A roundtable trading strategy Q&A


With the T.C. Jacoby & Co. trading team in the office for quarterly strategy huddles, we decided to record a special Q&A discussion for this month’s podcast episode. Each trader had the opportunity to ask a question of another trader, in order to gain some insight into expectations for the rest of 2022.

Their discussions, with some questions sent in by customers and via LinkedIn, produced a discussion that spanned cheese pricing, international trade and tight butter markets — among a number of other topics.

Yara is bullish nonfat, Diego and Don see potential for the U.S. to move in on some of Europe’s export business, and Jared doesn’t see where extra cream for butter churns east of the Rockies might come from.

T3: Welcome everybody to this month’s podcast, The Milk Check from T.C. Jacoby and Company. This month, we’re going to take a different approach to the podcast. Seated around the table are most of the traders in our company. We are having our quarterly strategic planning meetings and huddles. As we talk about what we think markets are doing at this time and what we think maybe they’re going to do for the rest of the year. And the approach I thought we would take is have each trader ask a question of another trader at the table of what are they curious about going on in the market. Not necessarily in the products that they focus on, but in some of the other products that we trade in the company. So I thought I’d start off. And I have a question for Yara. Mexico is the largest milk powder export market for the United States. What do you expect nonfat, dry milk sales to Mexico to be like for the remainder of the year, do you think they’re going to be strong or weak and why?

Yara: I think it’s going to be a strong and the Mexican buyers is going to support and buy a more inverse in the second half of the year. Why? This is different reasons because all the milk that Mexico produced has been reduced because it has been reduced the production. Besides the deficit, We have the production milk in Mexico. So I think it’s about 3% went down the production mill in Mexico, and the weather is so hot so the cow doesn’t produce more milk. Besides Mexico has been making product for export like infant formula that’s increase about 45% exportation to another countries. And one of the countries, it was United States. So that’s just another thing.

And the other one is because Mexico has been producing products to export to another countries like whole milk powder, known federal milk, cream, butter, and they export to South America, and in Caribbean, in Asia also, the whole milk, they sell it. So the exportation has been increasing inclusive cheese because they has been exploring cheese too. So that’s the main reason that I’m thinking that the Mexican customer are going to start buying more products the second half of the year.

T3: Are you telling us you’re bullish, nonfat, dry milk for the remainder of the year?

Yara: Well, you know what? The basic consumer guys increase all the costs because to fill in the cows, all the input, like a corn and soybean has been increasing. So the inflation has been increasing too between 10 to 15% everything. So I think the price is going to be…

T3: You think things are going to stay strong.

Yara: Yeah, I think it’s going to stay strong.

T3: That’s awesome. Good deal, Josh. I’m going to go to you next. You have a question for someone.

Josh: Oh man. I want to break the rules already though. Like, I don’t like the one person question, but I’m going to start. I think this actually kind of goes to both Bri and Don, and this didn’t come for me specifically, but I think it was a really good question. Someone responded on LinkedIn with this one. The question specifically was over the past couple years, we’ve seen a lot of additional cheese production capacity in the US. Additionally, we’re expecting more capacity to come online over the next year or two, will that result in Class IV remaining tight compared to Class III?

Bri: I mean, my knee-jerk reaction was yes. I mean, it is a lot of commodity cheese that’s been added over the last year and it is coming down the pipeline here over the next couple of years. So, I mean, it’s also that also results in a lot more whey production. So, I mean, we’ve got to factor that in, but it’s not a new powder plant necessarily. Don you have anymore?

Don: I would just say, I don’t think so that it’ll necessarily short Class IV because the cheese plants are in regions that are not traditional Class IV regions. You could argue maybe that’s fuzzy in Texas because there are a couple of large powder plants there. But also when these plants go on the drawing boards, the supply side of the equation has already gotten commitments from producers to add cows, to provide the milk, to fill the plant. Now that can still go wrong or be delayed or not timed correctly with the ultimate construction of the plant, which can cause a lot of disruption. But I would say, generally speaking, those plants will get new production to fill them.

Josh: Is it too general or generic to say like, it’s kind of maybe a little bit, but not as much as people would think?

Bri: Yeah.

Josh: Because correct me if I’m wrong, maybe Greg, you’ve got some input on this. Some of those cows are actually moving as opposed to just being brought online. And so those might be coming away from some plants in Class IV areas.

Bri: Yeah.

Josh: But to your point, we know a lot of these new operations at that. I mean, these are brand new committed milk suppliers going into newer or recently introduced Class III plants.

Greg: Correct.

Bri: Yeah. You’re just adding more potential downward pressure on Class III versus Class IV with the new addition of these plants.

Josh: Has that taken any milk away from areas where it can kind of move around? Like the Midwest? These new plants, has it sucked milk away from Class IV production in the Mid-East?

Greg: It has in the Mid-East, for sure. It’s pulled milk away from Class IV. You still have the powder plants in other areas running strong, but in the Mid-East powder plants are running west.

Don: Mid-East, sort of Ohio, Pennsylvania.

Greg: Michigan. Yeah. Michigan, Ohio.

Josh: So was it true? Like there was rumors during the flush when milk discounts were real weak in Wisconsin, that there was still Class IV drying capacity in Michigan?

Greg: Yes. But then you have transportation issues, lack of haulers or because of fuel surcharges, it doesn’t make sense to bring it around. We used to be able to travel milk to the spot where kind of even things out, but with transportation the way it is, it kind of limited that.

Josh: So it’s only made it that argument that it doesn’t move classes that much stronger, I guess.

Greg: Piggybacking on that. So I talked to a lot of cheese plants and they talk about the block-barrel spread with these new plants and the volatility that we’ve seen in block barrel. Do you think that the volatility will continue or do you see a more normal block-barrel spread kind of moving forward during second half of the year?

Bri: I was anticipating that we would continue to have barrels above blocks a little bit longer just because of the demand that we’ve seen and the fact that there are a couple of manufacturers that are not producing as many barrels as they had in the past. So going forward, it’s difficult to say because it’s all based off of demand, and we’ve seen that demand over the last few months has been lackluster. If that continues into the fall into the winter, we could flip flop basically is what I’m saying. I mean, you just kind of flip flop between the two.

Josh: So when you said demand, block demand was poor?

Bri: I just mean like in general, overall retail demand, retail food service.

T3: Interest rates have gone up, we’re starting to see a pushback in demand. There’s a lot of talk of people maybe downgrading to less expensive choices. Do you think we’re going to start seeing demand switch more towards processed cheese and away from natural cheese?

Bri: I don’t. I’m not really the expert on that one. I don’t know because there’s still alternatives out there that are, I mean, processed cheese is not that cheap. When you go to the grocery store and you buy the slices, you compare prices. Natural cheese is still pretty competitive. At least from my perspective. I buy the groceries for our house. I don’t know if it’ll be clearly defined in that way. I think processed cheese is more of a food service-driven product. So it’s all going to depend on, are people eating out? Are they still spending money, eating out at restaurants and the data so far as saying it’s down. So if it continues to go down, then it is going to affect the barrel price. And we probably will continue to have the spread widen again whereas barrels will be below box.

T3: Okay. Diego, you want to go next?

Diego: Absolutely. Jake with the US dollar basically strengthening heavily during the first half of the year. What should we expect for a remaining of the year and what should that effect be on commodities basically?

Jake: You know, I think the US dollar’s been strong enough for long enough now that any export impact probably has been built in already. I would say I don’t see the dollar weakening anytime soon, unless the Fed really changes their tune. I really go back to, yeah, I kind of feel that the biggest front of the impact that a really strong dollar gets, basically any currency in the world has probably been felt. All right.

Diego: Okay.

T3: All right, Don, your turn.

Don: I’m up? Okay. So Greg and Jared, I think, both. So we’re approaching yet another school season, universities reopening, will we have a real squeeze on available milk created by filling the Class one pipeline? And how does this look, going into September?

Greg: I anticipate a normal type August, probably tighter than normal, just because production has been running at or below year-ago levels, recently coming back to near year-ago levels. But yeah, I anticipate the pipeline being refilled to cause very tight milk markets for August as we get into the second part of August. And like you said, university schools, high schools, elementary schools, they’ll all be bottling and it will create a very tight market for several weeks.

Don: And then smooth out?

Greg: I would expect it to. Once you get that pipeline refilled, everything kind of normalizes a little bit, but there is another pull as that fluid demand continues that we haven’t seen and couple months that will make less muck available on the fringes for cheese and butter and powder.

Jared: And I can echo what Greg is saying on the fat side of things We’re still seeing ice cream pull strong. And as last one sales pick up here in August, we’re definitely going to see some tightening there, maybe a few weeks of leveling out, but then as baking season nears again, of course we’re going to see multiples reach potentially even new highs there. We’re already seeing cream being traded at delivered prices in the low $1.50s, and it’s early August. So I think it’s a sign for very tight cream markets and very expensive cream loads to say the least.

Don: Is that why butter’s moving up too? What do you think?

Joe: Well, butter and cream seem to be moving in lockstep. Butter’s not gotten any cheaper with the cream multiples as high as they’ve been. It doesn’t make sense to churn. So it just adds less inventory out in the marketplace.

Jared: That was going to kind of lead into a question I had for Joe. With the pricey cream, has that discouraged processors from churning butter and storing it for use later in the year? Now with cream multiples reaching their highest levels of the year. Demand is strong. Temperatures are high. Transportation issues that we’ve already talked about with the fall baking season looming large, processors are not likely to step up churn rates anytime soon. So can you speak to the current tone amongst butter buyers that you’re seeing?

Joe: Yeah. Nervousness, in one word. Nervousness with the buyers, but at the same time, they’re still having trouble committing further out. There’s a lot of people that are not covered for Q4. So we have potential to push this market even higher. Manufacturers aren’t willing to hold onto product right now because there’s such a steep inversion in the market. It doesn’t make any sense to hold onto the product. Cold storage reports are coming out lowered, year over year, but you have to keep in mind, the industry is very short-sighted. We always like to look at our year-over-year numbers. If you look at historicals, we move 2020 and 2021, we’re pretty much on par with those previous three years, 2016 through 2019, as far as inventory levels are concerned. So one could make the argument that the price currently is a little overinflated because at those timeframes we hover around a $2.10 to $2.40 butter price, pretty much for the whole three-year span.

So I think it’s a little emotional right now, but we’ve seen the same $2.90 to $3 range for two months now. So there’s some type of validity behind it. I’ll go ahead and double back and jump in because I was actually going to piggyback off of my answer, going to your questions, Jared. What could change on cream to where we could see some possibility of something opening up into next year, where we could get some product actually going into churn again, as opposed to the cream utilization, effectively east of the Rockies, going into just about everything else?

Jared: Right now, we’re seeing opportunities arise. We’re able to bring cream from the west back over to the east. And I think being able to travel product will certainly help alleviate some of the tightness in the marketplace. Obviously, we’ve seen how high diesel prices have gone this summer. Starting to see some relief now, as we sit here in the first week of August, but if freight rates, due to a number of different issues that hauling companies are dealing with their care, companies dealing with as far as drivers and other concerns, if we’re able to alleviate some of those costs there, I think we’ll have the ability to travel cream a lot easier if we give them the next year.

Joe: Okay. But what actually opens up some cream availability east of the Rockies?

Jared: Well, with the new cheese plant in Michigan, a lot more fat is being swallowed up in that area. So I am not really sure what’s going to open up more availability east of the Rockies, to be honest with you, at least not in the near term here.

Joe: Okay.

Don: One thing maybe that could, but I think it’s still two years out. There is a mozzarella plant schedule for Texas and that would consume relatively more protein than fat. But that’s, I think- at least a two year window. It might even be three year window.

Joe: Yeah. But conversely, we have two to three more cheddar plants in the pipeline. So more full-fat cheese is getting just pull that much more cream out of the complex.

Don: Unless that’s more offset by more cows to support those plants.

Joe: True.

T3: And continued increase in butterfat per cow.

Don: Per cow, which genetically seems to be on a tear.

T3: Absolutely.

Joe: We’ve had multiple discussions about silage quality and feed quality. And what components in the milk would have to see a pullback at some point or at least a stabilization. I can’t see them growing at the peaks that they’re at, moving forward.

Don: I can’t argue that. I don’t think I know that historical data well enough, but feed is typically an annual cycle on quality. And if it’s poor in certain regions this year, you assume it will be okay next year until it’s not.

The group: Until it’s not.

Josh: Is anybody talking about how hot it’s been and it’s effect on the crop in like maybe not the Midwest corn belt, but other areas?

T3: The Southwest, it’s definitely affecting feed quality in the Southwest. In the Texas Panhandle, in that area, it’s having a pretty negative effect.

Josh: My father-in-law just got out of milking. He made that comment. He’s like, “I don’t know if I made the right decision, but I know I wouldn’t have had enough hay.” He said that multiple times. He can’t be alone.

T3: I asked one of the larger farmers we know in the Southwest a similar question. I asked him if it was going to affect milk production. His response I thought was interesting, said, ‘I’m not sure if it’s going to affect milk production, but it certainly is going to affect how much I’m paying for the hay I’m buying.’

Bri: That kind of does feed into my question. I know school’s starting here in a few weeks and it’ll draw down on milk initially, but we are experiencing a heavy cheese market right now. I think this question’s for multiple people. I mean, whoever wants to chime in, go for it, but if we’re able to kind of hang out down here in the dollar eighties and maybe even get blocks down into the $1.70s, what do you think that’s going to do to milk production that we were kind of thinking was going to be up to percent? What do you think it’s in there in Q4? What do you think it’s going to do to milk production next year? If we hang out down here, I don’t know if we will, but what if we hang here for a couple months as we get things sorted out?

Greg: It’ll hurt. I mean, margins are tight. A lot of areas with the feed cost the way they are and cost for everything with inflation and diesel prices and labor. So it will definitely make a difference and probably limit any expansion. If it stays in that area, does it favor one area than the other because you’ve got producers in the Southwest or west being paid on a Class IV and you’ve got a lot of Midwest producers paid on the Class III. So maybe it balances that back out again where it helps the Class IV guy pay for, feed a little more. Maybe we do still see an increase in production, but maybe not as much as we would’ve.

Don: I’ve been accused or have stuck my neck out to say that maybe we could see 2% more milk by the end of the year on a year-over-year basis. And half of that, my thinking or understanding would be driven by higher cow numbers because we’re past the bottom and slowly seeing some recovery. And so I think the cow number piece will add cows, now for margins for an extended period of time, it will slow that a bit, but I still think you’re going to be up at least a half percent on cows, if not a full 1% by the end of the year. And then it’s a question of feed management incentives on the per cow piece of the picture.

Bri: So do you think that price-wise next year will kind of come back down to more of the normal range? Maybe it’ll be less volatile of markets that we’ve had this year so far?

Don: It’s a really tough question. I think we’re in a period of volatility for quite a while and because at least, we’re just talking about cows and milk per cow, but you have the inflation piece and the labor cost piece and all of these other factors. And if you would get a pullback at a certain point, well then I think you’re just setting the next price peak cycle to happen.

Joe: We talked about this before, right? When milk was $23-24. It’s not $23-24 milk to the farmer, right? It’s like 18-19 equivalent. If you think about the added costs and higher inflation. So now we’re at $19-20 milk. Farmers are effectively seeing $15 milk because of all of their input costs and everything that takes to keep that farm running.

T3: Well look, cheese price is dropped from basically &2.40 to a $1.80 that’s 60 cents. That’s at least $6 cwt.

Don: 25% drop.

T3: Yeah, they’re not $25 cwt. I don’t care what a farmer said he was profitable. At $18 cwt in today’s environment. I’m going to argue most of them are not profitable, which means it’s going to slow down expansion. I think a lot of the initial growth in 2023’s already paid in. I think the plans are already there. The barns are already getting built. And so what’s happening now in cheese. I’m not sure if it’s going to have a big effect in Q4, but it’s probably going to have a big effect in Q2, Q3 of next year. If we stay here. If the cheese price stays here around $1.80, milk production by the second half of next year is going to struggle. That’s the way I look at it.

Who’s next? Yara?

Yara: This is for Josh. In Mexico, the whey has been difficult to move because in the beginning of the year, it was so expensive, the whey, because the market and now is much better, but it’s still difficult. So Mexico has been using the liquid whey and whey permeates like a substitute or whey that they make and Mexico, but obviously is not enough. What do you think that the whey market is going to be in the next semester? And this semester coming?

Josh: I guess we’ll start with right now. It feels like we finally stabilized a bit. And then we can talk about maybe what some of those upside price influencers are and some of the downside ones might be. What’s finally stabilized is we’ve got to a point where I think the US feed market’s stepping back in to buy sweet whey powder. And that signals that we’ve worked through stocks at higher prices and the customers are starting to reload some inventory. So I’d say that at least has a nice support level. What could move it a bit higher would be Asia buying, particularly China on the lower end products like the whey permeates and rumors are that the piglet market’s improving in China and they’re starting to restock and they’re buying again. So there’s been a few permeate providers that have noted that they don’t have it.

And I think that product that’s put a lot of pressure on the market and certainly had people concerned about overall demand. So I don’t know that I would predict China’s necessarily back in buying heavily across all consumer products, you really have to divide this up the hog market and the feed demand is returning. At least for now that’s stabilizing things. Whether it grows year over year or fills in some of the void, I don’t know, that’s totally different than cheese and high-end proteins and other products going into China, for the record. On the other side is here in the US, whey solids go to all kinds of different places. Sweet whey powders, the easiest and it moves into it, but it also will go into higher proteins and then put that permeate onto the market. And I think there’s still a lot of questions about high end protein demand.

Someone submitted another question on LinkedIn. Do we think that the WPIs and the WPC 80 prices that have started to fall a little bit is driven more by extra supply or by demand destruction? I don’t think we know the answer yet. And I think it’s probably a little bit of both. I believe that WPC 80 inventories are reported that they’re up. That suggests we’ve got some extra supply. Now I think China’s and agent demand is partially blamed for that. And then the sales cycle, if I understand it right, and I’m still trying to get my bearings on this too, but talking to people we sell to, the supply chain’s really long for high-end proteins, which means if you sell alone and it goes in to be manufactured into a sports nutrition drink, and eventually goes to the store, finds its way to the consumer, just because our commodity price dropped today, doesn’t mean that the consumer prices have dropped until that inventory has been burnt through.

And I think that those prices are really high hitting the customer now, and it has to be heard in demand, but I don’t believe that the current sweet whey price would equate to, I think a much better WPI, WPC 80 price, the consumers aren’t feeling that lower price yet either. So it’s going to be a while before that works its way through the system. And that at least has me a bit concerned that we’ll see extra sweet whey powder in the market over the coming months. And that will at least keep it from moving up. Don’t know if that means it’ll move over again. Feed seems to be starting to buy.

T3: Jake you’re on the clock.

Jake: Sure. It’s fresh in my mind. In the last hour here, we had the last NDPSR print come out. And one that stuck out to me was that the nonfat NDPSRs were dropping 6 cents week after week. So Diego, I can’t remember the last time we saw 6 cent drop on nonfat. Should we expect volatility like that going forward? What do you think?

Diego: I think it’s definitely something that was surprising. We hadn’t seen that drop like that in quite some time. I think right now I still see a lot of downside potential. Technically we could see a bounce, but I think until right now, all eyes are on the demand side. And until we see a stronger GT or we see prices in the other side of the world, New Zealand and Europe, bouncing back, we could see more pressure on US features definitely.

Jake: Stepping away though. Even from the price itself. Do you see volatility in the NDPSR? Do you see bigger swings like 6 cent swings happening more regularly now? Or is this a one off?

Diego: It could happen if there’s a lot of volatility and we see a 20 cent drop, like we saw for the past month, we could see swings that big. Definitely.

Don: It’s always the ultimate black box to try to figure out this NDPSR because it’s an average of all reported sales. So what you do know is that somebody sold far enough below the market, the blast reported market to pull that average down 6 cents at the same time, some other people were selling above the average. So they had to go even lower. It’s just math. Then the question becomes, well, did they clear everything out? And if that’s the case, does it snap back next week, to the extent next week pricing is driven by this week that mutes it a little bit, but it could still bounce up 3 or 4 cents quite easily. Unless somebody as a manufacturer, I shouldn’t say somebody because only manufacturers can report that they have to keep feeding this or it does revert back to the higher level.

Diego: Adding up to one more comment. And I think the reason why I see I was surprised by a 6 cent drop, is that when you talk to manufacturers, most of them can agree that this year’s volume, a big percentage was on a contractual basis. We came from a year that was relatively tight and customers and traders wanted to lock in some volumes through supply agreements that are usually based on a formula. So that should lead you to having less swings or less extreme swings basically.

T3: Okay. I’m going to ask a related question that came in from one of our international customers. And this is to both Don and Diego. What is your outlook on the US nonfat low heat market going forward into late Q4 and Q1 of next year in terms of world market competitiveness versus EU SMP and Oceana SMP? Will US origin nonfat and skim milk lead the way? Will it flood the north and Southeast Asian and Middle Eastern markets with skim milk and also whey powder?

Josh: Sounds like that question came from Europe.

T3: Are we the price setters in this market is kind of the way I interpret that to be asked.

Don: We’ve more been following the change, okay? Because as the Euro has weakened against the dollar, we’ve followed that pricing somewhat reluctantly. But at the end of the day, we export 75% of the production of nonfat and skim. So regardless of what happens on pricing or the rest of the world, we still have to price at a level to export that relative level of production. So we will be competitive. There’s just no way around that. Unlike butter, where we export maybe one or 2% of production, it just doesn’t matter.

T3: And I would tend to agree because I think the US, at least in Q4, we’re going to have positive numbers on milk production.

Don: Yes.

T3: I’m not sure Europe will. Which means where does that extra milk production, where is it going to go in the US? It’s probably going to go into nonfat and therefore we’re going to have more production of nonfat as we get into Q4. And I think Europe will have less compared to last year, but I don’t know, flooding the market is a bit of an aggressive term. And I’ll also say that I don’t think there’s really a large enough nonfat inventories out there at the moment to truly flood any of these markets.

Josh: If Mexico disappeared. That’d be the only way.

T3: Right. Yara is bullish Mexico, right?

Don: And again, Southeast Asia is principally a medium heat skim market and we can do fantastic medium heat skim. It’s just not every dryer can. So can you do more than what you’re already producing? I think that’s not a clear yes.

Diego: So summarizing their response to our dear customers. We think that the US could steal some of the destinations that Europe is currently providing because we’re going to be growing in milk and availability and Europe is going to have a little bit of a harder time.

T3: Well guys, thank you so much for joining me today. I think this is a fantastic podcast. To all of our listeners, the dairy farmers and people in the dairy industry that listen to us, thank you for listening. And we look forward to talking to you soon.

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