The Milk Check

Ted, T3 and Anna talk through the problems caused by chronically high milk supplies before diving into a discussion on why the widening block-barrel spread hurts dairy farmers.

Anna: Welcome to "The Milk Check," a podcast from T.C. Jacoby & Company, where we share market insights and analysis with dairy farmers in mind. Today is November 1st. We've still got too much milk, Class III prices aren't doing what we would generally expect for this time of year, even though demand seems okay. Ted, why don't we start off with your impressions on what's going on right now?

Ted: Well, we're in a very unique situation where 75% or 80% of the time, in the second half of the year, the prices for milk and dairy products go up. I guess as late as three or four months ago, we thought that that cycle was gonna continue for 2018. Obviously, it hasn't. And we find ourselves in actually a pretty desperate situation with the Class III price nudging the $14 range. The PPDs are at a lower level than we've seen in my memory. And Class I sales are bad. However, in spite of all that other sales, other than fluid milk sales are pretty good. Exports are still very good on an annualized basis, but the price of milk is low. The question is, how is this problem going to be solved anytime soon? We're going to need to see a reduction in the amount of milk out there in order for these prices to go up.

We've heard a lot of conversation about it. Everybody talks about it. There's sales. There's talks about record number of dairymen in Wisconsin and New York, and so on going out of business, but the production goes up and not down. And our production numbers have reflected that for the last six months.

T3: The feeling that I get is that in the last month with the price of cheese dropping instead of going up as we get into the holiday buying season, if you're a dairy farmer who's been on the fence trying to decide whether to stay in this business, it's almost like the last month has been that final nail in the coffin that's made you decide maybe this isn't worth it. And it takes three, four, five, six months for those decisions to play out. But I wonder if the latest price decrease was that final nail into the coffin that that maybe has changed the landscape a little bit. Maybe we're finally going to see some of the negative production numbers that we need to see if we're going to hope for a turnaround in dairy prices.

Ted: We all would like to see a little light at the end of the tunnel other than the train coming at us. I'm sure the dairymen even more than us would like to see that. However, we don't want to paint a false picture. We got to see some production reductions.

T3: Our current situation reminds me a lot of the mid-1980s. The '70s was a period of high volatility. Milk prices, corn prices, oil prices all significantly increased. There was a period of significant inflation, but more importantly, there was a period of significant increases in commodity prices and significant volatility. And then in the '80s, inflation subsided. The economy as a whole started to grow strongly, but it didn't really pull the agricultural commodity business with it. The '80s was a great time to be an investment banker in the stock market. It was not a great time to be a dairy farmer. The mid to late '80s was a period of relative stability in dairy prices at the low end of the spectrum.

Ted: Let me take a little bit of an issue with that just for the sake of the discussion, to point out what's different. It wasn't the '80s necessarily, but in 1974, we had a huge price increase going on for two or three years in dairy prices. And the psychology at that time was that it would never end. It's like every increase in pricing, anytime that market's going up, whether stock market, dairy prices, milk prices, cheese prices,

Things are changing in California, where around one-fifth of the milk in the U.S. is produced. Starting Nov. 1, the state's independent milk marketing order will cease, giving over to the country's newest Federal Milk Marketing Order. In the second part of this month's two-part conversation, Ted, T3, Anna and industry expert Mike McCully discuss the changes and predict whether the implementation of a Federal Order in California will have the affect dairy farmers have been hoping for.

Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Company, where we share market insights and analysis with dairy farmers in mind. Welcome back to Part 2 of our October 1 discussion with Mike McCully. In Part I, we discussed the new trade agreement between the U.S., Canada and Mexico. Today, in this Part 2, we discuss the new California Milk Marketing Order.

Ted: Mike, Anna printed off a copy of the order here last week, and I took a quick look at it. And you know, in my layman's view, I don't see a hell of a lot of difference between the California order and the other orders. We use Richie McKenna here as a consultant on Federal Order issues, and I asked Richie to see if anything jumped out on the pooling provisions and unit pooling and so on. Nothing jumped out to me. You know, we've always worked very closely with the MAs, and we've had a nice relationship with the MAs representing smaller and independent factors in the order. We know that the big boys get, sometimes, a little overly aggressive and manage to aggravate the federal order officials. So our relationship has been quite good in that area.

So a couple of things I think will determine whether how the Federal Order in California plays out. The first thing is who are the handlers, and how is it structured for pooling purposes? You know, there's still enough handlers in the Midwest, for example, to be able to cobble together a unit to keep little guys pooled. Even though the big boys sometimes work diligently to try to thwart that effort, we still do it. Do it in California, I don't really have a good sense of who the Class I handlers are, who the pool distributing plants would be in order to know whether or not there might be the ability to handle unit pooling for people of an independent nature there, of a non-cooperative nature or a proprietary nature is the better way to say it.

What's your view of how that looks from that perspective? If you're an independent manufacturer of cheese, for example, and you want to maintain your own milk supply, you know, and of course, minimum price under the order provisions do apply. How is that gonna work out?

Mike: I think there's...first, the order language is very similar to other orders. And the reason is...MAs have actually told me that a lot of that...not all of it was basically copied over from other orders. The language is very, very similar on those things. And to my knowledge also, I've been through it a number of times with the MAs in seminars and so forth, I don't really think there's anything that would jump out that would be different. Really, the main issue is what you've already brought up is around pooling. And when I went through the Federal Order hearing process, the co-ops and the farmers pushed for mandatory pooling like it is today in the CDFA system and it has been forever, really, in the CDFA system. However, as you know, the market in California is very different than other orders in the U.S. that would have mandatory pooling. And it looks a lot more like the upper Midwest where you've got a high percentage of milk that goes into manufacturing. Eighty-plus percent of the milk in California is Class III or Class IV under Federal Order.

So in that case, you'll see the high manufacturing of milk utilization. You're gonna have more liberal pooling to be pooling tools,

Late last month, trade authorities of the U.S., Mexico and Canada have finally agreed to an updated trade deal dubbed the U.S.-Mexico-Canada Act. In Part 1 of a two-part episode, we enlist the help of dairy industry expert Mike McCully as we analyze what's new and what's not under the USMCA.

Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby and Co., where we share market insights and analysis with dairy farmers in mind. Today is October 1, and with us we have industry expert Mike McCully to talk about two timely topics. They will be coming to you in two separate episodes. Up first will be the new agreement between the U.S., Canada and Mexico that will replace NAFTA. The second topic, which will come to you in about a week, will be the new California federal milk marketing order due to start on November 1.

Ted: Are you updated, up to speed, on what the changes are, Mike? Can you give us a little bit of a preview as to how this is gonna effect our UF and blend sales?

Mike: I think on just the initial...well, the initial reaction is I think positive overall that they're gonna eliminate the Class 7 pricing. The actual impact is gonna take a little while to come into effect. What they've said is it's gonna be six months after the new agreement goes into force, and when they're gonna change that. So, you know, if you figure it's not gonna get officially done here until later this year, you're really looking out into middle of 2019 before being able to eliminate that, and we can get back to maybe where it was before.

I think then the next question is, you know, they've increased milk production in Canada a fair bit since then, and whether they're gonna really have that much of a need for U.S. milk out of the U.S. at that time, I think it's directionally positive that there could be some imports starting second half of next year. But I think it's partly still a little too soon to tell whether that's gonna happen or not.

Ted: So how's Canada gonna handle it internally? Now, if they don't have the Class 7, so what are they gonna do? Take a hit on selling powder in the world market?

Mike: That I think that's probably gonna be the early impact of it, and what...they're going to implement to minimum price for the solids nonfat in Canada that will correspond to the U.S. nonfat dry milk price, minus the margin for what they called the Canadian margin. So they have been pegging that class seven price at what they call the world price, which was essentially, you know, I think arguable not compliant with WTO. But this is one of the concessions they made, is they would change the peg to the U.S. NFDM price, which is, you know, to kind of get it back on more of an even footing than what the U.S. price is.

T3: That Canadian margin, Mike, is that kind of like our make allowance? Or what is that, exactly?

Mike: I think that's what they're referring to. There wasn't a lot of elaboration on the notes that I got, but I'm gonna assume that's what it is.

Ted: Okay. Let me see if I got this straight. They're gonna adjust the Class 7, by whatever name, to conform to international indices for milk powder and butter?

T3: No, that's the way it is now. They're going to make it conform to U.S. pricing.

Mike: Yeah. Instead of pegging the class seven SNF price to this, quote, "global" price or world price, they're going to now take it to U.S. nonfat dry milk price.

T3: The reason that it wasn't working before, from the U.S.'s point of view, was because, basically, by dumping powder onto the world market, Canada was actually driving down the world price, and then using that price they were driving down to lower their own milk price.

Ted: Right.

T3: Now they're gonna use the U.S. price, which is, you know,

Is there a structural problem plaguing the dairy industry?

In this discussion, Ted, T3 and Anna dig into some fundamental changes in the way Americans are eating that spell bad news for the supply side of the industry, which seems unable to shut off the spigot.

Anna: Welcome to "The Milk Check," a podcast from TC Jacoby and Company, where we share market insights and analysis with dairy farmers in mind. As we'll discuss in a moment, markets haven't changed much since last month, but we plan on having a wide-ranging conversation about a few market dynamics that have us worried, and it has nothing to do with tariffs. T3, get us started.

T3: We're sitting here in the first week in August, the markets, at the moment, are very similar to the markets of July. Not a lot has changed in terms of tone in the last month or two. Cream multiples have been better, so maybe on the butterfat side things have been a little bit better. But probably not enough to create a material difference in a farmers' milk check. My guess is that the August milk check isn't going to be that much different than the July milk check.

As you get into late August, schools are getting back in session, the Class I plants will be pulling some milk away from the cheese plants and the Class IV plants. And so, you may see a small increase in cheese prices, you may see a small increase in powder prices, which may mean the Class III and Class IV prices go up a little bit. But the way I look at the market right now, if you look at the current spot prices for cheese and whey and non-fat dry milk and butter, and you look in what that calculates out from a Class III, Class IV perspective, and you compare it to the futures. You'll see there's about a 75 cent to a dollar gap between where we are now and where the futures are predicting, September, October, November are gonna be.

We certainly have a different attitude about the strength of dairy markets in the fall today than we did four or five months ago. We're definitely not as confident about better demand and higher prices today than we were. And as a result, we've kind of gone off into a different kind of path in our discussion on the podcast today.

Ted: I'm troubled by the fact that everything I read is trade and tariffs.

T3: Right.

Anna: Yeah.

Ted: Everything. We're obsessed with it, and we have record trading, okay, right now. And everybody says, "Well, this is the source of the low prices." It's not.

T3: Well, it's a timing issue though. Most of the tariffs...

Ted: I will grant you that if all of a sudden we have embargoes and a full-fledged trade war, it will happen, but we haven't got that at this point.

T3: Right. Most of the tariffs didn't go into effect until the first week in July. And so far, our trade data is through June. And so, we won't know the effect of the tariffs until they start producing the July data.

Ted: Well, why doesn't the world know that? You know, this has reached the point of the most disingenuous thing in the face of the Earth. It's not. It may be one day, but it's not right now. What we got right now is too much milk and not enough sales.

T3: And not enough domestic sales.

Ted: Yeah. Domestic sales are the issue.

T3: The first question is gonna be, "Why are sales down?" The second question is gonna be, "Where did the sales go?" You know, and so, that's what we don't know, is where the sales went. Now, I suspect, you know, the vague answer to that is there's a lot of little privately-held food companies out there that are grabbing a lot of these new sales. I know part of it is also they keep saying they've lost a lot to private label. But we see the private label side of it with Schreiber and Great Lakes and those guys.

While the American dairy industry is collectively obsessed with trade wars and tariffs, that's not the biggest elephant in the room. Ted and T3 look past the headlines to discuss the trend that could have a far greater impact on markets over the long term.

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

Toby: We welcome you back to The Milk Check. It's July 17th, 2018. I'm Toby Wall, I'm in for Anna Donze, she is out today. And with me today is Ted and T3. And we're here to talk about what we think is the biggest problem or at least the biggest challenge right now, in the dairy industry, and it's not what you think it might be. So the conversation about tariffs has occupied everybody's mind lately, but it's not necessarily the biggest issue, right? Since these have been announced, prices have come down in dairy markets. They've come down significantly. But is that the result of tariffs? Or is there something else going on here?

T3: The first thing that we need to keep in mind when it comes to price is markets are not just a matter of math, they can be emotional as well. And I think that one of the things that's happened in the last month and a half is that, as we kept hearing over and over again, about the retaliatory tariffs and how China and Mexico have put tariffs on cheese, and China's put tariffs on whey and other dairy products, the emotional side of the market has really come to bear. Fear. People are afraid that those markets, we're gonna be...our demand is gonna be reduced because we're going to be exporting less to those markets when prices come down.

To me, there's an underlying issue that is a bigger issue than the tariffs. But the talk and what everybody's talking about is what's going on with the tariffs. What concerns me though, is milk production over the last three months has only been up about 0.8%. That is below the natural growth rate in demand in this country. The assumption has been over the last 30 years, the demand for dairy products tends to grow at an annualized rate of somewhere between, 1.5 to 2%. That correlates very closely with increases in population in this country. But it also correlates with a slow and steady increase in dairy consumption on a per capita basis.

So if we're only up about 0.8% in terms of milk production, we should start seeing our inventory numbers stagnate, if not go down a little bit, as we are continuing to consume at an increasing rate, but we're supplying less milk. That's not happening. We've seen our cheese inventories continue to increase this year at a faster rate than they did last year, and at a faster rate than they did before. Inventories are up, for cheese are up this year, relative to last year, even though milk production is down. And the fact of the matter is, even though right now, that all the discussion is about the tariffs, the truth is, for the first five months of the year, January through May, exports have actually been excellent. They've been way better than last year, way better than the year before. So why is our cold storage...why are inventory numbers going up?

That's what has me concerned. Somewhere, whether it's we're producing more cheese or we're producing less of other dairy products because they're not being consumed, somewhere in the domestic demand data, and we haven't been able to pinpoint exactly where it is, we suspect there's been some decreases in domestic demand for dairy products that really isn't coming to the forefront, that's not obvious to people who really studied the numbers.

Ted: I tend to believe that only the most isolated segments of the industry attribute the current problem to trade and exports. Demand goes up 2% a year and milk production goes up 2% a year. Up until the last year or so,

The dairy industry has been worried since the Mexican government placed tariffs on U.S.-made cheeses in early June.

Ted, T3 and Anna welcome Yara Morales to The Milk Check. Yara, who is Director of Sales for Latin America and Mexico, shares valuable expertise on how the new tariffs will affect markets on both sides of the border.

Also, Ted, T3 and Anna discuss their expectations for milk prices this fall.

Episode transcript

Anna: Welcome to "The Milk Check," a podcast from T.C. Jacoby & Company where we share market insights and analysis with dairy farmers in mind. Today is June 14th, and we have Ted and T3 as usual. Today we need to talk about NAFTA and tariffs to Mexico. So, we've brought in Yara Morales, our Director of Sales from Mexico and Latin America. So, let's get right into it. Ted, why don't you start us off?

Ted: The question that we need to resolve or address is how this will affect milk pricing, if it will affect it at all. I would expect that NAFTA will be terminated. I guess from the dairy industry standpoint, yes, you don't wanna throw out the baby with the bath water, and, yes, the trade agreement is very important, but it does need to be renegotiated, it does need to have dispute reconciliation put into it, particularly that. And I think the dairy industry will survive very nicely under this scenario with possibly temporary disruptions in pricing, which in my view will probably not be that major.

T3: I think more specific to what's going on today, and this plays into the temporary disruption that we're talking about. The Trump administration increased the tariffs, the steel tariffs to include allies, so it included Canada and Mexico and Europe, and in response, the various nations implemented some of their own tariffs. I think the one that's been in the news the last couple of weeks has been cheese. It was included in some of the tariffs that Mexico have added. NAFTA when it was implemented in '94 over that five-year period, it basically brought U.S. cheese tariffs to Mexico to virtually zero. The new tariffs that will be implemented as a response to the Trump administration's steel tariffs are gonna be approximately 25%. The immediate reaction to most of the people that we've talked to is that, "Oh my God, that's a huge price increase. That's gonna have a major effect on our exports to Mexico." I think there is some important background knowledge that needs to be had about that. And the first is this. Cheese tariffs and Yara... We have Yara Morales with us today. Yara is our Director of Sales for Latin America and Mexico. And so, Yara, correct me if I'm wrong here.

Yara: Yeah, absolutely. Yeah.

T3: But cheese tariffs coming out of Europe are primarily already at about 25%.

Yara: Yeah, already, since we know for many years in a tariff...the United States doesn't have a tariff. They've had zero tariff.

T3: So, cheese coming from the U.S. has been coming into Mexico at 0% tariffs, but cheese coming out of Europe has been coming in at a 25% tariff. So, now we're on equal ground. We're at 25%, they're at 25%. But what's going on in Europe right now is the milk production in Europe is tight enough that the European cheese price right now is higher than the U.S. cheese price. And so if that's the case even with a 25% tariff I don't think we're gonna be losing a lot of cheese sales to Europe.

Yara: Yeah. The only concern in my opinion about Mexico, Mexico is gonna still buy in cheese and nonfat and all the products from United States because it's very convenient, but if Mexico approved cupos to those countries and don't approve cupos to United States maybe it's gonna reduce a little bit. But it's something that I don't think. So, it's very convenient shipping all the products from the United States most than the other countries.

Dairy markets are getting stronger, and dairy farmers are earning higher paychecks as a result. Ted and T3 welcome Vice President of Powder Sales Jeff Johnson to The Milk Check to help project how much higher the Class III price goes by the end of the year.

But, as Ted warns when things get too bullish, "careful is the watchword."

Episode transcript

Anna: Welcome to "The Milk Check," a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind. Today is May 10th. This is Anna Donze and with me, I have Ted and T3 as usual. We also have a special guest, our vice president of powder sales, Jeff Johnson.

Things have changed over the past month and instead of our usual “wait and see” discussion, we seem to have good news to share. The Class III market bottomed out in February at $13.40, went up to $14.22 in March, and $14.47 in April. So what's going on?

T3: Well, not only that, but it's probably gonna come out somewhere around $15.30, $15.40 once May's done pricing. To be honest, markets have gotten stronger. We've seen good exports, good cheese exports, we've started to see, I think, good powder exports. It's not the environment that we expected back in February. We're seeing much better demand not just domestically, but internationally. And that started to kind of change the supply and demand dynamic.

Ted: What do you mean we didn't expect this in February? You wanna go back and listen to the last podcast?

T3: Okay. So, I didn't expect this in February. You did, you did.

Ted: If I recall correctly, we said exactly the base for what we're talking about right now. And I don't think there's any mystery at all as to what's going on right now. We have a good economy. We have increased demand in the U.S. as a result. The world economy is also strong and we have increased exports at almost 2014 level. In fact, in some areas, actually a little bit higher. Now, the markets have gone up, they've gone up. If you wanna look at February versus May, the Class III price has gone up something a little less than two bucks. But if we look at the cheese market now, using that as a barometer, the spread between the European prices, the Oceania prices, and the U.S. prices has narrowed.

So, it doesn't mean that the increase is over, but I think that we're probably looking at a plateau here for May and June as far as Class III pricing is concerned somewhere in the $15, mid to low $15s. And then depending on how the harvest goes and depending on how the summer goes, if it's hot, you know, we could be looking at $16 by the time we get to July. I think we'll be at least another couple of bucks higher than that by the time we get to November. So...

T3: So, you think we're gonna see $18 Class III in November?

Ted: I don't know about $18. A couple of bucks to me is $17.

T3: Okay.

Ted: $17 to $17.50 on the Class III.

T3: And you think this is gonna be driven by demand?

Ted: I don't see anything to stop it. Production has sort of plateaued, it's still going up. But the European, the increase in production is down. And the U.S. increase in production is down. Culled cow rates in the eastern part of the country are up, but they're down in the west, southwest and the west. So, I think that basically we're gonna continue to see strong markets through the year. I don't think it's gonna be explosive. I think it'll be a steady increase at least through November. And then we'll see where we go from there. If, you know, we're gonna see some attrition with dairy, but we're seeing it. But it doesn't mean we'll have a negative number. At least I don't see that yet. But, you know, zero growth with an increase in demand is a very bullish situation.

T3: And to be honest,

In this bonus episode, Ted and T3 tackle tariffs. Specifically, they discuss how the exchange of tariffs between the U.S. and China could impact the American dairy industry.

Ted cites lessons learned during the Great Depression to dispel the notion that policymakers in Washington, D.C. will let the situation get bad enough to spur a similar economic crash.

Episode transcript

Anna: Welcome to "The Milk Check," a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind. We’re back with Part 2 of this month’s discussion. In Part 1, we discussed domestic markets and whether dairy farmers would sell out or stay in the business given the current pricing situation and given where we think prices will go between now and the end of the year. Meanwhile, pretty much any discussion of the world economy is overshadowed by the U.S. and China taking turns slapping tariffs on each other’s exports. T3, get us started. How did this start, and what will it mean for the dairy industry?

T3: Trump announces $50 billion in tariffs on China, which is I think 10% of what China exports to the U.S. China responds with $50 billion in tariffs on U.S. products which, because we export to China so much less than they export to us, amounts to about 50% of our exports to China, and so The Donald deciding that's not good enough, announces another $100 billion dollars in tariffs on Chinese goods. But the part that nobody is talking about is none of that is supposed to take place for another six months. I believe it's another 180 days away.

Ted: One hundred eighty days is right.

T3: So what's gonna happen in the next six months? Well what's gonna happen is that everybody's gonna export as much as possible and get it across that border before the tariffs hit. So one of my concerns about what's going on in terms of international pricing right now, is what they're trying to do is they're trying to beat the tariffs to the finish line, and so we're gonna see really good exports for the next six months. Ironically, even if the tariffs don't come to pass and there's some kind of a settlement, what's gonna happen is everybody's hurrying up now to make sure they've got good inventories before the tariffs hit and then whether they pass or not, six months from now we're probably gonna have a period of about six months where exports are pretty darn poor because of all this rhetoric that's going on today.

Ted: Let's look at it this way. Forget China a minute and let's talk about Mexico, which is our biggest trading partner. Let's suppose that the Mexicans dig in their heels and they say, "We're not gonna buy anything from the United States," okay? First place, I wanna say they're not gonna do that because if there's a quarter of a cent difference, they're gonna buy from wherever it's a quarter of a cent is saved. It doesn't make any difference where it is. Mexicans buy on price and price alone, okay? But anyway, let's just say that the Mexican trade is shut off and it's over. So does that mean all of the sudden, that we're gonna eat all that to business? No. If the Mexicans go out and they choose to buy cheese from Europe, well, Europe's obviously abandoning some of their markets to sell to Mexico and we're gonna wind up selling our cheese somewhere else. Now is it pain-free? No it's not. There may be a few cents a pound cheese difference as all this shuffling occurs and you lose the efficiencies of just going to the neighbor, but it doesn't mean that all of the sudden exports disappear. What it means is, is that you have to reshuffle who's selling who. A good example of that is the Russians. We got into a tiff with the Russians and we embargoed them, and they said, "That's terrific, we'll use it to develop our own dairy industry," which is what they're actually doing over there.

Milk prices are climbing back up from their low point in February, prompting Ted and T3 to predict how high prices need to get before dairy farmers on the fence about staying in business decide to stick it out.

They also discuss how the dairy exports situation could play out over the duration of this year.

Episode transcript

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

Today is April 9th, and with us we have Ted and T3, as usual. Today we need to talk about changes over the last few months. We had predicted that...prices were forecasted to drop into the $13 and stay there, but in reality were only that low for about a month. In terms of retraction, we need to look at what that does to our view for the future. We also need to talk about international markets, and trade agreements, and tariffs. So, I'll just open it up and let you guys go wherever you want.

T3: Do you want me to start it off?

Ted: You can start it off.

T3: Okay. I think, let's talk a little bit about pricing first. We bottomed out in February at $13...what was it, Anna?

Anna: $13.40 was February.

T3: So, we bottomed out in February at $13.40. We came up into March, I think we were up...what did we end up with...$14...

Anna: $14.22.

T3: $14.22 in March.

Ted: Those are the Class III prices.

Anna: Exactly....

T3: Those are the Class III prices and April is, right now, tracking towards about $14.85. And so, we're almost $1.50 above the low that we experienced in February.

Ted: In the Class III prices.

T3: In the Class III prices, right. I think Class IV prices have continued to stay in that $13 range, but at least in the Upper Midwest, prices have come up a little bit since there's a lot more Class III utilization in the Upper Midwest. My concern about that is that we were talking quite a bit in the beginning about a contraction in the milk supply here in the U.S. because of how low (the price) had gotten. But they didn't really stay down there long enough to have the effect that we were originally thinking. It looks like, by the second quarter, we're probably gonna be somewhere around $15 a hundredweight in Class III. Now, I'm not saying that anybody's getting rich off $15 a hundredweight, but that's not the financial pain that something around $13, $13.25 would give, which means there's probably going to be some dairy farmers who are gonna stay in the business, that we originally assumed might get out of the business. My concern is, without the contraction of milk supply that we'd been talking about, while demand has, I think, given us a nice floor and bounced this market a little bit up into the $15s, I'm concerned that without the reduction of milk supply it's gonna be difficult for us to get much more than $1, $1.50 higher than this. In other words, by the time we get up to about $1.70, $1.75 cheese, that's about as far as we're gonna go and our milk price will top out around $16.50 in the second half of the year.

Ted: You may be right on your projection for the second half of the year, but if you think that dairy farmers are gonna to be happy with a net price after discounts and after hauling at somewhere in the neighborhood of $13.50 to $14, that isn't gonna fly.

T3: I'm not saying they're gonna be happy, I'm just saying they're gonna stay in the business.

Ted: Well, I don't think they'll stay in the business anymore at $13.50 to $14 than they were at $12.75 or $13. I think the situation, as far as the dairy farmer is concerned, is extremely difficult right now. And I was in a meeting this morning with a couple of bankers who bank dairy farmers,

Some "ugliness" in dairy product markets remains, but Anna, Ted and T3 discuss how it's not as bad as it could have been.

Higher EU cheese prices bode well for the U.S.

Butter prices aren't stellar, but they're not awful either.

What will a gradual shift from Holsteins to Jerseys mean for milk markets?

Ted cautiously predicts when dairy farmers may begin to see higher milk checks.

What's the situation where you are? Send your observations or questions to [email protected].

Episode transcript

Anna: Welcome to "The Milk Check," a podcast from T.C. Jacoby & Company where we share market insights and analysis with dairy farmers in mind. Let's start today with a follow-up on a topic from last month's discussion, the Gulfood show was in mid-February and T3, you mentioned being interested in feedback from that show, particularly in getting some indicators of whether it be the U.S. or Europe getting the export sales in the coming months. I've only heard a little bit of the feedback, but it sounded to me like the answers were pretty mixed. What were your impressions?

T3: I think they were mixed by product. So the nonfat dry milk market is, in a word, ugly. There's too much in Europe. There's too much in the U.S. There's too much everywhere. And that's a problem that's getting worse, not better. So I don't see a quick recovery from the price issues we have with nonfat dry milk powder or skim milk powder anytime soon.

And unfortunately, the weakness in the nonfat dry market is cascading over into the other powder markets. Lower nonfat prices lead to lower protein prices, and so you're getting weak prices in the milk protein concentrate part of the business, the whey protein concentrate part of the business and ultimately, even in the sweet whey powder part of the business because some of the older nonfat dry milk is starting to enter into the feed market. And it's an issue of sweet whey powder's 12% protein. Nonfat dry milk is about 34% protein, and so it's close to a three-to-one ratio which means if we're at 60 to 65 cents a pound for older nonfat dry milk, divide that price by a third and you get 22, 23 cents, which is why that's where the whey prices is.

The good news is on the cheese side, we came out of that show more bullish. Cheese demand globally was surprisingly good. Europe is getting a fair number of decent cheese contracts, and the U.S. is getting a fair number of decent cheese contracts. I think global demand for cheese is up, and I think it's benefiting everybody at the moment. We came away with some good opportunities, some good export contracts. We know that some of the big manufacturers did as well. The mozzarella market was particularly strong, but the cheddar market was strong as well. Well, I think right now while we're during the flush, the cheese market, and the cheddar market specifically because that's what drives price, is going to be well enough supplied that I don't expect any sudden big increases in cheese price today in March or in April. I think it sets the tone for the rest of the year where cheese inventories are not gonna become terribly burdensome and cheese demand will probably be pretty good. And as a result, I think we can be optimistic about the trajectory of cheese prices between now and the end of the year.

Ted: I agree that the prognosis for the rest of the year isn't as bad as it could be. Powder nonfat dry milk, SMP is bearish. It's probably gonna be bearish for quite a while, inventories in Europe, inventories in the U.S., and I agree with you, inventories everywhere. However, the other side of that line is butter. While it's not as strong as it has been in prior years, it's certainly not weak. The prices are still holding above two bucks, which will tend to hold the Class IV price up. We watch the synthetic Class III and Class IV prices...