The Milk Check

Markets remain sluggish. Anna, Ted and T3 discuss whether that's partly due to a retrenchment in demand for dairy products. Ted and T3 believe milk checks are as low as they're going to get, and it could be mid-summer before a spike in milk prices is anticipated.

You're welcome to send questions and observations to [email protected].

Episode transcript

Anna: Welcome to "The Milk Check," a podcast from TC Jacoby & Co. where we share market insights and analysis with dairy farmers in mind. Today's February 15th and we have Ted Jacoby and T3 with us to discuss current prices. Most producers will be receiving their January final checks in the coming days and they will see yet another drop in the Class III or blend prices on their checks. When we've talked about prices in our office, one of the topics that keeps coming up is lack of demand. We did touch on this in the last episode. But for anyone who missed that conversation, can you give us a bit of a recap of where demand is now and any new thoughts or information you have on the issue?

T3: It's interesting, the other day, the "Daily Dairy Report" actually had an article about the disappearance of demand. And I thought that it painted the picture pretty well. It talked about how domestic demand has been surprisingly flat in 2017. But it also talked about how exports were up, I believe it was somewhere around 14%,15%. And I think that paints a pretty clear picture and it jives pretty closely with anecdotally what we've been seeing in the office. And unfortunately, I think what we've seen so far in the short time we've been in 2018 is a continuation of what we were seeing in '17.

Exports are okay, to decent. No one's hitting home runs but there's exports getting done and domestic demand just continues to be lackluster. And this isn't a phenomenon that's just happening in the dairy industry. If you look at just about every CPG company in the Fortune 500, they're all having the same problem. They've seen their sales flatten and in most cases, they're actually down. Yesterday, I had a long conversation with someone who I think pretty highly of who made an argument that I think bears discussing.

He said that what we're seeing, and I think in our office where we tend to really focus on the commodities side of the business, we're seeing very clearly a flattening of demand. You're not seeing growth in the commodity dairy products. And when I say commodity, I use that term loosely. I'm talking about everything from mozzarella cheese to cheddar cheese to, you know, yogurts that are sold on a mass level. And just about all of the high demand high volume dairy products, whether it's through the retail channels or through the food service channels, that demand has been very, very flat, and even a bit negative in some cases.

Yogurt demand in the last 12 months are down about 5%. Processed cheese demand in the last 12 months are down about 4.5%. Fluid milk sales, we've been arguing for years has been on a steady decline. The commodity dairy products are down. We are seeing growth on the more specialty and unique side of the business. Fairlife is something that certainly has seen a huge increase in demand lately.

I think when you go over into the specialty cheese category, you're seeing a lot of really good demand growth there too. And so, if you go into the places where there's a lot of unique product mixes, you are seeing growth. The problem is that you're comparing flat to decreasing demand in the high volume products that probably encompass 80% to 90% of the dairy industry. And where you're seeing demand, it's in the much smaller market segments that probably only use between 10% and 20% of the milk out there.

And I guess personally, unless we start getting some significant population growth in this country which I'm inclined to think is not going to happe...

Anna, Ted and T3 shift gears to 2018, forecasting the impact on the industry in a time of oversupply. Ted and T3 predict milk production will have to drop off before prices recover and farmers start making money again. They also discuss what would happen if make allowances in the classified pricing system were increased or decreased.

You're welcome to send questions and observations 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. In this episode, we're going to focus on looking forward through 2018. To start with, you guys just got back from Dairy Forum, what were the main takeaways?

T3: I just came from the IDFA Dairy Forum, and the best way that I would describe the tone at that meeting was most people were generally bearish, but I think most people also had a general attitude that the low prices are in. In other words, we are already low. I didn't spend a lot of time talking to people about prices going a lot lower than they are now. Now, that's not a pretty picture. Let's face it, what we're talking about is something around $13, somewhere between $13 and $13.50 in terms of a Class III price, which with the premiums that in the basis, I guess, if you will to use a grain term, that we've lost on the mailbox price for the dairy farmer.

You know $13 dollar milk today is the equivalent of almost $10 dollar milk five years ago. And so, we're at very low prices at this point, but I'm beginning to believe that we're somewhere right around the bottom where we are. Going forward though, to me it's a cart before the horse issue. Prices can improve but only after we start to see milk production go negative. And I mean milk production go negative both here and in Europe. And one of the issues that we have in the US right now, we've had four or five years in a row of consistently increasing milk production, and that has put in a position where we have a surplus of milk right now.

At the same time, you know the latest figures out of Europe that in November, Europe was up over 6% over the previous year. And Europe is a milk shed that is almost two times the size of the US milk shed. And so if Europe's 6% in the largest milk shed in the world, that's going to be a problem for dairy farmers, not just in Europe but worldwide. And so I think that we're going to need to see not just start to see a shrinking milk production in the US which at these prices I think we will, but we're also going to probably have to start to see something similar in Europe. And they're probably farther away from getting negative on their milk production. In fact, most of what we're hearing is that they probably won't start seeing smaller milk checks or milk checks that will cause contraction until March or April. Well, the rule of thumb is usually it takes about six months after you get milk checks that are at the contraction level before you really start seeing a contraction in the milk supply.

Ted: Another factor that has an impact on the price to the dairyman is the inflation in hauling costs. The hauling costs have been going up at least 50% in the last year and a half to two years. You actually could argue with fuel surges and fuel adjustments and so on that it has gone up even more than that. And regardless of whether the dairyman is paying the hauling out of his milk check or whether his customer is paying the hauling, it still comes out of the dairyman's milk check, directly or indirectly. And so if the hauling right now, the hauling two years ago was 50 cents, the hauling today is probably 75 to 80 cents, regardless of who is paying it. So you're looking at 5% to 10% reduction in the dairyman's milk check just by hauling alone.

T3: And I wish I could give you better news on the end product front,

In our first episode, host Anna Donze, Ted Jacoby Jr. and Ted Jacoby III (we'll call them Ted and T3 from now on) recap movements in dairy markets in 2017. It was an abnormal year for many reasons, capped off by an oversupply of milk and weakened demand that will depress milk checks for months to come.

You're welcome to send questions and observations 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. Today is January 26, and I'm your host Anna Donze. With me today, we have Ted Jacoby and Ted Jacoby III, whom we'll refer to as T3 to avoid confusion.

So now, we'll get right to it. For this first episode, we'd like to talk about past events that have gotten us where we are, particularly in 2017. So first thing’s first, where are we?

Ted: Well, offhand, I'd say we're in one hell of a dilemma. If we want to look at all the bad news we got, we just came off of a year where the prices started out relatively high and continued to decline the whole year. We're in the middle of—the end of January, and the prognosis of everybody coming back from California is that the market is long and it's about to get longer. And that's in virtually all products. It's gonna be in cheese, in powder, even butter seems less exuberant than it has in the past. So, the question, then, is where is it gonna go from here? Have we hit bottom or is it gonna get worse before it gets better?

T3: Well, I could jump in, and at least from the product side of the equation, 2017 was a strange year, I would say. We went into the year knowing that we were gonna be long on milk in the upper Midwest and the Mideast. You know, the idea that we had a lot of milk in Michigan, and we didn't have the capacity for it was not a surprise. But what was a big surprise, especially on the cheese side of the equation, was that demand was not very good in 2017. We had an economy that seemed to go really well and seemed to be moving in the right direction, and yet cheese sales were up about only 0.5% through the year. And for the first six months of 2017, they were as flat as could be. And that follows two years in 2015 and 2016 where cheese demand was up almost 3.5% each year. And then, all of a sudden, we went flat. That caused, I think, cheese inventories to back up a little bit. Meanwhile, 2017 for butter was actually a pretty good year. But it wasn't driven by butter demand in the U.S. Butter demand in the U.S. was also very lackluster. Fortunately, they had a shortage of butter in Europe that drove international prices for butter up very high. And for a while, pulled the U.S. butter market with it. And we got up to prices around $2.70 and eventually settled back down into the $2.10-$2.20 area. So, I think, butter for around 2017, was a pretty good year. Cheese? Probably a little bit on the disappointing side, and then on any of the powder side, I think 2017 was very disappointing. There's a lot of inventory of non-fat dry milk and skim milk powder throughout the world, and we keep producing more. Europe has over a billion pounds of powder in intervention. And nobody's interested in buying it, and now it's almost two years old. Meanwhile, in the U.S., we have powder inventories being built up at the manufacturer level, at the trader level, at the wholesale level, and even at the end user level. And so, it's hard to imagine that things are going to suddenly get significantly better on the powder side.

And then, if you look at the whey market, we pretty much started the year up in the $0.40s and ended the year down in the $0.20s. And so, it was a steady grind lower, and that certainly isn't what we want to see either.

And so, as we get into January, we don't have a lot of good things to say about what's been going on in terms of wh...