The Milk Check

A special guest joins this mostly macro-level episode of The Milk Check. Dr. Andrew Novakovic compares today’s inflation with U.S. inflation eras past, and the group examines evidence toward the unlikelihood of another Great Recession as well as downward pressure holding back a forceful economic rebound.

Both Ted Jr. and T3 still see some upside in dairy markets, Dr. Novakovic sees a continuation of the trend toward larger farms finding more success and T3 expects inflation to “pull back significantly.” To close out the podcast, Ted Jr. and Dr. Novakovic talk Federal Orders, “urgent marketing” and the challenges in removing or updating federal regulations and/or terms of trade.

T3: Hello and welcome, everybody, to the Milk Check podcast. This month, we have the pleasure of welcoming Dr. Andrew Novakovic, professor emeritus at the Dyson School at Cornell University, professor of dairy markets and policy. Andy, it's a pleasure for us to have you on our podcast this month. Thank you very much for joining us.

Dr. Andrew Novakovic: Yeah. It's always a pleasure to work with you guys, and I'm anxious to see where the conversation goes.

T3: So we also have, besides the usual suspects, my father and Anna, Josh White, and Jacob Menge from our trading team are joining us as well. So I'd like to start off this conversation this month, Andy, by asking you a question that's been on my mind since you and I were talking a couple of months ago, and you mentioned this almost as a passing comment, but it really piqued my interest. And it was this. We were talking about inflation and how inflation was probably going to affect our economy. And you mentioned that the inflation we're going through this time in 2022 is a lot more like the inflation of the 1940s and '50s than it is like the inflation of the 1970s and '80s. What did you mean by that? What's the difference? What are we experiencing right now?

Dr. Andrew Novakovic: So of course, inflation means that prices pretty much across the board are rising, so it's not a sector event. It's not we had a bad corn crop, and that's having an impact on beef. It's something broad. So what kind of things have that broad sweep of effect? And like so many thing in economics, there's a supply side and a demand side that could theoretically be at play. And a lot of times when we look at inflationary periods, they come from a certain amount of government overheating, fiscal policy that's relaxed where money is kept in consumer pockets, as opposed to going into government coffers.

So we reduce taxes, and people get to keep more in their pocketbook, or we spend money in a way that gains income for people. It might be through jobs, it might be through direct income subsidies or what have you. Those people go out and spend that money, and that heats up the economy.

The other inflationary route is supply side, which is leading to cost. And there was an element of the '70s that for sure does relate to what we see now, and that's energy. OPEC had been around for a while. Their obvious goal was to monopolize, to a certain degree, world oil markets. The first time they tried that, it didn't really work. But in the '70s, they started to get their act together. And those of us who lived through that time can remember just this catapulting of gasoline prices going from 20, 30 cents a gallon to over a dollar a gallon. You had to change all the pumps to put on an extra digit. That was pretty remarkable. And of course, energy is a big part of what's going on now.

But when we were talking, what struck me is that when you think of all the supply chain stuff that's occurring now, lot has to do with labor, but computer chips and resin availability for plastics, and just a variety of things that are impacting supply chain. That reminds me a little bit more of post world war disruptions that we saw in the late teens, early '20s. Late teens also was a pandemic period,

On this remarkably bullish episode of The Milk Check, the Teds bring in T.C. Jacoby & Co’s fluid milk team to talk about the market from their perspective.

Gus Jacoby, president of fluid dairy ingredients and dairy support, leads the discussion with help from milk marketing manager Greg Scheer and fluid sales manager Jared Miklasz.

Discussion lingered on tightness in the market, which points to a Q4 where we are short on milk domestically and internationally. Ted Jr. suggests the market is underestimating its own upside potential after being spoiled by long milk for about ten years. Gus agrees, and T3 teases the topic of discussion for the podcast's 50th episode.

T3: Welcome to the Milk Check podcast. Today, we have our fluid group joining us. While my dad and I like to get on this podcast and just debate back and forth what we think markets are doing, picking out certain issues, it's Gus and Jared and Greg and Anna, who really are in the trenches, working with the dairy farmers in the different processors on the fluid side that we work with.

And we thought it would be a great idea to have them lead the discussion today. And so I'd like to welcome Greg Scheer, who leads our Milk team, Jared Miklasz, who leads our Cream and UF Milk team, and my brother, Gus, who runs our fluid group. And really just give us their analysis of what they're seeing in the market today. With that Gus, I'll just turn it over to you.

Gus: All right. Well, thank you, Teddy. We have a very interesting marketplace at this moment in time. A number of months now we've seen contraction, but with respect to milk production. But we've also seen some other areas, some manufactured liquids that have been pretty dynamic. And I guess, adverse for some of those folks who are looking for solids in one way, shape or form.

And then we have that dynamic of Class IV and Class III, where Class IV is hovering above Class III which presents some challenges as well as opportunities for folks within our industry. But just to start with, I think what we want to mention is that at this moment in time, we've all seen the most recent milk production report showing that April was down a percentage point in milk production. We had a year ago, nine and a half million cows in the US dairy herd.

And now we have 100,000 less cows in the US dairy herd. So that puts things in perspective for what we're dealing with and what we're looking at as we get out of this spring flush so to speak and into the second half of the year when folks, I think are a little bit more concerned about finding the solids they need to fill orders.

To begin with, I think the Eastern half of the country is tight milk. And in addition to tight milk, we also have a major cheese plant that has come online in Michigan that has soaked up a bunch of butter fat, and that presents a prospect for cream supplies as well.

And then you have the freight impact of traveling product throughout our country, whether it be farm milk and the impact on the producer there, whether it be manufactured liquids and the impact on folks trying to get solids from one part of the world to the other. I think there's a lot of good information we can get from our leadership team here. And I think the best place to start is with Greg in milk, and then we'll move into some other areas. Greg.

Greg Scheer: Thanks, Gus. Yeah. And like you said, milk production down 1%. If you would've told us that milk prices would be where they're at today and we'd have declining milk, you'd say you're crazy. But you have the high cost of feed, the high cost of inputs, limited heifer supply, all those factors. And in some regions, a quota system that has really limited our milk production.

Most years, we would see a long market. When we're getting into May and Memorial weekend, right around the corner into June, it's less long than we normally see at this time. You just have tightening milk market where milk is not ...

On this two-part edition of The Milk Check, the Jacoby team lets listeners in on a monthly mass balance and charting meeting. The meeting splits neatly into two episodes, one led by Global Strategy Director Don Street and the other led by Head of Risk Management and Trading Strategy Jacob Menge.

In part one, we evaluated milk production data and predicted what Q2 will look like in terms of overall milk production and class allocation.

In part two, we zoom out to talk inflation, interest rates and the macroeconomic factors impacting dairy markets. Jacob makes a strong case that farmers should continue investing in increasing their capacity despite an increasing nominal interest rate before presenting a bird’s eye view of various commodities markets and interesting trends to note in dairy and beyond.

T3: Hi everybody. And welcome to the milk check. This month, we recorded our monthly mass balance and charting meeting. It is a monthly meeting that we hold internally where our whole trading team gets together. We look at the milk production and cold storage reports, and we look at some of the technical charts and we share our opinions about what we think this data is telling us and what we think this data is predicting about what'll happen in the future.

We had some really interesting discussions this month. I think you'll really enjoy eavesdropping into these discussions. It was a long meeting. It was an hour long, but it was a really good meeting. So what we've decided to do this month is split it into two parts. And the second part is what we call our charting meeting led by Jacob Menge, our risk manager and trading strategy director, who talked about some of the technical charts and what they're telling us about our dairy markets and even other markets such as the interest rate markets. It was a great discussion, I hope you enjoy it. Thanks for listening in.

Jacob: So I'm going to start kind of outside of dairy and move rapidly into dairy here, but there's kind of a common theme at ADPI in before. And a lot of it was surrounding the dairy farmer and kind of the tough headwinds they're facing here. You've got rising interest rates, you've got rising input costs. And at first glance, you're going to say, "Hey, if I'm a dairy farmer that maybe is getting close to retirement, maybe now is the time to just get out." And again, at first glance that passes the sniff test. The problem is there's interest rates and then there's real interest rates. And while interest rates have been rising, which is our little black line right here as has inflation, which is our red line, real interest rates have been dropping. And I'll zoom back out a little bit more here.

We have not been at these kinds of levels since the inflation eras in the late seventies and early eighties, we are actually lower on real interest rate terms than we were back then. And so in these real interest rate environments, you tend to want to continue to invest. If you're a business, that is telling you just keep pouring money into buying machines. In the economics textbooks, they always frame it as machines, buy the machine to produce the output. And that output is making you more money than you are not making by just capitalizing on interest rates. Opportunity costs pretty basic there, those economics should apply to farms as well. You have a machine. It just happens to be a living, breathing machine called a cow, but you're facing kind of this classic economics example of real interest rates are telling us, invest in your machine to make your product.

And a really good example of that right now is happening over in crude oil. So we have the crack spread here and it's a traditional 3:2:1 crack spread where they're basically saying, "If you buy three barrels of crude and turned it into two barrels of gasoline and one barrel of diesel, how much money are you making?" And the answer is basically more money than ever before.

On this two-part edition of The Milk Check, the Jacoby team lets listeners in on a monthly mass balance meeting. The meeting splits neatly into two episodes, one led by Global Strategy Director Don Street and the other led by Head of Risk Management and Trading Strategy Jacob Menge.

In part one, we evaluate milk production data and forecast what Q2 will look like in terms of overall milk production and class allocation. Ted disagrees with Don about supply-side expectations moving forward, and Don puts forward a modification to his predictive model.

In part two, we will zoom out to talk inflation, interest rates and the macroeconomic factors impacting dairy markets. Jacob presents a bird’s eye view of various commodities markets and interesting trends to note in dairy and beyond.

T3: Hi everybody, and welcome to the Milk Check. This month, we recorded our monthly mass balance and charting meeting. It is a monthly meeting that we hold internally where our whole trading team gets together. We look at the milk production and cold storage reports, and we look at some of the technical charts and we share our opinions about what we think this data is telling us and what we think this data is predicting about what'll happen in the future.

We had some really interesting discussions this month. I think you'll really enjoy eavesdropping into these discussions. It was a long meeting but it was a really good meeting. So, what we've decided to do this month is split it into two parts. The first part is Don leading the discussion about the mass balance. What we think is happening in Class I milk, Class II milk, Class III milk, and Class IV milk. It was a great discussion. I hope you enjoy it. Thanks for listening in.

Don Street: All right. You should see the PowerPoint for Mass Balance, April 2022. At this point, not completely, but all the data for Q1 that really counts we have. We'll get more early next week with dairy products. But we have it and now we're really at the point of what will Q2 hold. And I'm going to walk you through a couple of scenarios on that, and then we'll look for your guys' input.

So again, Q1s in the book, down 9/10ths of a percent on milk for the quarter. But clearly a steady progression towards trying to get to zero change year over year on milk. January was the big down, February less, March even less. We still have this reality that Q2 of last year was up 4% on average. And I think that's going to be difficult to be positive over it. It's just a question of how much negative under that will be.

But nonetheless, with these improving milk numbers, my projection is getting stronger. So, a month ago I thought we'd be down 1.7% for the quarter. Now I'm at 1.4% negative. You could argue, well, it's all in the same ballpark and I would concede that point. But nonetheless, two months ago I think I was talking over that we would have a reduction of over 2%.

So, when you add two months together, the second quarters not looking as dire as I once thought, but I still don't think the market's anticipating this very well. And to maybe add that, had several people tell me in Chicago this week that they thought we'd be even on milk production year over year by the end of the quarter. I just don't think that's possible. And mainly it's because of cow numbers.

Now, USDA really threw a curve when they restated the February numbers last week, adding about 10,000 cows that apparently shouldn't have been taken out of the herd. But I've now taken this forward projection and trying to listen to all the voices that will not see a strong change in cow numbers, but we should be past bottom. So,

The crew comes back to the mic to predict how demand will respond to milk prices approaching record highs across the market.

Between widespread inflation and rising interest rates, the economy hasn’t been in a remotely similar situation since at least the 80s. The discussion touches on potential for a European recession, how interest rate increases affect nonfat trade with Mexico, milk consumption expectations and the barriers to a rapid supply response to record-high prices.

The team comes up with potential answers and a few more good questions. Ted Jr. closes out by backing T3 into holding onto a bullish position.

T3: So, this week, joining my dad and I in the discussion is Don Street, our head of global strategy, Jacob Menge, our head of trading strategy and risk management, and Joshua White, our vice president of whey and feed ingredients, and we thought this podcast, the conversation that would be pretty appropriate would be, given the current economic environment we're in, dairy products are 50% higher in price than they were just six months ago, and interest rates are climbing. Are the combination of those two factors going to start stifling dairy demand, and if so, how is it going to play through the system?

The old adage has always been the cure for high prices is high prices, which means as dairy prices go up, there'll be pushback from those high prices, and ultimately, demand will go down and it'll correct itself. Meanwhile, producers are making more money at higher prices, so they increase supply at the same time. The increase in supply, the decrease in demand tend to start getting prices to adjust. But we're in a very different environment this time around. The kind of inflation that we're experiencing is unlike anything I think we've seen in this country since the 1980s, and the interest rate response by the Fed is going to be probably unlike anything we've seen since the '80s, and I think as demand will adjust this time, it's not going to be like anything we've seen in the last 10 to 15 years, so I think it's worth bearing a discussion. Jacob, how do you think high dairy prices are going to affect demand from your point of view?

Jacob Menge: I think the first and most important thing to address is, are these prices high? What is a high price? I think that's an important part of the question to address because you said the old adage is the cure for high prices is high prices, but I think there's a lot baked into that statement. Part of that is historically when prices are high, that's an indication that suppliers probably have good margin baked into that number because their costs didn't really increase that much. So, when these prices really increase, suddenly they've got a lot of margin. That's an environment that can't really stick around. I would maybe push back and say prices aren't even that high, quote-unquote, anymore because we've really had the inputs increase so much, and I think that's really an important thing to address here, is you just need to reframe what the definition of a high price is and reframe the market overall in your head. Let's just run with it, though. The consumer's still going to push back with the higher number. You add to the overall prices, you're going to get pushback from consumers.

I don't think we're there yet. Consumers are pretty flush still with cash, just looking at consumer sentiment numbers, looking at all the numbers that we could get. We have a very good economy still, as much as it might not seem like it to the average household. You hear your good costs twice as much, but at the end of the day, if the consumer has the cash to pay for the goods, it's pretty unlikely that they change their buying habits. So, taking this one step further,

The Teds assemble a full crew to approach the primary question on the milk market’s mind: What does a war in Europe mean for the dairy industry? To help answer that question, they’ve enlisted Norman Oldmeadow, a dairy industry veteran and current managing director of Oldmeadow Consulting.

Norman fields questions about Russia’s commercial relationship to the EU – as well as Ukraine’s – what happens to freight, and how Ukraine’s position as one of the world largest grain exporters signals more trouble ahead for milk production numbers. 

Along the way, Norman discusses some of the UK’s dairy issues that hit close to home for US farmers as well.

T3: Welcome everybody to our March podcast. We have a guest speaker today. His name is Norman Oldmeadow. I'll give Norm, in a second, a chance to introduce himself. We also have a bigger group today than our usual suspects of myself, my dad and Anna. Jacob Menge, our risk management and trading strategy director is on the line with us, Gus Jacoby, president of our fluid group; Don Street, our director of global strategy, as well as Norm have all joined us. And our topic today is: How is the conflict in the Ukraine going to affect dairy prices? Norm, why don't you lead us off? Tell us a little about yourself.

Norman Oldmeadow: Okay. Well, I first came across Don a long, long time ago. I got involved in the food industry in the seventies when I joined what you know as M&Ms, but in the UK it's called Mars. And that got me involved in the milk and dairy industry amongst other things, sugar and cocoa and so on. But once I left Mars, I got involved in the dairy trading world and subsequently ended up starting a business in 1992, which was called Meadow Foods. And Meadow Foods was started by me doing the trading. And I was financed by two guys, a chap called John Kerr who may be known to some of you with his company called Fairfield. And my immediate partner then was a chap called Simon Chantler, who I think at the time was milking about two and a half thousand cows on three farms. And I stayed with that business, running it for 17 years before I retired.

However, once I retired, the people that I'd been working with in various manufacturers and traders and the European market asked me if I'd like to set up a consultancy and do some additional work, which is basically what I have been doing since about the mid – well, I was 65 then, so 10 years really – and I'm trying to stop, but they keep asking me to carry on. I think I just get very interested in the topic. So that's me. I'm doing consultancy now. So I'm in everybody's pocket learning as much as I can and trying not to confuse too many people.

But I mean, the topic about Ukraine, the first thing you would say in Europe is: Ukraine, now, what do they do in the dairy industry? And you have to go back to the way in which the European Union is set up in the sense that nothing gets in unless they want it in and anything can get out that they can move. And for a long time, business with Ukraine was quite small, but over the last few years, the cheese business has improved, mainly from Poland and partly from Germany. And I think at the last count, they were importing about 50,000 tons. Not much else, a bit of whey probably, and I think some butter.

But in terms of absolute trade between Europe and Ukraine that's more or less it. There are much, much bigger fish to fry with dairy, of course, than there would be there. Now, I mean, you've got to remember that Ukraine is a huge agriculture-based country. I didn't realize until the other day that it's even bigger than France, and France is quite a big place when you look at it on a map. And they are probably one or two of the biggest wheat and grain exporters ...

With milk production low and showing no sign of turning anytime soon, the dairy industry is bullish about 2022. 

What type of bull market are we in for? That’s up for debate. Inflation and continued logistics issues have roles to play.

Ted and T3 agree on the strength of Class IV milk and the shock buyers are in for next year. They disagree on most everything else, including the proper way to do math. 

In the end, Ted enlists Anna as reinforcement.

Ted Jr: I'm not sure what the right approach is. Sort of a rerun of what we had the other day with regard to the potential, the upside potential of the markets right now might be useful. We've got a dichotomy between hedgers and actual market demand, I think, which is useful to note.

T3: I would agree with that.

Ted Jr: I don't want to profess to be an expert of the hedging side of the issue, but the other side of the issue is the overall world marketplace is very strong. We have a continuing decline in milk production because of a number of factors, but primarily high feed costs worldwide. Barring some economic, call it black swan or whatever you want to call it, the market for dairy products is going to be a heck of a lot higher than it is right now. It could be a lot higher than the current world market price. I know interest rates right now are low, but we have dairymen basically getting out of the business, and when interest rates go back up, it's going to be that much harder for them to get back in. At the expense of sounding too bullish, my position right now is very bullish.

If we look at the gross returns on the GDT and the world markets and the continuing decline in production in Europe, $27, $28 of gross, not net. That transflates to the dairy farmer in the $22, $23 range. Right now, the futures market is two and three and four dollars lower than that. Now, we've got a couple of cycles to go through before we get to anything, but we're in the middle of, or actually, at the end of stocking for Christmas and Super Bowl. We're supposedly going to see some sort of a decline after those markets are fully satiated. Whether we see it or not I guess remains to be seen. Months later, we have the flush right before us, and whether or not that's going to actually amount to anything, that remains to be seen, too.

But we have a scenario which is extremely strong as far as the future is concerned, and even if we do have some blips in there, for the reasons that I just described, odds are we're going to look at pretty strong markets the second half of next year. A lot of things can go wrong: economic collapse, stock market collapse, a resurgence of the virus. I mean, all of those things are threats, but from my perspective I think those threats are pretty distant. Tell me about it from the standpoint of the futures market, which is considerably lower than that.

T3: So, I would look at it this way, and I've been pretty consistent on this topic. I think you can make the case that we could touch $25 cwt for Class IV milk at some point next year. Now, I'm not going to say it's the second half of the year because I think markets can be anticipatory, and so they often tend to find their peak before the real problem occurs, but I do think it's possible when you're talking about butter and you're talking about nonfat dry milk, you can plausibly create a market scenario where we've got milk in the $25 cwt. At the same time, though, I struggle with math that would bring Class III milk over $20 cwt. I'm just not as bullish Class III as I am Class IV, for a number of different reasons.

My approach to looking at next year is that just because the demand is in the second half ...

Slipping milk production and residual COVID-related volatility could cause something truly rare in dairy: An average Class IV price for 2021 that’s higher than the average for Class III.

This last happened in 2013, when the market was powered by a dramatic increase in exports.

Ted and T3 explain why the financing model for massive new cheese plants is a partial contributor to the phenomenon and try to predict farmer and agency responses.

T3: Let me start by throwing a couple of overall milk production numbers out, so we can establish what we think milk production is going to do in general in 2022. So the challenge with talking about milk production, especially when you're talking about it in terms of year over year right now, is we're measuring against last year. And last year was the pandemic, and everything was a mess, and I'm not sure if measuring against last year with all its volatility really helps us understand the real situation. So I went back really quickly, and I actually calculated what milk production has done so far this year relative to 2019 rather than 2020, and it was kind of interesting. In the first quarter, milk production in 2021 was up 4.3% over 2019, so a little over two percent a year of milk production growth. In the second quarter of 2021, milk production was up over 2019, 4.3%, the exact same number as the first quarter, and a little over two percent.

The third quarter, which we just wrapped up a little under a month ago was only up 3.1% over 2019. Now the fourth quarter of 2020 was up 2.9% over 2019, but it's starting to look like we might go negative for the fourth quarter of this year — which means on a two year basis, we may be up less than 2.9% over a two year basis. And so when you're comparing everything against 2019, it becomes a lot more clear that we're seeing overall milk production shift into an almost negative decline, rather than measuring against the year over year noise that we've been trying to figure out when we're dealing with a pandemic year last year from 4.3% to 4.3% to 3.1%. And I'm going to guess in the fourth quarter we may end up at 2.7%, so it's clearly declining at an increasing rate.

Ted Jr: I think it would be useful to discuss the dynamics of that. And referring back to Jacob's chart where he charted all the prices for agricultural commodities: corns, soybeans, sorghum, cotton, you name it. And then in the same chart, he included the milk pricing and it showed 25-30% increase in agricultural commodity prices but only a nominal increase in milk pricing. It was very stark. We have had increases in production that basically have caused us to have inventory, up to now at least in both powder and cheese. Class I sales have been less than lucrative. They've been declining on an annual basis. We've built new cheese plants. And when we build a cheese plant, we're building a multi hundred million dollar plant these days which requires that it be kept full. Cheese plants need to be balanced just the same as class I plants need to be balanced.

The difference comes out in the class IV market, and class IV is butter and powder. So we look at the last month's results, then we see that there is in the last several months a decrease in production. And I think the reason for that is probably pretty simple: the costs of making milk have not warranted increasing the production for the milk. We have increased feed costs. We've got increased maintenance costs on equipment, everything, land, you name it. The cost of running a dairy have gone up. It doesn't make any difference whether you're a big dairy or a small dairy, but I would guess that the costs of running a small dairy percentage-wise are a heck of a lot greater than running a big dairy,

On this bite-sized episode of the Milk Check, Ted Jr. and Ted III take a look ahead to discuss one of the industry’s most pressing questions: how will deflating premiums and rising labor and manufacturing costs affect market inflation? 

Ted Jr. begins by observing how decreases in Class III and IV premiums over the past five years have exacerbated the domestic industry’s reliance on exports, and Ted III follows by outlining the encroaching dangers of inflation to the domestic and international industries.  

The hosts go on to predict the timeline of market inflation, the dangers imposed by international supply chain issues and the reformations needed to counter rising prices. 

Ted Jr.: What we were talking about this morning was the change in the hauling rates and how it affects the dairymen. Talking with our milk group, five or six years ago, the norm on hauling from picking up the milk on the farm and delivering it to the usual handler or a plant, let's say. Call it 50 to 75 cents depending on location. Maybe less up in Wisconsin and maybe the handler, whether it's a co-op proprietary, is picking up part of the tab on the hauling. But today that hauling cost is pretty much double. And you're not going to have, even if the manufacturing plant is across the street, you're not going to really have it for less than a buck, and a buck and a half we decided is probably the norm. Well, the issue is, and this relates also to Ted's meeting on how to handle Class III and IV. Five and six years ago, the norm was to sell the milk to the manufacturing plant at a premium, and premium over the Class III or IV as allocated.

Ted Jr.: And today premiums are difficult. If we get any premium at all, they're relatively small. Five and six years ago, maybe a buck in some cases, a buck and half over delivered. Today, 25 cents if you're lucky to deliver it to a manufacturing plant. Then in addition to that, you have operating costs not only for the manufacturing plant, but also for the handler who happens to be handling the milk, whether it's cooperative or proprietary, and those costs continue to go up. So, we're asked from time to time, when are we going to get back to a premium? Well, I don't see it coming. I do see the price possibly going up, the net return to the dairyman. But if you do the numbers right now, you've got Class III and IV at roughly $20, a hundred weight. Hauling costs in a buck and a half or so. The dairyman is lucky to wind up with $15.

Ted Jr.: It's a rare dairyman who's going to make money at $15. Yeah, there's some very efficient, large dairyman who could probably do it, but the everyday dairyman is going to have a problem with that. I think this is a reality which needs to address, which of course is one of the reasons that…why you had the meeting. Obviously the people who call the meeting are feeling the same heat that I'm detecting with regard to how much money is actually being filtered back to the farm. And we're becoming more and more reliant on exports. And what a mess that is when you look at the logistics for getting containers, whether it's cheese or powder or whey or whatever. Getting it to the port and then there seems to be quite a bit of controversy on who's the problem at the port, whether it's the port facility or the trucker or the steamship line, it's a mess.

Ted Jr.: You wind up losing business. You wind up with much, much higher costs and very little margin left when you're done. So this is an issue that I think we need to deal with. I'm not sure how we're going to deal with it. I think inflation will probably take care of it and the result of that would be that there would be continuing diminishing milk supply. We dropped to 1.1 last August.

Will the U.S. dairy market grow fast enough over the next five years to sustain 2% milk production? 

The Milk Check crew welcomes back directors Don Street and Diego Carvallo and Jacob Menge, our futures & options trader, to take on the million-dollar question.

The crew dives in deep on a vital point of growth for the industry — U.S. exports and their ability to keep up with foreign markets. The conversation jumpstarts with a discussion on the impact of Cooperatives Working Together (CWT) and its effect on buyers foreign and domestic. 

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.

T3: Hi. This is Ted Jacoby. I'm joined as usual by my father and Anna Donze. Today, we're also joined by Don Street and Diego Carvallo from our milk powder team, who handle the majority of the exports for T.C. Jacoby & Co., as well as Jacob Menge from our risk management team. We start by asking a question. Will U.S. dairy exports be able to grow fast enough over the next five years to sustain a two percent milk production increase?

T3: Because if we continue to grow milk production at a two percent clip, we're going to have to continue to grow dairy exports at a record clip. Now, the truth is we never end up answering the question specifically, but we go off on a tangent that ends up in a very interesting place.

T3: As usual, this podcast is about food for thought. This is a question of whether or not the dairy industry in the United States is set up properly, structurally to encourage exports. I hope you enjoy this conversation as much as we did. Thanks.

T3: I was reading that Matt Gould's Dairy Market Analyst over the weekend. And he mentions at the beginning of his write-up that the price of cheese is weak. One of the factors that is contributing to weak cheese prices is weak exports. Then later on in the letter, he mentions that June exports as a percentage of milk solids is 8.1%.

T3: I did some research, and in April and May, it was 8.9%. The Q2 average as a percentage of total milk production, we exported 18.6% of our milk solid, which I believe is a quarterly record for the largest percentage of milk solids we've ever exported. It just occurs to me that there's a real disconnect right now between what we're hearing in a lot of places that we need to export more in order to get prices up, and at the same time, we're exporting more milk solids than we ever have.

T3: It would lead to a really good discussion about what's really the issue here. If we're going to continue to have 2% milk production growth, and milk production growth continues to look strong. It means we're going to have to export a larger and larger percentage of the milk solids that we're creating in this country.

T3: The question is the export market capable of handling and taking on that additional volume? I think even more importantly, is it capable of handling that additional volume at decent milk prices? Because it's one thing to say, "Hey, we're going to export a ton of milk powder, and we're going to do it at a dollar a pound."

T3: It's another thing to do it at a price like a dollar 28-29, like we are today, or even a dollar 50. I don't think most dairy farmers are really interested in massive increases in export volume, if we're doing it at super low milk prices because that really doesn't add to the profitability. We've invited Don Street, who's the Head of our powder group who handles the majority of the exports for our company, as well as Diego Carvallo.