned that we’re probably going to be in the export market 12 months a year, exporting cheese every day of the year versus in and out of the market like we are today. Our risk management tools will probably increase in liquidity as we use them more and more. What are some of the other things that Gus, Dad, you see?

Gus: We’ve discussed this already, touched on it, and even told a story about vertical integration concerning our partners in Select and their successes. Still, I don’t see that going away. I think vertical integration from larger producers is going to continue. We sat here and touched on the fact that we have heard in the industry that some folks have permits for 20, 25,000 cows. I don’t think many people would’ve thought that was a reasonable forecast just a decade and a half ago, but now it’s coming to fruition.

And with that kind of milk, you will certainly have the economies of scale to run successful milk processing plants. And then you add that you’ve already mentioned a demand for dairy solids in areas outside of the U.S. I think vertical integration will play a big part in our future. I think we’re going to see that more and more and more. We already talked about a group of larger producers, whether it be Fairlife, whether it be Hillmar, whether it be some other ventures that we’ve heard of more recently that have come of a, I can’t see why we’re not going to see that going forward from other larger guys. I firmly believe that this industry will be that much more than it is now, so ten years from now, and we’ve already seen quite a bit in the last 20 years.

T3: I agree with you Gus. I think vertical integration will continue to be a more significant part of our industry.

But I also believe that we’ll see this industry evolve in both directions. Vertical integration will probably continue to grow, especially at the commodity level. I think specialty dairy products, whether specialty cheese or other specialty dairy products at a smaller level, will continue to be one of our industry’s most critical growth spots.

I liken it to the craft beer industry or even the wine industry, where for every beer that becomes mass produced like a Bush and a Budweiser or a Miller, you’re going to get one or two more craft brewers that pop up that like to make it on a small scale. The same is true in cheese in the specialty cheese industry.

You’ve got different custom butter businesses, specialty butter industries, creams, and yogurts; all these other industries are getting more and more customized with unique products for the marketplace. And I think that will also continue to play a significant role in our industry.

Gus: I agree, with the transformation of marketing, social media, and the number of niche retail products we see succeeding today. I think dairy’s undoubtedly going to have that same maturation, right? They already have it to a degree, but I think there’s more potential for more, and we need it. We need that creativity. We need more niche products in our industry.

Fairlife’s success, for example, has been great for our industry as an avenue to show people that you can change packaging, find that health and wellness feature, and isolate protein. You can create a product that people will embrace, appreciate, and purchase. I would see more of those things happening as we move forward. For

T3: Sure. I agree. I see another thing happening as this industry continues to evolve. We haven’t spent much time talking about everything that’s happened in the whey industry in the last 30 years, and that’s also been a massive development.

Gus Good point.

T3: We went from the 1950s, when most cheese plants treated whey as a waste product, to the 1980s, when people started putting in dryers for their whey powder to feed it to the feed industry, to the late 90s.

I remember 1994 or 1993, I believe, was when Jerome Cheese was built out in Idaho, and they built the huge protein fractionation plant to make what we now call WPC 80 and ship it around the world. That fractionation is going to continue. Not only will we be able to separate hacine from whey proteins, but we will be able to take all the various whey proteins and splice out the lacto albumin; some of the other smaller chain proteins in whey, find particular uses for those. And I think that will extend beyond whey. I guess we’ll see more and more things that we can do with all of the milk proteins, the beta casine, the alpha casine, all of the different fatty acids in butter, the palmitic acid, stearic acid, the oleic acid, and start fractionating those if those have other uses, different functionalities at different melting points.

And then I think the hope for everybody in the dairy industry is to find better uses for the carbohydrates in milk because that’s the lowest value of the different components. And right now, Gus, how many calls a week do we field from people looking for better value out of the lactose in the carbohydrates because we just don’t have good value there?

Gus:  Yeah, that’s certainly something that I think you can make a case about how the industry has changed so much as it relates to whey and, therefore, the value of other solids and how that’s changed quite a bit. And I think, as an industry, we’re still trying to figure that one out, to be frank. But you’re right; there’s some maturation there that I think we’ll see, which will also be helpful to the industry. Whey has come a long, long way in the last 25 years or so.

T3: No, absolutely.

So, we’ve just spent this time talking about our 75-year journey from when our grandfather started this company through the 35 years dad ran the business to where we’re at today and where we think this industry may be 25 years from now when TC Jacoby & Co celebrates our 100th anniversary.

I’d be remiss if I didn’t take this moment to remind all of our listeners that TC Jacoby & Co. is a family business. We’ve been around for 75 years, and frankly, we plan on being around for a lot more. We love working with everybody in this industry. We love this industry. We think the dairy industry just has a fantastic future. There’s so much more opportunity for this industry to continue to grow and thrive.

We look forward to working for everybody for a long, long time into the future. And at that, I think it’s time to wrap this up.

Exit Audio (with music): We welcome your participation in The Milk Check. If you have comments to share or questions you want answered, email [email protected]. Our theme music is composed and performed by Phil Keagy. The Milk Check is a production of TC Jacoby & Co.

T2: That was a traumatic experience.

T3: Well, when you’ve been around for 75 years, you’re not going to spend the whole time walking through a bed of roses.

A lot has changed in the dairy industry in the 75 years since Ted Jacoby, Sr. founded TC Jacoby & Company in 1949.

Today, we share Part 1 of a special two-part episode celebrating TC Jacoby & Co’s 75 wonderful years in the U.S. dairy industry. From picking up 10-gallon milk cans on the farm in the 40s to shipping internationally, we’ve come a long way. Join Ted Jacoby II, Gus Jacoby, and Ted Jacoby III for part 1 of a special 2-part episode as we discuss:

Plus, Ted Jacoby II shares his eyewitness account of the introduction of ultrafiltration (UF) milk. It all began with a coffee break.

Join us for a walk down the milk memory lane in our 75th-anniversary episode, Part 1: Dive into our history.

Ted Jacoby III (T3): Welcome and enjoy the show.

Episode Intro: Welcome to the Milk Check, a podcast from TC Jacob and Company, where we share market insights and analysis with dairy farmers in mind.

T3: Hello, everybody, and welcome to the Mouth Check. Today, we have a special edition of our monthly podcast because this year, 2024, TC Jacob and Company celebrates 75 years of servicing the dairy industry. In honor of this special anniversary, we are publishing a two-episode edition where, in the first part, my father, my brother Gus, and I discuss and, in my father’s case, share tales of the first 50 years of our history. In part two, we share the more recent 25 years of our history and our thoughts on the future of this great industry we work in. Dad, I’ll ask you: when Grandpa started the company in 1949, we still picked up milk in 10-gallon milk cans on the farm. So what was it like those first 10, 15 years of the company

Ted Jacoby II (T2): When my dad, your grandfather, got out of the Navy in 1945, I think he and two other fellas bought a dairy in Highland, Illinois, and you’re right, they had milk coming into that dairy in cans. He and his partners operated that dairy for a couple of years. They sold the dairy to Midwest dairies. Midwest Dairies was then taken over by a company called City Corp. And City Corp, and Midwest Dairies had consolidated almost all the dairies in southern Illinois. All these dairies were consolidated, then spun off to Prairie Farms, and Fletcher Gorley took over Prairie Farms and turned them into one of the premier co-ops in the United States. After they sold the dairy, he booked office space in St. Louis on the ninth floor of what was the commerce building. So he would act as a broker of barrels of this and drums of that and set up shop as a middleman for mostly dairy ingredients.

There was a relationship that developed between us and Prairie Farms that has extended over all these years. We know each other quite well. The relationship has been strong for a long, long time. In the 40 years between the sixties and the nineties, pardon me, 30 years, you had several things occur. First of all, the consolidation people were picking up milk and bringing it to receiving stations, and then you could go from the receiving station to your regular market, or you could go somewhere else. There were receiving stations, called bump overs, which would consolidate the milk from many small farms and put it in a position to take it somewhere. You didn’t have any dairies that shipped truckload quantities in the nineties in the Midwest. And then gradually, over that period of 30 years, you had large dairies that shipped truckload quantities, and that all occurred in the nineties and two thousand.

T3: Once those bulk tank trucks became common, when we started seeing milk move to the southeast in the fall when milk got tight,

T2: When tank trucks came in, it was about 1953 to 55, somewhere in that area, and the tank trucks were relatively small. 3,500 gallons was a big truck in those days, and when it became practical to move milk, it came from places like Jim Falls and Bloomer and Turtle Lake down to Florida, and Florida set up an inspection point. Remember, it’s very political. The states in those days were very protective of their agriculture, and the federal orders sort of helped them do it. They were structured to take care of the local producers basically, but if the milk supply ran short, they didn’t know what the hell to do. The Kirkoff family of Peevley Dairy needed someone to balance their milk supply. They had jumped all over that. He balanced Peevley’s milk supply and moved tank trucks during shard periods down to places like Shreveport, Nashville, Louisiana, New Orleans, and so on.

That’s where the balancing came in. So our job was to get milk in there and to navigate the difficulties in doing so, and we did. So Lake City had an inspection point set up in Florida, and anybody who went into Florida with any sort of agricultural product, including milk, had to go through that inspection point, and that was a bit of a minefield. But anyway, we got the milk into the users in Florida. Then, of course, the Southeast also managed to consolidate their milk supply to where they were beginning to move their milk out of southern Georgia, down to Florida, and so on. And so the industry down there matured to the point where the inspection ports weren’t necessary because they were regular supplies in that market. Anyway, by the time you reached 1965, the average tank truck was 5,000 gallons.

Today, it’s closer to six, but 5,000 gallons was a big tank truck in those days. And then, of course, balancing was still required because the suppliers had dedicated supplies pooled in St. Louis, and they had to move that milk. Then, often, milk would be moved from one place to another up in Minnesota, Iowa, and Wisconsin. And so we became very familiar with the options in that area. So then Gary Hammond prevailed upon the Kirkoff family to take over the Peevley dairy milk producers and turn them over to square deal milk producers that took care of Dad’s balancing operation with Peeley dairy. But that got the whole thing started concerning tank trucks and so on. With regard to the St. Louis market,

T3: When did TC Jacobin company start trading cream? Were we trading cream back in the very beginning, or was it something that we started doing a little bit later in our history?

T2: Well, we started, in the beginning, we were selling Zare in the fifties; for example, there used to be a tank on a railroad car that went from Bloomer to Abbotts in Philadelphia with cream. You can see that tank at the Museum of Railways in St. Louis on Barrett Station Road, and that tank used to move fresh sweet cream from Bloomer to Abbott’s, which was the big buyer of cream back in those days in the northeast. I remember the old pros time to tell us how we’re supposed to test cream in a can. They had a special tool that looked like a plumber’s helper that they used in the can to agitate the can, and you had to do it so many times to get a good test. It was primitive in the way it was handled. That’s why those 10-gallon cans are in museums today or used for people’s umbrella stands.

T3: That’s funny.

T2: We got it done. They used to have to wire the lids when you were shipping milk across the mountains; they’d wire the lids shut to keep it from exploding. It was very primitive technology developed cooling technology, 45 degrees on the farm. That was a big deal. Now, 33 degrees on the farm is a big deal, but it used to be 45 and eventually reached the point where if you got to the dairy at anything over 45, it was rejected, but it took them 20 years to get there.

T3: So back when milk went into those 10-gallon cans that were not refrigerated, was the milk picked up on the farm every single day?

T2: No, Those deals were made with the hauler. These haulers were a breed into themselves. You wouldn’t want to tan with them. Most of those haulers had covered trucks with doors on the bed. You could insert these cans in. Some haulers would pick up one of those 10-gallon cans with each hand and put them on the truck bed. Now, they’d run their route, and they’d wind up with a hundred of those cans. They were tough gizmos. So it was a tough crowd, those milk haulers, but a well-respected crowd because those haulers were responsible. They showed up on time, and they protected their customers.

T3: So, Dad, you joined the business in 1966. What was going on in the industry at that time? What were some of the significant trends? I know consolidation was one. Wasn’t that still a time when there were a lot of receiving stations that would collect the local milk before shipping it to a plant?

T2: Well, that was it. By then, the milk had been consolidated in truckload volumes somewhere other than the destination, a receiving station, a plant, wherever. Now, you could get your hands around a truckload of milk. So if the cheese plant or customer or milk plant was short, or if it was long, we dealt in the long and short positions and moved milk from where they had too much to where they didn’t have enough. So we’re on the phone all day, determining long and sharp positions in fluid milk and cream, condensed milk, and so on. And that’s basically what we were doing. And we had, I don’t know whether you recall, but we had a spindle in the middle of the table where we kept track of the schedule’s longhand.

T3: Oh, I remember that. In that office downtown, in the Marquette building,

T2: The computer system that occurred in the eighties. That’s very critical, not only for us but also for everybody else, in the way that they can keep track of their milk.

T3: Was it the eighties, or was it more the nineties?

T2: They had some computerization in the eighties, but they didn’t have it to the extent that they have it today, where they know where the last drop goes and how it was utilized.

Gus Jacoby: Dad, in the eighties, computers came in, and I assume that’s what took over as your primary scheduling communication tool. Right?

T2: The scheduling and the fact that it would give us the ability to share those schedules because one guy’s on the phone and you’re yelling on one phone, somebody else yelling on another, and you got a loud room and all that, and nobody knows what the other one’s doing

That solved that problem. Looking at it today, they were primitive, but in those days, they were state-of-the-art. We worked on a deal to develop software to solve the problems we described. So we would put in confirmations of the sale with the schedule and all that, and we would generate the confirmation of the sale to the customer, both the buyer and the seller. A printer in 1979 was the size of a Sub-Zero refrigerator, so we developed the prototype to print the confirmation and so on, and then we’re going to run a benchmark to trial to see how it goes. The only place to put the printer was in Dad’s office, your grandfather’s office. So we entered all the confirmations and got everything in there. Okay, let’s print. And I’ll never forget this damn thing erupted like a volcano, and paper is shooting out of it and bouncing off the ceiling. It was so loud. I mean, you could hear it three floors away, and Dad, I thought he would pass out on the spot. I mean, this thing was to make it all of a racket. And then, a year later, we came back with an HP 3000 model 3000, which supported a database management system.

T3: And if I remember correctly, that HP 3000, we were the first one to have one in the Midwest, and that became the first mass-produced server database server in the country.

T2: I think you’re right.

T3: So the business computerized, we probably had developed without realizing it, one of the first CRMs in the dairy industry, just so we could keep track of our milk schedules, right?

T2: That’s about right. And also to print the confirmations and send them to both the buyer and the seller. It worked out very well, and we were, what, 15 years ahead of the curve, something like that as far as our business was concerned as dealing in long and short positions. We were probably about there.

Gus Jacoby: Hey, Dad, in the eighties, we had California, I know, had some large dairies, but was it reasonably commonplace in other parts of the country to have full-load shippers at that point

T2: In the eighties? No, there weren’t any. They were very much the exception.

T3: So, really, the nineties is when it started to become more commonplace elsewhere, and we had many other things going on then, too. Right?

T2: Well, the hotspot of the nineties other than California was New Mexico, the Pecos Valley, which is where we got together with our partners and worked on developing UF milk and the cow, the large dairies, I’m going to say 95, 94, when we made those contacts, there were 2100 cow dairies, dry lot dairies, beautiful dairies.

T3: Well, I know I worked on one of those.

T2: So there were a few in Texas, I believe, at that point, but that particular group was a close-knit group out of California, so they stayed together in the same area. I think there were other dairies. The Chino Valley was a typical spot in California where the land values had reached the point that people were buying up the land for big bucks, and the dairy industry was being forced out. So they took the money and moved to New Mexico, and some of them also went to Texas.

T2: And not only did the industry kind of change a lot in the nineties, so obviously we had an office. We started in Mexico when NAFTA kicked in, and then we also had the Teddy. I think that’s when risk management started becoming a lot more commonplace in our industry.

T3: The nineties was a busy time. You had nafta. We opened up an office in Mexico. We started exporting. We had North American milk products, which was our joint venture, which started the single pass UF milk, where we put those systems on a lot of those dairy farms extensively to save the hauling costs. But what we found out was cheese plants loved it because it increased their throughput through their whole plant. And then we had risk management. We had the CME starting Dairy Futures and restaurants beginning to reach out to cheese companies, asking how they could stabilize their cheese and butter prices. And yeah, that started a lot of different things for TC Jacoby and Company that led to some of the things that we’re doing today. If you’re a dairy producer or a cooperative looking for a better market for your milk or food manufacturer hoping to strengthen your dairy procurement or risk management strategy, please contact TC Jacoby and Company. We’ve been building worldwide relationships with all sides of the dairy supply chain for over 75 years. Tap into our expertise for unlimited free consultive support, and we’ll develop a sales or procurement strategy that hits all your targets. Please visit us [email protected] to get started. Thanks for listening to the milk check back to the show.

Let’s talk a little bit about UF milk, and let’s talk about how that whole program started in those relationships. That’s just really a great story. Yeah, it is.

T2: Well, it started at the A DPI or the Dairy Forum, one of the two with a cup of coffee. Dave Hibbard grabbed me by the scruff of the neck. Dave was membrane systems; as the name implies, he sold membrane filtration systems, and he said, I understand you all ship milk all over. I said, well, you might say that, so I’ll buy you a cup of coffee. I said okay. We sat down, and he said, why don’t we explore filtering the milk and taking the water out of it rather than shipping it with all that water? I thought about that. Well, it wouldn’t be a bad idea, but I don’t know how we will do it. There are a lot of complexities between removing the water, and that’s all we thought about was removing the water at that time. So anyway, Joe Hilton, who we knew well, had good relationships down in New Mexico, and Joe took me down and introduced us to the Select Milk Producer Group down in Pecos Valley in Artesia, New Mexico.

And in the course of conversation with Mike McCluskey and also the rest of the board, maybe that’s something we ought to take a look at. So I got together with Dave Hibbard and with Mike McCluskey, and we talked about, what would you call it, a benchmark or an investigation of how this filtration would work with regard to milk. And so Mike brought in Jimmy Caller, the head of the veterinary medicine department at UC Davis. So we prevailed on Jimmy to run an experiment where we put one filter on a little trailer equipped with a pump, and we filtered the milk. It captured the ate, which would be the milk protein and fat. The rest was water and lactose. So anyway, my job was the marketing. So we can’t very well develop this without spots to go. So I hooked up with Alzo at Kraft and talked about how we would concentrate the protein and the fat and what a good item would be for the cheese industry.

And he agreed. And so Mike went ahead and based on the markets, which we had set up a room with the filtration equipment on county line two, the deal was with Joe Schmucker of FDA, and his name was Ricketts, who was in charge of IMS. In those days, they had to approve it, and the system had to run under 45 degrees. That was the grade a standard in those days, so you couldn’t have anything in the system coming out at over 45 degrees. So this was a big deal. There was a lot of cooling equipment that had to go in to make sure that the raw milk going in there was cool. And then, of course, the alternative would be to pasteurize it and try to filter. I lobbied against that, as cold doesn’t denature the protein. A pasteurized product is of limited use to be pasteurized only once.

So do we want to do it hot or cold? Well, we want to do it cold. That was a decision that I made, and Mike and Dave bought into it, and so we cooled it down, and we ran it through, and of course, my rationale was the protein; the actual reason it worked out so well cold was that the butter fat went through there with almost no butter fat loss. If you picture the butter fat, it’s little water balloons, mini water balloons in the milk, and when it’s that cold, those water balloons are tough to fracture. So they just go right through and are rejected by the filter, and the water and the lactose go right through it because it’s all dissolved. That turned out to be an old single pass. The vision was to have the system hanging on the wall of the milk house.

Well, we began to realize that there’s more technology involved than you want to have the hired hand and the milking parlor dealing with. So, it was a separate room rather than a milk house system, and FDA and IMS were much more comfortable with that. The next hurdle was getting the product approved for use and cheese. We had a benchmark down in Artesia at Mike Starry, and Ricketts and Joe Schmucker were there, and Mike, Dave, and I were there, and we had a tank of melt in the receiving room, and we’re going to filter it, and load a tank truck. We’re going to do this experiment to prove to Dave Ricketts and Joe Schmucker that we’re not going to go above 45 degrees. Anyway, we got it running, and we got everything going perfectly, and then, okay, let’s turn off the refrigeration and let the temperature go up. Okay, so we threw the switch, turned off the refrigeration, and were all sitting there. There were five of us sitting there watching the temperature chart going up and up and up and up, and it was like a shotgun going off. When you hit 45 degrees, it would boom, and there’s milk flying all over the receiving room on the floor, but Joe Schmucker and Dave Rickett said, well, that pretty well proves it. You could keep it under 45 degrees. Well, then it should be fine with us.

The next hurdle was using it in cheese and ensuring we were not adulterating the cheese at the FDA. She agreed that this could be used in cheese on a trial basis, on a limited basis, and not have to label it, but it was a temporary permit. Okay? Twenty-five years later, they made it permanent, but it was a temporary permit. And so we got that done. We got a letter on that, and it was approved.

And so I said, “Okay, where do you want to go with this? You want to go to Melrose?”

And he said, “Oh, no, we’re not going to Kraft.”

I said, “Whoa, what do you mean?”

“Well, we’re not your Guinea pig,” he said. “We can’t do it.”

So we worked out a deal to go to the Bonguards, and they loved it. Suddenly, instead of getting a 10 yield on their milk, they were getting 12 or 14, depending on how far they wanted to go and what quality they needed in the finished product. It was terrific. So anyway, that’s where it came from. And then, of course, over the years, Mike continued developing designer milks, and that’s where Fairlife came from.

T3: Yeah, I like to tell the story that we were there initially helping them develop the technology. We told them that we would handle the industrial marketing side, and if they wanted to explore something on the retail side, they were welcome to do it. Little did we know what we were giving up so we could focus on the industrial side.

T2: We did all right in our industrial side. Yeah,

T3: I tease when I say it, but we’ve benefited wonderfully from that association and what UF milk has become today, so we’re very proud to be a part of that. Thank you, everyone, for joining us on this journey. Don’t forget to tune into part two, where we share some of our more recent history and our thoughts on the future of this great industry we work in.

Episode Exit: We welcome your participation in the milk check. If you have comments to share or questions you want answered, email [email protected]. Our theme music is composed and performed by Phil Kagy. The Milk Check is a production of TC Jacoby and Company.

The 2024 ADPI/ABI Annual Conference starts next week and will likely move the dairy markets. What does Jacoby predict for dairy production and demand for 2024? Join Ted Jacoby III and our guests Jacob Menge, Vice President of Risk Management and Trade Strategy; Joshua White, Vice President of Dairy Ingredients; Diego Carvallo, Director of Dry Dairy Ingredient Trading; Gus Jacoby, President of Fluid Dairy Ingredients and Dairy Support; Joe Maixner, National Sales Manager of Dairy Ingredients; and Ted Jacoby Jr.

We discuss:

Plus, is whey the new canary in the coal mine? Find out more on today’s episode of The Milk Check.

Ted Jacoby III (T3): Hello, everybody, and welcome to the Milk Check. It’s April 22nd, a week before the ADPI meeting in Chicago. And I thought this timing would be right for us to have a market discussion going into an annual conference that does have a tendency to be a bit of a market mover.

Today with me, I have Jacob Menge, our head of trading strategy and risk management, Joshua White, head of our dairy ingredients group, Diego Carvallo, our head trader for non-fat, dry milk and other dairy powders, Gus Jacoby, head of our… President of our fluid division, milk cream, UF milk. Joe Maixner, head of our butter trading, and my dad, of course, joining us to give his thoughts on these markets.

Welcome, everybody, and let’s get to it. I was looking at our markets this morning, getting ready for this podcast and I kept asking myself the question, where did we think we’d be this week when we started the first week in January. And I don’t think in any of our markets we really were thinking that we’d be dealing with what we’re dealing with right now.

So, I think, maybe, what we’ll do is we’ll start with cheese. Jake, when we were entering the year, if I remember correctly, we were pretty bearish the cheese market, and if we were talking about what we thought the second quarter was going to bring in cheese, I didn’t think it was a market that was going to be up 8 cents today and in the seventies, and probably, going higher over the rest of the week.

So, what do you think is going on in cheese, and compare and contrast what we thought would happen at the beginning of the year and what we’re seeing right now?

Jacob Menge: I would say cheese has probably been the most in line with our expectations of all our commodities from where we started the year. We were bearish, and I would argue we saw that bearishness, right? I mean, we were in the 140s for a while in both blocks and barrels, and so, I think, yeah, we’ve seen a pretty good push the past week or two.

But otherwise, I think cheese, more or less, went in line with what we expected. Demand’s been off a little bit. We’ve seen exports numbers are starting to look pretty good, but in general, sluggish has been what it’s felt like for most of the year up until the past few weeks.

I’d say cheese kind of went along with what we expected, and it’s been this cycle that we’ve seen for about a year now, right? We get a good push higher. Last year in July, we saw a pretty good push up into, I think, the upper 180s, and then, we seemed to kind of kill demand [inaudible 00:02:57] we’ve been getting to those levels. And then, we’ve fallen into the 130s, 140s, low 150s, that generates some more demand, and we yo-yo from there.

So, yeah, I wouldn’t say anything too crazy from expectations on the cheese side.

Joshua White: You asked at the beginning of the year, would we have expected prices in our market conditions to be where they’re at now on April 22nd? And I just did a quick look back right when you asked that, just to see what our commercial meeting notes and what our dialog and discussion are.

And where I was expecting it to be significantly different, comments from Diego and from the group at the end of 2023 were, basically, along the lines of range bound price, maybe a little bit more upside than we’ve experienced, but the risk that the flush and lackluster demand would keep us in the range bound with limited downside price movements from the channel just because of the fundamental supply situation.

And I think maybe the only material difference from where we expected to be and where we’re at right now at the end of April is, I think, the top end of that was compressed even more than we expected, largely because demand was just taking even longer to return, or even poorer than maybe we expected. But for the most part, not a huge surprise.

T3: And you’re talking specifically non-fat, correct?

Josh: Yeah. And whey, I think. I think if you look at our whey notes, it’s sort of similar.

T3: Okay.

Josh: I don’t think we expected the market necessarily to run away. We expected to find a little price resistance because demand globally just isn’t that great.

T3: But what about this past week? It looks like everybody’s suddenly quite a bit more bullish. What’s going on?

Jacob: Yeah, I think we got some exports done, if I had to guess, when we got to those lower prices. It’s been a fairly thinly traded market on the CME recently, with only a few players on either side, and that’s nothing new. But I think there was one player in particular that kind of was the driver of the price is lower, they stepped away, and the bulls kind of took charge.

And I would say it was a justified push, especially out of the 140s, and then, the 150s, that… Again, always got to keep in mind, with our cheese markets, they’re 30-day, it’s a fresh cheese market. So, even though there might be decent stocks out there, it’s the price of what 30-day or younger cheese is priced at.

And I would say that market is tight, that fresh cheddar market, in particular, is tight right now. So, not a surprise to see it has come off those lows.

T3: Milk production’s been down about 1%. Is that playing into it at all?

Jacob: I think it is, and I think we’ve brought this up on the podcast before. I think that certainly is playing a factor, but at the same time, it has felt like demand has been off, whatever milk production has been off or more. And so, even though milk production seems contracted a little bit. That demand piece, which we just don’t have great visibility, it seemed really soft, except for a few markets.

Cheese going into Mexico has been really strong and continues to be strong by all accounts. There’s certainly pockets of really strong demand, but otherwise, just kind of so-so. And so, even though milk production’s been off, I think the effect of that in cheese in particular has been muted by… And really, across all our commodities, we’ll hear from the other traders, but has been muted by just kind of lackluster demand.

T3: Got it. Okay. We’re talking about supply a little bit. Gus, I’m going to pivot to you, on milk. We’re down 1%. There’s been discussion in the market lately about the HPA1 avian flu virus that’s been going around.

Are we expecting that to affect the market and what are we expecting milk to do over the course of the rest of the year?

Gus Jacoby: Oh, Ted, I can’t really tell you. I don’t think anybody really can how this bird flu will affect the market going forward. I mean, we know that the older cows that it affects pretty much takes them out of the herd. The younger cows seem to bounce back pretty quick. The infections started in the southwest, they’re kind of moving throughout. It’s already tight down the southwest and the west.

It still seems like there’s ample surplus in our spring flush in the upper Midwest and Mideast areas and northeast areas to a degree. So far, I don’t think it’s really affected those three regions. I guess, how it unfolds here over the next few months is yet to be determined.

T3: What do you think just milk production in general is going to do for the rest of the year?

Gus: Well, I don’t think farm economics provides for anything good on the farmer end. I mean, the heifer supplies are short, so cow numbers really can’t take any significant increase without impacting what would be an older herd, right? So, you start to question what the dairyman’s wherewithal is to continue with strong yields per cow as the herd starts to get older.

And that’s what I see as we struggle as an industry here to get an ample supply of heifers into the national herd. We’re not going to have the same number of heifers come into the herd as we’ve seen over the last decade, and therefore, we’re going to call less as you’ve seen in the slaughter numbers. And with that less calling, I think it’s safe to say that, at some point, yield per cow will be impacted. Is it going to be soon? Doesn’t seem like it. It seems like Jeremy had figured out how to increase that, if you look at the numbers and the reports recently.

But if you look at the statistics on cow numbers and heifer numbers and heifers that are prospective to come online over the next six months to a year, really, they’re limited. So, that means I continue to see, and we don’t look at… beef prices are very strong, too, so it makes it very difficult for a dairyman dealing with adverse farm economics to continue to hold on to cows in this climate.

I think they will, because they have to if they’re going to stay in this business and they’re not going to want to stray from being short barns and risking some economies of scale that they typically have gained over the years. But nonetheless, I can’t see any credible growth, unless it’s a short-term thing with weather or whatnot that might help the cow, in the short term, produce more milk.

What I see is a struggle to keep cow numbers up as a US industry, a struggle to keep the age of cows in your barn relatively normal, and therefore, at some point, the yield per cow being impacted. And therefore, all I can see in the near term is contraction. At the end of the day, I do not see any ability for national herd to grow anytime soon.

T3: So, what you’re saying is milk production is going to be constricted for some time?

Gus: I don’t think we can avoid it, Ted, yes.

Jacob: Ted, I think that ship has sailed. The supply side part of the equation is a slow moving ship. It just does not turn all that fast. And the direction of that is really, really, it’s clear. This is a demand market. It’s really just a matter of when does that demand come back.

I’ve heard people make the argument it won’t be till early 2026, and that seems like an eternity way with the prices we’re looking at, if you’re a dairy farmer, right? I think you can make the argument it’s this year, it’s probably somewhere in between those two. But, yeah, that’s supply side of the equation. The math is kind of written in stone there. I think this is a demand market.

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Thanks for listening to The Milk Check. Back to the show.

T3: You think there’s a particular product in our dairy portfolio that’s the canary in the coal mine, that if this market starts to get tight because demand’s coming back, it’s indicator that the whole market’s shifting?

Gus: Whey has been the canary recently for the past few years, I would say. I want to believe that it is still that canary, but it’s been facing some headwinds with manufacturing issues and just some other things that might upset it from kind of being that leading indicator this time, but I would let Josh kind of further comment on that.

Joshua White: As it relates to your question, as Jake mentioned, the past few cycles, you could argue that whey led the cycle, and I would maybe make the argument that whey protein led sweet whey powder, the rest of the products and the dry portfolio nonfat dry milk, et cetera, for our followers.

I don’t know this time, sweet whey powder prices increased, diverged from Europe, and have since, turned a bit bearish again. I don’t know that I’m ready to concede that that’s a reversal in the market, and that we’re oversupplied sweet whey powder for a number of reasons. First of which is the higher whey proteins, I believe, are a little top heavy at the moment, but I’m not ready to say that they’re oversupplied, and that’s going to force the whey stream back to sweet whey powder.

I think the recent move that forced convergence had to do with the production issue in the country, that forced somebody to switch to sweet whey powder production temporarily.

How temporary that is, I have no idea. I don’t know the answer to that. But that immediately, then, with extra product that was not, that wasn’t budgeted, that wasn’t being offered out there and hitting the market and hitting the CME spot call, that forced us to converge with Europe. There’s Japanese tender this week. I think that’s going to answer a lot of questions about where the international whey support price is. So, we’ll know a lot more later in the week.

That being said, I don’t know that I would call it a bullish market either right now. I don’t know if it’s a hold the ball under the water situation where it’s going to bounce right back up, or if we’re just going to stay in this sub-forty cent per pound price channel that’s a little bit more competitive with Europe and that’s demand related.

And so, the big difference between I think our cycles of the past few years looking at whey as maybe the first to move and this cycle is exactly what Jake and you guys were referring to earlier, this isn’t a supply situation, this is a demand situation. And I wish I was better equipped to forecast what the demand climate will look like on the consumer end later this year. I think there’s massive challenges in doing that.

When you talk about our dry products, milk powders and whey powders, a good portion of those go into consumer packaged goods at a low inclusion rate. They’re not driving the price of those consumer products. So, the cycle for the commodity price to reach the consumer is a very, very long one. And tomorrow, perhaps, we turn the page on new budgets and new pricing at the retail end that moves more volume or not. And that’s the part that’s difficult to forecast.

Now, when we talk about some of our products with shorter distance between producer and consumer like cheese and butter and even like whey protein, for example, that has a larger percentage of the utilization that goes into something where it’s a driver, those products, I don’t believe, have great elasticity right now. I don’t think the retail price is moving at the same rate as the commodity price.

So, when the commodity price drops, I think margins are just better for those supplying the retail end. And when prices move up, their margins get worse. I don’t know that the consumer is the beneficiary of those price movements. And until we start to see that, these supply movements aren’t going to have a material change in demand for a lot of our products on the domestic side of things, and I think that’s probably true in Europe as well, where I do think that you’re still seeing price elasticity is in Southeast Asia, maybe Mexico, but definitely, Southeast Asia, and that market has been slow.

And I really would love to get anybody’s opinion on what will change the Southeast Asian demand curve later this year or even into 2025.

T3: Well, let’s go to Diego. Diego, what are your thoughts on that?

Diego: It’s really hard to tell what’s going to change the demand outlook, but one of the main reasons why the demand has been so lackluster is China. China’s local milk production has been trending, at least, 5% up versus last year. And the previous year was also something like 10% above 2022.

So, if the biggest market, the biggest destination is not importing as much as they used to, you’re obviously going to see lower amount of loads going that direction.

T3: You think that market’s coming back anytime soon?

Diego: If you look at China, most of the consumer data has been better than it was at the beginning of the year. So, there seems to be some light at the end of the tunnel, but when it comes to dairy consumption, it’s improving, not imports.

T3: This is a demand-driven market. You look at some of the statistics on nonfat, our market has moved lower even though our domestic inventories of nonfat dry milk are 20% lower than where they were last year at this time. That’s how bad demand is.

I think we’re underestimating how bad demand has been internationally for non-fat, because China hasn’t been buying. Fonterra had to find new places to move their product, and they were taking markets away both from the US and Europe, which forced Europe to get more aggressive as well. And the US has kind of just sat out that market.

And then, as our milk production has decreased, we’ve really been taking it mostly away from Class IV rather than Class III. But it’s created a situation, where I would say non-fats are canary in the coal mine, because if demand comes back for non-fat, we have taken away all inventory buffer to an increase in demand, and that market will skyrocket higher. But we’ve been waiting for this demand to come back for over 12 months now, and the big question is when’s it going to come back? Is it going to come back?

Jacob: We, and I would say almost everybody else, has kicked the can on when that demand comes back. Probably, two times, at least, now, we’ve been, as a market, dairy has been just historically poor at predicting the change in demand and when it’ll occur. So, any prediction we make right now about demand, I think, has a big asterisk next to it.

Josh: I think we should also start to do our best in discussion to break out what we mean by demand. Because an upward price movements, demand is both consumer and stocking, and in downward price movements, it’s both consumer and de-stocking. And I think that if we want to add, at least, a positive upside potential for this market, I do believe that customers globally using many of the products, particularly, our powdered products, have de-stocked.

So, at the first signal, that consumer demand is outpacing budget or some metric driving purchasing decision making, there is an opportunity for a short covering price move to the upside, for all the reasons you mentioned, the stocks, I believe, we’ve de-stocked all the way from manufacturing stocks to consumer stocks working inventory.

T3: And every month that goes by that we don’t see demand pick up enough to really move that price higher, we’re actually digging a bigger hole, because milk production is down 1%, which means, we’re making that much less. And because of all the cheese plants that are being built, milk production is down 1%, and it’s mostly getting taken away from Class IV, rather than Class III, because that milk is going to Class III.

And I think one of the reasons, we’re starting to see maybe some of that milk getting pulled away from Class III into Class IV, but it’s nowhere near enough to solve this non-fat inventory problem. When that consumer demand comes back, it’s going to get really interesting really fast.

Jacob: I don’t want to distract from the conversation at hand, but something interesting that you mentioned about more cheese, more cheese supplies coming online that we’re really starting to see clearly now, is we are really pretty much in lockstep for the past decade with cheese demand increasing at roughly the pace of cheese supply increasing.

You know, there’d be stair steps in there because you don’t bring new plants online overnight, and so, they wouldn’t go hand in hand, but they were trending really well together. And it’s becoming pretty clear over the past year they are starting to diverge, historically, diverge, where cheese production is now well outpacing the increase in demand from the consumer.

So, something’s got to give there, and I think that plays into what you were just mentioning, that, maybe the price of Class IV products, right, demands that we send more milk there, and it’s not as easy as that. We know, moving milk between the classes in different states and all that, it’s not as pure economically as somebody like myself would like it to be. Something has to give on that production versus demand on the cheese side. Maybe, we should kind of stretch that rubber band far enough. Right now, that something gives.

T3: I would’ve to agree with that. The one product we haven’t talked about yet is butter. And then, butter may be the one product which we went into the year bullish butter, but did we really think we’d be at $3 butter in April, Joe?

Joe Maixner: No, I was bullish, but I was definitely not this bullish. This has been a market that, despite all attempts, has continued to surprise me throughout the year so far. We’ve continued to have higher highs, higher lows, higher highs going against a higher than average inventory builds.

Demand has remained steady, product is moving even at these levels. There’s no real reason right now for any type of pullback.

T3: Are we building enough butter inventory?

Joe: I have my hunches, but the question is is are we building enough of the right butter inventory? And unfortunately, we won’t know that, because the cold storage report does not tell us what type of butter is being put in inventory. It only tells us that there is butter in inventory.

That is the million-dollar question. What I will say though, is that the higher we get now, the more reserved I become on how high we get second half. We have to be getting to a point where we’re going to start getting pushback on the demand side when we’re this high this early in the season.

T3: So, it sounds like you’re describing an anticipatory bull market, which means, we go to a place right now to kill demand, and then, anticipatory bull markets end up having long tails. Is that how you think this butter market might play out?

Joe: I think that this market can remain higher than it should for longer than it should, if that’s what you’re trying to imply by the long tail. But I also believe that… End of January, everybody was predicting $4 butter by second half this year.

I have a really hard time believing that when we’re already where we’re at. It just feels like, with inventory builds, the lack of demand in Class II has been pushing a lot of cream into the churns for the past three months now. It feels like we’re going to be sitting on a lot more butter in the second half than a lot of people are thinking that we’re going to have, which, to me, feels like it’s going to kill that upside potential.

Now, I will preface that with we are not, I don’t believe that we are capped out where we’re at. I do believe we still have the potential to go higher. I just don’t think I am in the camp of $4 butter this year.

T3: Dad, you’ve been listening to this conversation. You’ve been watching these butter markets, these dairy markets for a long time. What’s your takeaway right now?

Ted Jacoby II (T2): Well, I think the current situation is very confusing. In fact, in our recent discussions, we used the word goofy. I tend to agree with that. The demand picture right now, it’s definitely true, we don’t have the demand for cheese products. We do have some demand for butter, and we don’t have the demand for nonfat. And I suspect that exports are up as we’re all suspecting.

I tend to feel that, as far as the dairy industry is concerned, we haven’t reached a point at this point where any dairymen are going to be expanding their barns. We may see some marginal increase. By a marginal, I mean, less of a reduction month by month in production loss. But I do think we’re going to continue to see production levels erode, and that ultimately should lead to higher prices.

Jacob: I think inflation has almost become a word that people are sick of hearing of like COVID was back during the pandemic. But paying attention to the breakdown of the inflation numbers, I think it’s actually going to be really important for dairy farmers of all products, because our CPI is averaging like 3.5% or something like that, but it is feast or famine in the breakdown. Right? We’ve got, at the top, our insurance numbers up 22% year on year in inflation.

Meanwhile, we have airfares, down 7%. There’s a whole lot of different metrics that are taken that make up this CPI number, and the really hairy thing, food is up 2.2. So, we’re close to that average. It is important to note, food away from home is above the average at 4.2. But the interesting thing is the Fed is pulling all these strings trying to make the economy have the soft landing or whatever you want to call it. They’re pretty much looking at that average CPI number, you got to think. They’re not digging in to the various categories and saying, well, we’re not doing this. So there’s going to be winners and losers in there, right?

If your airfares, airfares are down 7% this year, if you’re an airline and rates are being held high because that average CPI is being drug up by something like car insurance, you’re feeling the hurt on both ends. Your actual revenues are going to be down, because you’re deflationary and you’re borrowing costs are still high because the Fed is saying, “Hey, we’re still inflationary”.

And so, what you really don’t want to see is food kind of tick to feel what airlines are feeling right now. Inflation is really important, we still got to pay attention to that, because the Fed is going to make moves based on those CPI numbers, and they can be really deceiving when you actually look at the breakdown.

T2: Yeah, you’re certainly correct on that. But we’re competing for the consumer’s dollar, and obviously, we’re not competing very well. The money’s going elsewhere right now. Now, maybe, the last week or two have changed that, maybe we’re going to see a pop in April, which is unusual. We’re competing for that consumer dollar, which supposedly is inflated, and we’re not getting it.

So, where’s the money going? It ain’t going to us.

Jacob: The Fed’s making it tough, right? When they keep rates high, that’s just a vacuum sucking up dollars. And so, that’s exactly what my point is. If that… Food could go deflationary, but if the Fed’s going to keep those rates up, that’s a tough, tough market.

T3: The one thing that has me a bit surprised on this demand side though is we are still at full employment, and that surprises me that dairy demand is lackluster the way it is. Because I would think there’s other things, if money is tight, but everybody’s full at full employment, that would go before dairy demand would go. You know, I would expect it to be durable goods like refrigerators. I would expect it to be home remodels. I would expect it to be things like that that would weaken first.

We haven’t seen that. That brings me right back to your point, dad. These markets are just kind of goofy, and I think they’re hard for everybody to get their head around right now.

Josh: I think we also got to pay attention to the production and sales cycle. Home renovations, you don’t sign those contracts every month. Those are longer term contracts. Building new dairies are multi-year decisions based on an assortment of things. Food is maybe a little bit quicker in certain instances.

And so, I think, as you start to see some of these things shift, they should be an indicator that everything that has a longer sales cycle, perhaps, might shift along with it. It’s a little bit more difficult to reverse the trend in certain areas that are heavily, heavily labor-based, right? Because those rates aren’t coming. Labor costs aren’t coming down quickly.

T3: That’s a really good point. I didn’t think of it that way.

All right, well, hey, we’ve had a great discussion. Before we wrap up, does anybody have anything that they want to add to the discussion heading into ADPI?

Joe: It’s going to be an interesting meeting.

T3: I think it’s going to be very interesting meeting. I’m very curious to hear what everybody wants to talk about.

Well, before we say goodbye, there is one thing I want to do. Dad, I want to congratulate you. Last week, we were up in Milwaukee, Wisconsin, and you were awarded the Industry Champion Award by the Wisconsin Cheesemakers Association. Well-deserved award, and very proud to be your son to watch you on stage receive that award. Congratulations.

T2: Thank you. Thank you. I appreciate that.

T3: All right, everybody.

T2: Take care, guys.

T3: Take care.

This is the first podcast episode in our quarterly Understanding Export series. Today’s special guest is Fernando Anaya, Director General at DILAC. DILAC offers powdered dairy products and has a 27-year track record within the Mexican dairy industry. Our Jacoby team includes Ted Jacoby, President; Yara Morales, Director of Sales for Mexico and Latin America; and Diego Carvallo, Director of Dry Dairy Ingredient Trading at T.C. Jacoby and Company, Inc.

Today’s episode discusses the Mexican consumer market for dairy products. Fernando shares his take on how drought, exchange rates, and political waves will affect Mexico’s milk importers in 2024. How has the extreme drought in Mexico impacted domestic milk and cheese production and consumer demand?

This plus what importers should know about changes in milk import procedures and Fernando’s opinion on the most important factor for milk imports in Mexico—dive in with us on today’s Milk Check.

T3: Welcome to this month’s episode of The Milk Check. I’m Ted Jacoby, president of T.C. Jacoby & Company. Today, we are joined by Yara Morales, sales director for Mexico and Latin America; Diego Carvallo, dairy ingredient trading director; and special guest Fernando Anaya, director general for DLAC. DLAC is a very good customer of ours in Mexico, and we’re excited to have him. Fernando, welcome, and thank you for joining us today.

Fernando Anaya: Ted, thanks for the invitation. I’m really glad to be with you and your team.

T3: This episode will be released in Spanish and English, the first in our Understanding Export series, which we will publish quarterly. Today, my first question, Fernando, to you, is when we think about the Mexican dairy market and how much dairy Mexico imports, what is the number one thing exporters to Mexico must understand about the Mexican consumer? Obviously, one of them is price, but beyond price, what’s important to the consumer in Mexico?

Fernando: Okay. Well, Ted, I think that’s a really good question. Well, just to have a rough number of the imports into Mexico, I will say that 15% of our needs have to be imported every year, and that really is not changing a lot. I think that’s the same number from maybe ten years into now.

So, what do the exporters have to be aware of to be in the Mexican market? The number one for sure will be price, the second will be price, and the third will be price. So that’s something that I guess you can agree on that. Of course, Mexican customers will always look to have a better price, but again, it’s not the only thing they are looking for. There are some things that the exporter has to be aware of, and one of them will be regulations. For the past two or three years, Mexico has been entering into new regulations.

For example, for non-fat, there’s this new regulation, the NOM-222, and I know there have been a lot of challenges for the exporters because they must be sure they will be ready to fulfill this regulation. It’s not that hard, but again, that’s something that the exporters, mainly in the US, had to make some changes in their COAs, registering some labs to fulfill these regulations. So again, that’s something that the exporters into Mexico must be aware of.

The other thing is logistics. The way that Mexican customers purchase mainly non-fat food is changing. Right now, the Mexicans are looking for the product to be available in the customs agent warehouses. Why? Because it’s very quick to get the product into Mexico. Let’s think maybe ten years ago, to get the product into our warehouses. We will need maybe three to four weeks because of the time they will take to make the contract and transit it to the warehousing and the water, and then the entire import process will take three or four weeks.

Right now, many customs agents are looking for the protocol and the documents in advance to obtain the health permit. So everything is just ready to import, isn’t it? Right now, for example, the unit product and the exporters have the product in our customs agent’s warehouse.

With the documents, we can have the import process the next day, and in two or three days, it will be in Mexico City, so we need less than a week to have the product available in the Mexican warehouses. So that’s something that is changing. And, of course, one of the reasons for that is that Mexicans are not having really high inventory levels. Most companies are just looking for the product they will need in the short term. So that’s something that’s affecting the way the exporters are seeing the Mexican market.

T3: Makes sense. Question, what would you say, with all of the skim milk powder that Mexico imports, where is most of it used? I know cheese manufacturers, fluid milk. What is the breakdown of the different places where skim milk powder gets delivered these days?

Fernando: Well, I think cheese is the number one application. I think that will be, and one of the reasons that we are bringing in more and more volume is that it is non-fat, low-heat, in bags. That’s the number one product, and most of that product will be going into cheese. But if I separate the different applications, I will say that’s one of the most important ones. The other will be to pasteurizers.  And for that, you will see the import of skim or non-fat [inaudible 00:05:13]. So that will be another of the most important applications.

The other will be ice cream manufacturers. I think much volume is going into ice cream manufacturers, and the other, that is a big amount for sure, is going into [inaudible 00:05:27] onsite. We saw them as a separate entity. I will see the Mexican government is getting a lot of non-fat products that are going to be mainly going into social programs or even fluid, but I think that will be the most important application in Mexico right now.

T3: Okay, okay. Going back to the cheese manufacturers, one interesting thing to note is that because non-fat dried milk from the US tends to have higher protein levels than skim milk powder from other parts of the world, that tends to be the desired product for cheese manufacturers in Mexico. Is that a fair thing to say?

Fernando: Yeah, for sure. Yeah, non-fat will be the first need for cheese manufacturers.

T3: Awesome. Yara, anything to add?

Yara Morales: Yes, it’s interesting that the United States is Mexico’s market for non-fat dried milk. They can get the products very quickly. In a week or a week and a half, they can have the products there. So, they use a lot for Mexico’s exports and make a large [inaudible 00:06:22] for infant formulas. Infant formulas are the number one export from Mexico to other countries and the United States.

T3: Interesting.

Yara: Yep, that’s number one.

T3: Diego, what are your thoughts?

Diego Carvallo: I was going to ask Fernando a little bit more about the recent developments in Mexico, and one of the questions that most US manufacturers are trying to figure out is imports or US exports to Mexico for January. We saw a significant decline in the products that moved across the border, especially the non-fat. I believe it’s a 15% decrease. So, I wanted to ask Fernando what he believes are the main causes of that decline and his expectations for what’s left of 2024.

Fernando: Thanks for the question, Diego. I agree with you. The import numbers for January 2024 were less than January 2023, and I think 15% will be correct. But I believe we need to start reviewing the numbers for imports, maybe in the third quarter of 2023. If you see and compare the numbers from 2023 with 2022, you will start seeing the decrease in August and September of last year.

So, I think what we are seeing right now in January is the same decline that we have been seeing since August and September of last year. The reasons for that, I think, are several. One of them that I am pretty sure of is the impact of inflation on the finished product in Mexico. The inflation numbers are pretty high, and the impact of those inflation numbers on the end user’s product is pretty simple. So that will be one.

The other thing that I expect to affect the import number for the rest of the year is the participation in [inaudible 00:08:23] last year’s import of a lot of schemes into different sectors, especially social programs. And as far as we know, the Mexican government will not import any powder this year. At least, that’s the announcement they are sending right now. So, that will be one of the big players who will not be participating. And the other one I see with less interest in importing these ingredients is Lala, a large importer in Mexico. So, I feel the import numbers will be less this year compared with 2023.

Diego Carvallo: Do you think something that’s affecting also the non-fat imports is the recent increase that we have seen in cheese imports? A lot more cheese is crossing the border, do you think that’s somehow going into the end user as a replacement for some of the proteins and the solids on the non-fat?

Fernando: Well, I agree entirely, Diego. We have seen the import numbers of cheese getting a very significant increase in the last couple of months. And I agree, if you are getting more cheese into the Mexican market, and we do not see the rise in demand as the same proportion of the increase on the import of cheese, of course, what we are doing is producing less cheese because of that. So yeah, I agree that we will need less protein from non-fat because we have already imported a finished cheese product. So yeah, I agree with you. We will see less interest just because we are importing more cheese from the States.

Diego Carvallo: Makes sense. I have another question, Fernando. There’s a lot of noise and many headlines currently talking about the weather situation in Mexico. There’s a severe drought in Mexico and high temperatures for this time of the year. Has that impacted the local fluid milk production somehow, and do you expect it to have an impact in the next few months?

Fernando: Well, yeah, that’s true, Diego. We have been hearing that the drought and the high temperatures that Mexico will be dealing right now and in the future… So yes, to answer your question, we think that we will be producing less fluid milk, just because of the impact on the weather, even though we have seen in the past weeks a lot of fluid milk available in Mexico, mainly in the central and northern part of Mexico.

And of course, it’s partly because of [inaudible 00:10:50] for sure, but one thing that we have been hearing is that the demand for cream is decreasing just because of these high temperatures, that the consumers are not willing to take a lot of cream, and that the same time is decreasing the price of fluid milk, that it’s making for some producers to get more fluid milk, just because the cream is cheap. But in the end, I agree that because of the weather, we expect that the fluid milk should decrease their produce in 2024.

T3: If you are a dairy producer or cooperative looking for a better market for your milk or a food manufacturer hoping to strengthen your dairy procurement or risk management strategy, please contact T.C. Jacoby & Company. We’ve been building worldwide relationships with all sides of the dairy supply chain for over 75 years. Tap into our expertise for unlimited, free consultative support, and we’ll develop a sales or procurement strategy that hits all your targets. Please visit us online at www.jacoby.com to get started. Thanks for listening to The Milk Check. I’m back to the show.

Diego Carvallo: What are you expecting in terms of the political situation? We have a presidential election in the summer this year. What are you anticipating regarding the impact on the currency and the general economic outlook? Do you expect any significant change? Is there anything that we should closely monitor?

Fernando: Okay. Well, I think that the change of government this year will be a soft one. We have three candidates right now, but the numbers are pretty clear about which one is at the top. I don’t think that we will be seeing a lot of changes from now until the election date, which will be in July. So that’s the reason I think it’ll be like a soft one, but I am pretty sure that there will be some indexes that will be affected. One of them will be the exchange rate. I think the exchange rate will be going up because we are getting very close to the election day.

But after that, I think that the exchange rate will decrease, and we will maybe get around the numbers that we are seeing right now. And if we speak especially into the impact of dairy, the first one that was a little surprise for most of us, we thought that just because of the election year, [inaudible 00:13:22] will be trying to get some powder to inject that into social programs, and that didn’t happen. On the contrary, they say that they won’t import any powder this year. So that’s something that I’m sure, if you see the political side, will affect dairy. But I think right now, the exchange rate will be the one that for sure will affect us because of the reference between the exchange rate from now into the election days.

T3: Fernando, I have to ask the question. It sounds like Mexico’s going to have a female president starting after the July election. What do you think about Mexico ending up with a female president before the US?

Fernando: Well, that’s interesting for sure. Yeah, I’m pretty sure that will happen this year, Ted, because of the three candidates we have, two are female, and they’re the number one and two if you look at the polls right now. So I agree entirely, there’s no way the third one will win. So, I am pretty sure that we will have our first female president. And yeah, I’m surprised that we are doing that before the States.

I see that Hillary was close on doing that. That didn’t happen, and I don’t think this year will happen for the States. So yeah, it’s incredible. I thought that the US would be getting their first female president before Mexico, but I think that’s the one thing we will be the first, Ted, [inaudible 00:14:43].

Yara: Yeah, Mexico gives surprises.

Fernando: Yeah, this year we give a big surprise with that. I agree.

T3: Well, that’s wonderful. Diego, anything else?

Diego Carvallo: I was also going to ask Fernando to talk a little bit about the exchange rate. With the current strength of the Mexican peso and the competitiveness or the low price of the non-fat, but I would expect that the end demand get some support, but I wanted to hear your opinion. What do you think on the exchange rate and do you think the current low prices are going to create and incentivize some additional demand?

Fernando: Okay, it’s an interesting question, for sure, Diego. If we compare the price for non-fat in the Mexican market last year, the highest price that the companies were willing to pay was 90 pesos. Last year, I think maybe mid-September, if I recall correctly, the cheapest price we had was 45 pesos, so it’s almost half. The reason for that is the combination of the price of non-fat and otherwise the exchange rate that, as you were saying, is very, very low.

But what is interesting to understand is the impact on the consumers. So the thing is that because the way that the products are distributed in Mexico is very hard for the end users, for the consumers to see the benefit of decreasing cost. So if you go to the supermarket, the prices will not go down. So what happened last year, and it’s happening right now, because if you compare these prices with the prices two or three years ago, the price is cheap. It’s historically below the average, for sure.

So that, of course, we’ll be interested. But this benefit is just getting into these distributors and manufacturers; it’s not really getting into the consumers. So, it may take time to impact the consumers. So right now, it’s not getting into them, but again, if you see the numbers and compare the price of fluid milk with powder with the exchange rate, the powder will be cheaper. So, I think that the demand for powder will be good because of the prices we are seeing right now, combined with the exchange rate.

T3: Fernando, I have a question about the exchange rate. So, from our perspective in the US, we’ve been very surprised by the strength and stability of the exchange rate between the dollar and the peso over the last four or five or six years. What is that stability and the lack of what we used to see, which was a regular decrease in weakness in the peso relative to the dollar, but the fact that it’s been stable and strong, how has that manifested in terms of inside Mexico, in the economy?

Fernando: Well, the impact is huge, Ted. Of course, Mexico is a larger importer of a lot of things, a lot of commodities. So, having a low exchange rate will help most Mexicans, for sure. And it’s really strange. If you see maybe in the last 30 years, it’s very hard to see the exchange rate going down. And We have seen that since 2021 and 2022, after the huge impact of Covid, the exchange rate has been going down, It went up to 25 pesos. Right now, it’s just below 17. That’s a lot. So, of course, volatility is impacting for sure. But again, seeing the exchange rate as you see right now, it’s like numbers; I think maybe in 2017 or 2018, we will have the same exchange rate.

So we are six years old and have the same exchange rate. It’s really strange. But for sure, it’s having a good impact because of the imports in Mexico. Of course, it will affect the other way around to the exporters. The exports are not very happy, but we know that Mexico depends on imports, and of course, just seeing the stable exchange rate is good for the manufacturers. That depends on the imports because they can easily see the cost in pesos, and the exchange rate is not moving much. So, having a stable exchange rate benefits the Mexican companies a lot.

T3: Have the Mexican dairy farmers been complaining because they haven’t been able to raise their milk prices?

Fernando: Well, they will always complain, Ted.

T3: That’s true everywhere in the world, Fernando.

Fernando: Yeah, they will do that, for sure. But the truth is that, yeah, of course, the farmers are not happy. Their fluid milk is not getting the price they were looking for, competing with powder; with this exchange rate, it’s really, really difficult. So they have a lot of challenges, for sure. So they will continue not being happy, that’s what I think. I don’t think the powder price and exchange rate will change to compete with fluid milk. I don’t think that we are really close to doing that. So yeah, we are having a lot of farmers complain.

T3: Got it. I will say one thing: If we think of it just in terms of dollars, six years ago, the price of powder was what, Yara, in the US, about 75 cents? Now it’s $1.20. So, the price of powder has gone up quite a bit in the meantime, even if the exchange rate has stayed stable.

Yara: And something interesting is that when AMLO, the President, was doing his campaign, he said that he was going to protect the farmers and not buy non-fat milk and not import products from the United States. In the beginning, it was kind of hard because Liconsa didn’t buy products because they were waiting for them. But in the end, obviously, they need the non-fat dairy from the United States. So, I think they don’t want it this year because it’s an election year. That’s why. Yeah, they want to show the farmers what they are not doing.

T3: That makes sense.

Fernando: I agree.

T3: Yara, do you have any more questions for Fernando?

Yara: Fernando was… No, I think we cover all the questions that we have scheduled. Thank you very much, Fernando.

T3: Diego, how about you?

Diego Carvallo: No, no. Thank you so much, Fernando. It’s great listening to all of the information you have and your experience, so thank you so much. It’s been great.

Fernando: Thanks for the invitation. It’s great having these discussions. Of course, I think it’s very important for US exporters, especially Jacoby, to understand the Mexican market, and it’s hard, for sure. It’s not learning to speak in Spanish; it’s more difficult than that. Now, of course, I appreciate the invitation, the time, and the interest in better understanding the Mexican market.

T3: Thank you, Fernando. We really appreciate you spending the time with us today, and thank you for the long relationship we’ve had over the years. We really appreciate it.

Fernando: No, I feel very, very, very good working with a company like you, Ted. For sure.

T3: Thank you, thank you very much.

Yara: Thank you, Fernando. That is very productive. Thank you always for your help.

Fernando: Thanks. You’re welcome, Yara.

Este es el primer episodio de nuestro serie trimestral Entendiendo Exportaciones. El invitado especial de hoy es Fernando Anaya, Director General en DILAC. DILAC ofrece productos lácteos en polvo y tiene un historial de 27 años dentro de la industria láctea mexicana. Nuestro equipo de Jacoby incluye a Ted Jacoby, Presidente; Yara Morales, Directora de Ventas para México y América Latina; y Diego Carvallo, Director de Comercio de Ingredientes Lácteos en T.C. Jacoby and Company, Inc.

En el episodio de hoy se discute el mercado consumidor mexicano de productos lácteos. Fernando comparte su perspectiva sobre cómo la sequía, los tipos de cambio y las corrientes políticas afectarán a los importadores de leche en México en 2024.

Además de lo anterior, lo que los importadores deben saber sobre los cambios en los procedimientos de importación de leche y la opinión de Fernando sobre el factor más importante para las importaciones de leche en México; sumérgete con nosotros en el Milk Check de hoy.

The T.C. Jacoby team got together to talk about a two-part phenomenon that we’re expecting to wrinkle the dairy markets over the course of the next year or two.

2023 through ’25, plant capacity expansions total 9% of all milk production. But heifers are short, milk production was flat in 2023 and we expect it to be flat (or close to it) in 2024. So who will be left out, short on milk? Or will dairies pull off a production miracle?

Director of Milk Marketing Greg Scheer, “Semi-retired member of the board” Don Street, Dairy Ingredients Vice President Josh White and Dairy Ingredients Sales Associate Tristan Suellentrop join Ted and his dad to speculate on how these issues will resolve over 2024 and 2025.

From high level discussions of price and premiums to granular conversation about regional dynamics and potential changes to the direction of milk flow in the U.S., the team covered a lot of ground in 20-ish minutes.

Give it a listen, and let us know what you think.

T3: Welcome everybody to this month’s edition of The Milk Check. Today, I am joined by Greg Scheer, our director of milk marketing, Don Street, longtime dairy trader and industry veteran, Josh White, head of our whey and dairy ingredients group, my dad, another industry veteran, and then Tristan Suellentrop, who is part of Josh White’s team and also part of our marketing.

So today we are going to try to answer a very interesting question, which is is the dairy industry about to embark on a very expensive game of musical chairs? Let me tell you what I’m thinking.

Two seemingly unrelated issues are starting to feed through the dairy industry. The first one is the fact that we’ve got a heifer supply shortage because since the pandemic, beef prices have been so strong that people have been breeding dairy cows to beef cows because the value of a beef calf has been a lot higher than the value of a dairy calf. This has created a heifer shortage where we just don’t have enough heifers entering the milk supply right now, and it’s going to be very, very difficult for the US dairy industry to expand milk production because we don’t have the heifers to do so.

And think of it this way, if you make the decision today to breed to have a beef calf, you’ve got nine months of pregnancy, then you’ve got over two years of growth before that heifer can enter the milk supply, which means you have almost three years before you can change the dynamic that has already started. And everybody we’re talking to today says dairy farmers, most of them, many of them are still breeding for beef calves and so this heifer supply shortage is not going away anytime soon. So that’s one side of the coin.

On the other side of the coin, there is a lot of plant expansion going on right now. In fact so much that since the beginning of 2023 through 2025, that three year period, we are building enough additional plant capacity to equal about 9% of the total milk production in the United States. And given the fact that we’re already done with 2023 and milk production was basically flat in 2023, it’s hard for me to imagine, given the heifer shortage, that we’re going to be able to increase milk production by 4.5% a year over the next two years. In fact, our experts, and we’ll let them talk about it, are saying that we think ’24 is going to be flat as well. So what’s going to happen? All these new plants, how are we going to fill them? Where’s the milk going to come from when we aren’t going to have the additional cows to fill these plants?

I’ll tell you what, Don, I’ll start with you. What do you think is going to happen? How are we going to deal with this issue?

Don: First of all, one can always count on delays in plant construction so that the time arising gets pushed back a bit. It never fails, right? So maybe that takes a bit off of the leading edge, but it doesn’t really answer the question.

I think if profitability is there for the dairy producers that you could see a recovery in milk per cow, and that can give you, let’s say 1% year-on-year. And we’ve been more or less flat to very, very low on any increases in milk per cow. So that’s one spot it could come from. The other way to expand the herd is simply keep cows longer. And you probably, in a rotational sense, actually get better milk production out of a fourth or fifth lactation cow than you do a fresh heifer. So maybe that’s part of an answer. And then finally, it’s just survival of the fittest on the plant side and do all the old plants keep producing. So three thoughts.

T3: Greg, what do you think?

Greg: Well, I do think the US milk producer is very resilient and they find a way. If there’s plant capacity, they’ll find a way to keep that cow longer to continue to improve the feed and the rations. And then like Don was saying, maybe some of the older plants have to close and then it’s just the more efficient ones are the ones that stay open. So we’re not actually adding that much plant capacity. We are adding plant capacity, but some of the old plants will maybe have to shut down or retool. So I’m under the impression that you can’t count out the US dairy producer, even with the lack of heifers that they’ll find a way to produce some milk.

T3: Josh, what do you think?

Josh: It’s a complicated question, and it’s so much easier to talk about the supply side because we’re so unsure of what the demand climate looks like today. So if we focus just on the supply side of this, I’m pretty sure that a lot of it can be solved in the margins in terms of how milk moves around, how milk’s traded. But I’m fairly convinced that we’re entering a new cycle with a change in our traditional milk movement paths throughout the US and that milk may move differently over the next several years than the traditional flow of milk that we’re used to.

T3: So how’s it going to change? What do you think is going to happen differently?

Josh: Yeah, I think it’s dangerous to try to predict it specifically, but there’s a few things that over the course of the last growth cycle, the last at least 10 years, a lot of the growth that we’ve seen has been in Texas, in the Upper Midwest and the growth in production has been in those areas. And as we know, that’s a cheese-dominated area. But when you think about trading some of the components, product historically liked to flow East. That Texas market has put on a lot of capacity to manage that additional milk. Where was the surplus milk out of that market going to prior years and are they a surplus market anymore or are they potentially even a deficit market?

So I think it would be ignorant of me to try to anticipate exactly how it’ll change, but it feels like it is changing and it’s moving in different directions. And we may see pockets or periods of time where milk could flow directionally differently than we thought before. And very generically milk would flow from West to East at different points in times with the big obstacle of the Rocky Mountains blocking some of that. Do we see scenarios or different movements now where you actually could see periods where milk flows South or West? I don’t know.

T3: With beef prices as high as they are, Don, there seems to be a lot of incentive for dairy farmers to continue to call cows because we still have really high beef prices, really high live cattle prices. And most dairy farmers aren’t out there saying, “Hey, we’re making a lot of money right now,” which tells me that the economic incentive is not there right now for them to keep the cows in the herd.

Don: I would not argue with that point at all. If the financial incentives are there, then you would have an inducement to keep cows longer. But I would guess at today’s prices, even with falling corn prices, that that’s not the case. The profitability per cow is minimal at best, if not negative. So the easier answer or the most expedient cash flow answer is to send her to slaughter.

T3: And if that’s going to happen, that means there’s some plants out there they’re going to be losing milk to fill the new plants.

Don: Yes.

T3: Is there any region of the country that will be better off than others, do we know? Greg, you probably understand where the milk is long and short better than anybody.

Greg: Well, that’s a good question because producers are going to look at where do they have land, where do they have feed? So that’s why we’ve grown in the Upper Midwest. That’s why we’ve grown in West Texas. So those are still going to be key growth areas, but with the new plants in other areas of the country, we’re going to have to figure out how to move that milk. And so as transportation has become so much more expensive, that becomes a much more daunting figure to move milk around.

T3: A lot of the plant expansion’s happening in the Southwest, so West Texas. And I think that if there’s one place where I think it’s going to be difficult, even though there has been a lot of dairy farm expansion in the area, my sense is there’s nowhere near enough expansion there coming down the pike to fill the number of new plants that are being added to the area. In the fall, a lot of milk in the Southwest tends to get shipped into the Southeast. Is that going to stop? And if so, where’s that milk going to come from that goes into places like Florida and Georgia?

Greg: Yeah, that’s the key. In the first half of the year, it’ll be fine, but when production’s down in the fall and schools start up and we have the big rush on milk, where is that milk going to come from? It’s going to have to come from… Maybe it’ll stair-step some, but it’s going to have to pull from the Northeast and the Mideast. Maybe some Mideast milk gets pulled to the Southeast and Midwest milk comes around to the Mideast to fill in. I mean, that’s likely going to have to happen.

T3: That makes sense. Dad, what do you think?

Ted Jr: Well, the first question with regard to the heifer supply, heifers are short. But the last time we looked at that, I think we decided that the heifer supply is sufficient to hold us even given a normal slaughter rate, given the dairy farmer’s pension for looking at cash flow first. Probably what will happen is that the slaughter rate will go down in order for him to produce additional milk, looking at his feed and so on and how to keep the cost down and all that.

I do believe that they’ll continue to produce additional milk. I don’t think we’ll see new dairymen getting into the business, but if someone wants to sell out at this rate, I think other dairymen will snap them up immediately to fill their barns. So I’m not particularly concerned about there not being enough milk. All it means, as far as we’re concerned, is that when someone needs an extra load, he’s going to have to pay for it. This is the traditional solution to long and short supplies in the dairy industry, which we have seen for the last 60 years. So I don’t think that’s necessarily a big issue.

The bigger issue in my mind is the overproduction of cheese. And given that cheddar cheese has become the base commodity that drives dairy pricing and given the fact that cheddar cheese is probably going to be overproduced to the point where we’re going to have to put it in the export market no matter what, I guess it’s hard to visualize how this affects everything, but the base price will stay down, but the market for milk will gravitate towards higher premiums to people who can pay for it, which are specialty cheese manufacturers, Class I manufacturers who need the milk. And I point out at this point that Class I’s decline seems to be leveling off a little bit.

T3: Sounds like what you’re saying is dairy farmers should be happy about the fact that maybe the days of milk discounted by $10 cwt just to get it moved in the second quarter in the spring, those days may be over.

Ted Jr: You’re right. It’s a good way to sum it up. But we may be back to where we were 20 years ago in that regard. So Greg, you got the ball. When we look at a milk shortage up at all these specialty cheese plants up in the upper Midwest, it’s up to you to make sure that they get it no matter what.

Greg: Well, we’re going to have to have good haulers and hopefully diesel fuel prices don’t explode because the cost to move milk has grown so much. But like you said earlier, Ted, they’ll have to pay for it if they need additional milk. They’ll just have to help pay for that transportation to get it to the right area.

Ted Jr: Well, to put things in a little bit of perspective, not that we are trying to support this, but how low did the discount go when milk was long? I guess I don’t want to even mention the number. But how high can the premium go when milk is short if someone needs the load to cover orders? I think that’s probably where we’re heading. And I think the base price given the supply of cheddar will probably remain somewhat suppressed.

Don: So Ted and Ted, I have a question, which is everything that Ted just said would suggest Class IV prices will be higher than Class III prices. Can cheese plants then no longer standardize protein to fat but standardize fat to protein so that you have more cream moving to a higher value? It’s not good for plant efficiency, I would say, but is that a possible work through?

Ted Jr: The way I would look at it, keep it simple, if the Class IV price is $2 cwt higher than the Class III, the first thing that will happen is you’re not going to move it anywhere unless you’re at least $2 plus premium FOB the seller, whether it’s the seller’s dairy or whether it’s this plant, probably the seller’s dairy these days. So you’re looking then adding the hauling cost onto that. And quite frankly, you’re probably looking at some pretty big numbers to get milk delivered, which benefits the sellers probably at the expense of Class IV making Class IV that much more dear.

T3: I agree with my dad. This is kind of how I would imagine it. What’s been going on, Don, to your point, is a lot of skim condensed and skim UF milk has been moving from, let’s call it Class IV plants or UF condensing facilities into cheese plants to standardize to the higher fat levels of today’s milk. But those plants are going to really struggle to be incentivized to do that because that milk is a lot more valuable being turned into Class IV than it is into Class III.

Ted Jr: Correct.

T3: And so they’ll keep it, which means now the cheese plants that are just taking in the milk off the farm, at much higher fat levels than 10, 15 years ago, are going to have to spin off that extra fat and then sell it in the form of cream.

The process is going to invert because of the shortage of milk. You’re going to have a much tighter skim condensed market. You’re going to have a much tighter skim UF market. And I’m going to say you’re going to actually still have a tighter cream market, but for a very different reason. And that’s because so much of this additional plant expansion is cheese expansion. And we’re going to end up with a flat to only slightly higher milk production. You’re ultimately going to have taken milk away from Class IV plants in order to get there. And now that’s going to shorten the butter fat supply in the Class IV space. And that extra cream is still going to be in higher demand. It’s just going to be coming from different places than it did a year or two before. It’s going to be coming from a cheese plant instead of a butter powder plant.

There’s another dynamic that’s going to be very interesting. Traditionally, when we talk about depooling, we’re usually depooling Class III milk from the order, but this time around we’re going to be depooling Class IV milk. And I wonder over a long period of time the dollars are going to add up in terms of that dynamic. It’s going to be interesting to see how that plays out because it’s a different set of people who usually end up with the benefit. I think it’s already started.

Greg: And that spread is very wide right now.

T3: Where I’m going with that comment is some of these co-ops that have a butter powder plant, geez, it seems to me they’re going to be more likely to say, “I want to keep that milk,” than sell it to some of their local cheese makers. I wonder how much of that is going to happen in ways that we just haven’t experienced before because we’ve been around long enough that we tend to just immediately make the assumption that cheese plants get all the milk they need. But I wonder if this time around that’s not going to happen.

Josh: There’s a lot of moving parts to that, but I think right now you’re talking about a very wide Class III/IV spread. And to be clear, we’re doing that in a firm butter market, but a not so robust powder market because international demand hasn’t been very strong. So a couple things that we have to consider is what happens if the international demand returns and they need product. We’re already talking about the milk gap between III and IV in a weak demand for global skim solids. The rest of the world isn’t poised to respond either to milk production growth signals. We are clearly the market that can respond the quickest. And all of that being said, when a new plant starts, I’m not convinced anyone’s going to short them of their milk because part of that startup plan is to make sure that plant has the milk. And to Greg’s point earlier, who’s left wanting?

T3: It’s going to get interesting.

Ted Jr: Another side to the coin is the corn price. The corn price is what? Mid $4 range right now? Low $4? I sort of lost track of it.

T3: $4.40, roughly.

Ted Jr: Yeah. So that’ll also make it a little bit easier to produce a little bit more milk and keep the barn full.

Josh: Beginning when is probably the biggest question. And Ted, I think you brought that point up before too. How much at this price is available to be put up and how much has already been put up at a higher price?

T3: You’re talking corn.

Josh: Just feed. Feed cost.

Ted Jr: Yeah, good question.

T3: Well, I think that’s a good point. If this corn price, soy prices, just call it dairy feed prices in general stay low and maybe get lower between now and the fall, you may have dairy farmers looking at late fall ’24 into ’25 expanding because now all of a sudden the math works because feed prices are low enough and who knows what beef prices will do between now and then.

Josh: Greg brought up a great point, every time don’t bet against the US dairymen to figure out how to make more milk.

Ted Jr: That’s right.

Josh: Proven to do a pretty tremendous job in the past, but the things that have been mentioned, the availability of the animals to do that, the competitive market for those animals and how we can do that by retaining, maybe you can already expect that dairy slaughter rates are just going to be tremendously down through the majority of 2024. And the real question for me is what is the earliest we can see a reversal in the US milk production direction? What is the soonest we can see a supply response at this moment? And given heifer availability, given the decisions to put on large dairies and to build new ones, that model is a little bit different and it is going to take a little bit of time.

Ted Jr: I agree.

Don: I always like to remind people to be aware of what we don’t know, and it’s always a lot, right? We keep peeling the onion back month by month as we get more data and understanding of the markets, but things can always surprise you.

Tristan: What about how Jersey cows have been added to the herd year over year because they produce a pound of milk components at a lower cost compared to other major breeds. To what scale does this counteract the lack of heifers versus the added plant capacity in the US?

Don: Let me take the first stab at that, Tristan. We’ve seen and now for several years fat components of milk increasing at 2% a year ago over the prior year and 1% this year. So it’s fairly significant to where total solids in milk are well over 13% at this point. So that is just like producing more of five-year-ago milk, right? It’s just more solids to process. And genetically, if we have a lower level of heifers entering the herd, it will slow that progression a bit, but it certainly won’t stop it because it’s already present. So those cows will keep producing until they exit the herd at a higher solids level. And I would further guess that the heifers coming in are more reflective of crosses between Jersey and Holstein or just pure Jerseys to where that trend will continue.

T3: Anything else on anybody’s mind on this topic that you think we need to address?

Ted Jr: I think we’ve had a good discussion.

T3: Sounds good.

Ted Jr: No, I don’t think so.

T3, Josh and Tristan sat down with Jeroen Lemmens, who joined Cefetra Dairy in Singapore after spending multiple years trading dairy in China.

We’d spent months looking for the right person to talk to about China’s dairy buying habits past, present and future. The conversation gave some color to the disappearance of Chinese demand for American milk and some backbone to the hope that some of that demand will return in 2024.

Discussion ranged from trade agreements with New Zealand and the state of the hog market to domestic macroeconomic factors like China’s property market and industrial challenges.

Give it a listen, and let us know what you think.

Ted: Our special guest today is Jeroen Lemmens from Cefetra. Jeroen lives in Singapore and handles the Asian operations for Cefetra. Jeroen, why don’t we start by telling us a little bit about yourself?

Jeroen: I’m glad to be here. Thank you for the invitation. My name is Jeroen Lemmens. I have now been in dairy for, I think, close to 24 years. I worked in various trading firms in Holland, dealing mostly in Middle East, Eastern Europe, and Russia.

Then, about seven years ago, I went to China. I was active in the China operation, importer-distributor dealing in dairy commodities, dealing with the biggest dairy companies in China, both in food and feed. I think that was a very valuable experience. China has a dynamic all of its own. I think that’s also showing in the market at this moment.

Also, during the dark times, the last few years during COVID, that was actually a very trying time. Then, early this year, I decided to leave the company I was working for and join Cefetra. For Cefetra now, setting up the operation in Singapore for Asia with, again, also a focus on China again.

Ted: Wonderful. China for the United States is a key dairy trade partner. Really, so much of what happens in China, all of Southeast Asia tends to follow that lead. A lot of times the dynamics tend to be very similar.

It’s especially an important trade partner for the US when it comes to nonfat dry milk, and whey powder and whey derivatives. There’s been a lot of talk lately about … The import volumes in China are dropping, and, of course, in the US, our questions are always, “What does that mean for dairy prices in the US?”

I want to start with a very simple question, which is, from a dairy perspective, what is going on in China? What is driving the decrease in imports of dairy products? Is it across the whole spectrum of dairy products, or is it just certain dairy products? What are your expectations, going forward?

Jeroen: I think at the moment there’s a lot of different things happening at the same time, all affecting the markets. I think a lot of buyers actually have been expecting that, with the reopening of China after COVID, there would be a boom in consumption. People were trying to take positions to be ready for this.

Actually the import values this year so far have been bigger than last year, year to date, whereas the consumption dropped away by a variety of reasons. One is local consumption took a hit, especially the consumption of, let’s say, higher grade, fresh products. That consumption reduced a lot, so that’s less consumption, more imports. That’s one reason early in the year.

Second one is that the local production of milk powder in China actually continues to be strong. It has been very, very strong last few years, but it’s still growing. You have growing local raw milk availability coupled with reasonable stocks and lowered amount, and I think that’s dragging the market down now to a certain extent.

Then, looking at nonfat for US, you have the other situation that’s starting this year. There will be no duty for New Zealand milk farmers, full year. Normally, there would only be a period in early Jan that the first 100,000 tons of product would be low duty. Now it’s no duty, full year.

That means that the incentive for buyers to go to New Zealand over US is a 10% duty advantage. That will at this moment limit interest in US products, because New Zealand is the cheapest source available by normal price, and then, after duty advantage, is the lowest cost by far.

Josh: Jeroen, I got tons of question. I want to jump on that last one for a moment. You would maybe know a bit more about this than I.

There’s very seasonal production, but they’re a large importer of these products. We know that their internal milk production is increasing, and that might have some impact on their overall demand for these products.

Where is the product stored? Because historically I had the impression like there’s a duty advantage that lines up with the peak season out of New Zealand. These products then flow into China, would maybe go into the traders’ hands and users’ hands to be distributed throughout the year.

Is there going to be a significant change in the net importation from a volume standpoint as a result of this duty change, or is it really just shifting when the product moves? Give me some thoughts on that, if you would.

Jeroen: I think, let’s say, overall, I would say my expectation for coming in, let’s say 2024, I think that the overall import volumes will be slightly better than ’23 for many products. Not specifically skim milk, but for many products. I think it’ll not be as good as 2022, so it’ll be less than ’22, more than ’23. I think there will be import requirements.

However, in line with what you’re mentioning, that’s quite interesting to see because then it will no longer be this perfect fit on the main season of New Zealand. Normally, New Zealand, you’ll have the peak production month, and that peak production month will fit very, very nicely into the peak demand in China. This year, that will not be the case.

Listening to people in Oceania, they claim to be very well sold. I think the O’Neill term has recently … They have helped them clear some of those stocks that normally would have gone to China. I think that will be an interesting thing to watch into Q1, whether that demand from China will kick in and whether, at that moment, New Zealand will actually have those volumes available or not.

Josh: Maybe to avoid making this purely about the components, there’s two areas that I’d love to talk about. Let’s start with the consumption side. It’s been discussed amongst our group at Jacobi multiple times that, over most of my professional career, most of the career of, say, some of the older Millennials, really, we’ve been balancing supply.

Demand for a lot of the dairy-related products has been somewhat predictable. It moves slightly above trend one year, slightly below trend the other, but very much, on a multi-year pattern, is falling within a very predictable trend line. For the first time in our professional career, as someone around my age, we’re now questioning demand across the board.

A big disruption historically to those price trends is Chinese buying. It’s my opinion, or at least I’d be curious to get yours, that we’ve gone through multiple periods in the past where China has stocked or destocked, but I don’t know that their consumption pattern has been so volatile year over year. I believe, just from what I’m reading, that they’ve accelerated their per capita consumption of dairy products quite a bit over the past 10 to 15 years, but it isn’t so volatile year over year.

Whereas, now, for the first time, I think we’re questioning whether or not the per capita consumption rate is growing at the same rate it has for the past decade. Do you have an opinion on that?

Jeroen: I do agree that you have seen a strong increase in per capita consumption in China over the last few years until 2021, but in the last two years we expect that there was no consumption growth, perhaps even a consumption reduction. Like you mentioned, the entire market, including stakeholders in China itself … Everybody was banking on this continued growth.

I think that didn’t really materialize. That, combined with a strong focus on growth of raw milk, they started producing more local full cream, but they were also starting using, for instance, local raw milk to replace imported skim milk powder, and so on. They were also supplementing.

I think that’s at this moment happening to some extent. I’m hearing stories from multiple sides that, actually, a lot of industries are facing a strong reduction in consumption at this moment. That’s sometimes even, let’s say, higher than 10% reduction in consumption over their finished goods.

Ted: Another way to describe what you’re saying is we have started to see a fundamental trend shift in consumption of dairy in China. After 20 years of significant per capita growth in dairy consumption, it’s starting to plateau and flat.

Jeroen: I expect that it will start growing again, because I think the authorities also are invested in growing a stronger local industry. At some point, I think they will start supporting the local industry again by either promotional activities like before, where they advertise the health benefits, or just by spread out promotions. I think that will start happening.

I think at this moment what we’re seeing is just the effect of a very, very bad economic situation on multiple levels, stock market, housing markets, industry. At this moment, China’s going through a tough time, which I think they will get through.

People were thinking that the worst was over when China reopened. Everybody was expecting this reopening and a bounce back to normal, and what they found was actually that a lot of problems now start surfacing which they thought were already passed.

To highlight, again, a little bit on that is that also a lot of Chinese dairy consumption is still out of house consumption. As soon as people are less going around, there will be less dairy consumption. You and me, we consume readily at home, like sandwiches, and pizzas, and so on. Those are, for most Chinese people, still more items they consume out of house, like food service.

Josh: Can we talk a minute about the scale of Chinese milk production? I went down a rabbit hole earlier on YouTube, and everyone knows everything on YouTube is very quality information.

One of the things that I was exploring is the size of some of the Chinese dairy farms. I was blown away by a couple of these, multiple farms of a 100,000 milking cows. The geographical area they covered, I think, was 65 million acres equivalent, like the size of Portugal. If I understood it correctly, the largest one in the northeast part of China, ultimately built in conjunction with Russia after Russia banned imports out of the EU … I just didn’t realize that connection. I did know that there was large scale there, but nothing like what I was beginning to research.

That growth over the course of the last decade has been enormous. Is that trend to continue, or is this economic environment that they’re in today really going to suppress that continued growth?

Jeroen: If you’re looking at the ROB milk price, that’s now more or less reported … It’s always a little bit of a mixed picture. Let’s say the milk price that’s now generally accepted as most likely the average milk price, that should not cover all the cost of a normal farmer.

However, I think in China, a lot of the farms are owned by the processor, who also owns the retail brand. The entire chain is in the hands of some big market players.

I think, on many, many levels, you see big local producer, but also smaller regional producers. Everybody has been investing in local farms. This is done by companies, but also either partly saying no to regional stakeholders or state shareholders.

I think these incentives is there. Those investments are made. This will continue to go. The only thing you see happening is that a number of the smaller private farms are not surviving in this situation.

Our expectation is that the grow of milk growth will slow down, but it will still grow. Our assumption is … Let’s say normally the last few years, you saw perhaps a growth of about 7%. This may come down to a growth of about 4%, give or take, but the growth will, in our opinion, still be there. They’re building this big industry up north, but the cost of getting dairy from the north to the south is actually not so much more economic than getting products from, let’s say, the US to the south, because it’s not a balanced geographic area.

Ted: I will say that I believe that, very much so, because we actually see the same thing in the US. It’s more expensive to ship dairy products from California to Wisconsin than it is to ship them from California to China. It’s just the logistics of putting it on a big ship is just cheaper than the logistics of having it in an 18 wheeler.

Josh: It’s a pretty good back hauling, also. It’s quite a bit of stuff coming here.

I want to be clear, too. I would love someone to debunk or fact check these stats I was hearing, because, in terms of their daily production per cow, it was enormous. They said in one of these articles I read the top 25 dairies represent 29% of the milk.

These are economies of scale that we have here today in the US. I imagine that they very well could have it in China, but I’m curious how factual that particular source was.

Jeroen: I think that’s one of the biggest challenges for almost everybody I’ve been speaking to in China the time I was there, or even now, at getting the correct figures.

Looking a little bit broader, I think at this moment there’s a lot of issues facing the Chinese markets on imports and consumption, but I do feel, like you mentioned before, that China was known for stockholding. I think at this moment they are chewing through stocks, so I do feel that, in the coming year, that situation will start changing and imports will be resuming again.

Then, looking at, if you, let’s say, set the time ahead for a few months and the situation start changing, then I think the US is actually quite well lined up to benefit from a possible revival of demand. Looking at the way, let’s say, New Zealand, then, will be going out of season, and Europe is actually struggling at the moment.

Josh: Jeroen, help us understand. China is a very important trade partner to the United States, particularly for our whey products, and growing across some other products. As we find, at different moments in time, when the US is competitive on price, we have opportunities to do a fair amount of business into the highly competitive region in Southeast Asia across many different products, help us understand the relationship between Chinese buying patterns and their influence on the rest of Southeast Asia, if you would.

Jeroen: At this moment, the biggest influence China has on the rest of Southeast Asia is, I think, that the rest of Southeast Asia has been waiting for Chinese tourism, for one, to get back to more normal. Because, yes, there’s a lot of, let’s say, Europeans and Americans going on holiday here, but that’s not the majority group. It’s the Chinese tourist which is the backbone for tourism is the region. I think that’s one thing they’re missing.

Secondly, a slow economy in China will affect the rest of this region as well because they are supplying raw materials, they’re supplying our finished goods. A slow China is affecting them in that sense as well.

On the purchasing side of things, I think Southeast Asia to a certain extent, and the Middle East now, definitely are actually benefiting from the fact that China is not there to do the bulk buying. They are able to step in and get their buying done at reasonable prices.

Ted: I want to digress for just one quick second. One of the reasons that the Chinese are not traveling at the moment is, in the beginning of 2023, they basically had a second COVID outbreak. They still today haven’t gotten back to normal and are traveling again. Is that what happened? Is that a fair way to put it?

Jeroen: Yeah.

Ted: What are your expectations? When will that international travel get back to normal out of China?

Jeroen: My personal feeling is that will be strongly correlated to the economic situation in China. I think, from people I speak to, a lot of people have just become more careful just in spending, in consumption in general, even traveling in China itself or consumption in China itself. It has just reduced a lot while people look for more direction of where things are going.

Property market is down considerably, just even in tier one cities, which is actually quite a shock. Stock market is not performing. Unemployment was bigger. There were pay cuts for all from … Overall, the entire spectrum is not that great. People are just taking a slight wait-and-see approach, I think.

Ted: It’s not like there’s going to be a moment where suddenly everything’s back to normal. It sounds like it’s just going to take a while for them to slowly evolve back to the way things were, let’s say, a few years ago.

Jeroen: Yeah. Saving in China is speeding up a lot. The money is there, but, just, people are not spending it. I think they are accumulating wealth, how you call it. I think as soon as they see that they’ve passed the worst moment, people will start investing and spending again, because that’s the moment when they see opportunities.

Ted: You and I, I think, are going the same place.

Josh: Sounds real familiar to what we experience.

Ted: In the US, everybody stayed home in 2021. Their savings accounts got really, really good, and then 2022 and even 2023, they were spending that money and going out of style with it. It almost feels like 2024 in China is going to be a little bit like 2022 in the US, where, by the time you get to the middle to the end of this year, things are going to be going strong there if they’ve got the money to spend.

Jeroen: I think China could be the accelerator when things start going better, let’s say not only in China, but more in the world. For instance, if US and Europe become little bit more positive, start consuming more, more orders going to China. As soon as that start happening, that things start going well, I think at that moment they could kick in with, let’s say, a more optimistic view and start spending as well. That could be, then, the accelerator of everything.

We have to go through this phase. We haven’t even touched on other things, because there’s more problems than only consumption on dairy. For instance, you highlighted earlier on the whey, and especially going into feed, whey, and permeates. The pork market in China actually is going through a tough time as well. Also, again, less consumption, which means lower pricing. AFS is still a strong problem in China.

All these things combined as well are not the most optimal conditions for the sector there as well. They have been losing money for a long time now because pork prices have always been lower than the feed cost, and that has drained liquidity from that sector.

Again, this sector will survive because it’s an important sector. It’s a sector with a lot of state or regional influence, but it’s a troubling sector at this moment.

Ted: Interesting.

Josh: I think the important takeaway for me was you don’t feel like this is a consumption trend change, this is an economic-driven or a disposable-income-driven slowdown that we’re seeing right now. That, in a healthy economy, the Chinese consumption per capita may continue to grow fairly rapidly.

Jeroen: I do feel. I think, talking to a lot of people in China, as far as I know dairy is still considered a valuable nutrition. It’s different than some parts of the Western world where people are looking at dairy as … Perhaps the trend to vegan, or whatever. In China, there’s still a strong focus on that dairy ingredients are a valuable nutrition.

Josh: One final question. Within the EU, we talk about environmental pressures on dairy production, and that’s impacted one of the variables that impacts the EU’s ability to scale production like we’ve seen in other parts of the world. I mentioned China earlier. We’re certainly seeing much more larger farms in the US.

We, here in the US, have less pressure than perhaps across the pond, but we still have pressures as well. We have the impression, I think, generically that there’s far less environmental driven pressure on production out of China. Is that an accurate statement?

Jeroen: That’s what we hear as well. Yeah. The incentive is to grow the self-sufficiency. The incentive is to be less dependent on the world.

Also, there’s a strong push within China to increase dairy as an ingredient for nutrition. I don’t see any, let’s say, hurdles to grow the local industry.

The only perhaps would be their access to breeding stock. There’s some countries now who are limiting the export of cows to China. That could, to a certain extent perhaps, take some limitation on their growth. But the incentive is there and their industry is there, so I don’t see that slowing down.

But, at the same time, I also feel that, once the consumption starts growing again, they will still be struggling to have that industry grow at the same time as their consumption is growing, because their per capita consumption is still quite small. As soon as they start consuming more dairy again, I think they’ll still be struggling to have their industry grow as fast as their consumption.

Ted: It almost feels to me like the first half of the year we could almost expect a little bit of a game of chicken, where the demand is not quite going to be there. The Chinese are going to play their cards close to the vest, buy what they need to, but not much more than that until prices come down to a place where they really feel confident building their inventories. Once they get there, they could be building those inventories from wherever they can grab product, whether it’s New Zealand, the US, Europe, wherever.

Jeroen: When I was there and the crisis started, I was expecting purchasing to go down. Because normally, as far as I always knew, in time of crisis, buyers would like to keep as much cash around as possible. In that instance, Chinese buyers did the complete opposite. They started buying a lot of product, because they would rather have product in time of crisis than cash. That was actually quite interesting.

Ted: That is interesting.

Jeroen: At this moment, I think they don’t have any fear that there will be no product. I think as soon as they fear that perhaps the product will run out, they will start buying. At this moment, they don’t feel that people are worrying about the availability of products.

You see some message coming from New Zealand that perhaps Q1 will be affected by El Nino, leading to less product available. I don’t think this fear has kicked into China. They don’t have that same fear.

Josh: Ted, maybe to say what you mentioned slightly differently, is … I’m not so sure that the price needs to go lower before the Chinese market will begin buying and stocking, it may be that they need to see the activity in their own consumption recover a bit. Regardless of where that price is, they’ll start to buy more aggressively. One would assume, without China, that prices will be relatively affordable at that time.

Jeroen: If more consumption, or a fear of missing out product in the coming Q1, Q2 … I think that could trigger buying. At this moment, the incentive is not there. At the same time, also in China, liquidity is also still an issue. If you don’t feel this fear of missing out, keep your liquidity with you.

Ted: I think that liquidity comment’s a big one. That makes a lot of sense to me.

Tristan: Production is increasing in China. Would you say that it’s more at the farm level, or would you say it’s just more about getting more cows at the farm and buying more land?

Jeroen: I think both. I think you see the shift from, let’s say, small farms to more professional, bigger farms. In that shift, you see more production per cow coming, and, at the same time, you see more cows coming as well. It’s a double.

Normally there’s two numbers of milk production you can see in China. There’s two different agencies reporting. I forgot the names, but there’s two different agencies. The number of one is always a lot higher than the other one, and the reason is they are tracking big farms. They only track big farms, and the growth of big farms is a lot bigger than total market.

Ted: Do you think more milk comes from big farms or small farms in a totality, Jeroen?

Jeroen: Tricky one. I think, by now, it’s switching to big farms. I think that a Yili, Mengniu together, some of the other bigger ones, they now control most of the milk, if not the vast majority of the milk.

Whether that’s only in big farms of their own, or also they have farms operating, they supply the milk to the … That’s possible, but I think that the big farms are not taking them.

Ted: Makes sense. Jeroen, really appreciate it. I am going to ask one last question. It’s a predicting question.

Where you sit in Singapore, seeing prices from Oceania, Europe, and the US, are you expecting to see higher prices at the end of 2024 than you’re seeing right now, or lower prices?

Jeroen: End of ’24? That’s a big prediction. I think that New Zealand will go up. I think that’s too low. I think that US now, what I’m hearing, is prices coming to Asia is quite reasonable for now. I think Europe is a little bit too optimistic. Especially looking into future’s Europe, I think that’s quite optimistic. At that moment, I start fearing demands. End of next year, I would say up.

Ted: I think the dairy farmers here in the US are going to like your answer.

Jeroen, thank you very much. Really appreciate it. Thanks for taking the time. This was a great conversation, and we really appreciate you joining us today. Thank you.

Jeroen: Thank you guys for your invitation. Happy to be here.