These market anomalies are worth watching


As the industry preps for the holiday buying season and looks forward to 2020, some abnormal market conditions—both domestically and internationally—caught our attention.

Ted, T3 and Anna discuss market anomalies that might set the tone for markets in the new year.

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 going to talk about dairy markets today but this isn’t just another discussion of markets. That’s because there are several anomalies we’re watching that we think will impact the way markets behave through the end of this year and into 2020. Ted, let’s start with you. Milk production in Europe has caught your attention. Why?

Ted: As far as Europe is concerned, production seems to be starting to come up and the question is why. The reason is the Dollar has been so strong and the Euro has been relatively weak. Their production costs have reflected that also. We look at currency valuation as—we have in the past—we’ve looked at it as what’s the cost of putting milk powder into China or the Philippines or wherever. And the Euro is one value, the Dollar is another value and it reflects on the landed price of the product.

Well, if you look at the mailbox price in Europe relative to the mailbox price in the United States, the European prices, you know, 15%, 20% lower than ours depending on the country and so on. So what that means is that our currency valuation is a hell of a lot more…

T3: It’s having a negative influence on our ability to export.

Ted: Well, it reflects on the producers’ costs in a way that we really haven’t acknowledged up to now. Their cost of production has got to be a lot lower than ours in order for them to be increasing production at the price level that they have. Their production’s going up, not down and these are basically smaller dairymen than ours, less efficient than ours. And their production is starting to bottom out and go up.

What I’m conjecturing on this is that…or concluding on this is that the value of the currency affects their production costs in ways that we haven’t really come to grips with. You know, we tend to think in terms of landed price of product somewhere in the world but it also affects their production cost. If their production costs were quid pro quo with ours, they wouldn’t be increasing production. Europe is a lot bigger than we are and if we’re gonna be competing for markets particularly in the trade discussions, with the trade discussions going on and so on we’re gonna be competing for markets. In this kind of environment we’re gonna have a tough time doing it.

T3: I think we were…I think last year feed quality was very poor and I think this year feed quality is better. So when you’re talking about a 1% change in milk production levels, feed quality is enough to change that dial about 1%. I think the more relevant question may be, “is it sustainable?” And I haven’t heard anyone that strongly believes European milk production is going to be growing at that, you know, 2%, 3%, 4% rate that it has in the various years, in the last five years because as you say, I don’t think the numbers are there.

Ted: Well, maybe not. But, you know, we also have to factor in our feed quality which right now is on the edge. This is one of the anomalies. We have not had a good growing season. If we’re looking at our frost here in the northern…in the upper Midwest in the next week or two, it’s gonna greatly affect the feed quality for the next year.

Anna: Dairy markets move on an international scale. Buyers and sellers thrive when they think globally. Put T.C. Jacoby and Co.’s 70 years of market expertise to work for your organization. If you’re looking for someone to help you market your products or you’re looking to source supply, get in touch with us now. Email or dial 314-822-5960.

T3: Domestic dairy prices are pretty high. We’re talking $18 Class III, you know, maybe even 18 and a half. That is a good price for the dairy farmer. I’m not saying it’s a home run but it’s better than what we’ve been seeing the last few years.

Ted: You’re gonna have half the dairy farmers in the country saying that that’s not good enough and the other half saying, “Well, maybe I can survive at that.” You’re gonna have about half of them mad at you and the other half tacitly acknowledging.

T3: But I think they’ll all agree it’s better than the last two years.

Ted: Everybody will agree with that.

T3: Some of the anomalies that I’m seeing in the market is these price levels. And I’ll start by talking a little bit about cheese. One of the things that’s pulled that Class III price up has been…cheddar blocks have been short and there’s been very healthy demand for cheddar blocks. Meanwhile, there has not been terribly great demand for cheddar barrels. Yes, the market for cheddar barrels has been gyrating and you’ve got this block barrel spread that…it got as wide as $0.40 at one point and then closed back up to $0.20, you know, may close back up to $0.10 but the reality is what’s driving this cheese market right now is natural cheddar demand, not processed cheese demand, which translates to 40 pound block demand rather than barrel demand.

The anomalies that I’m seeing in the cheese market are even though there seems to be good cheddar block demand right now, we’re not seeing a material change in cheese inventories. And that concerns me because what that’s telling me about this market is that there’s currently a demand for young cheese but we’ve got a lot of old cheese sitting in warehouses throughout the country and that eventually comes back to haunt our market.

It won’t hurt our market as long as Christmas and the holiday buying season and maybe even the Super Bowl buying season is in front of us but eventually when people start…when we get into that time of the year when it’s about inventory building, the fact that many people already have a fairly decent amount of cheese in inventory is going to affect their purchasing decisions.

And so let’s say February 1st to June 1st I’m concerned about our cheese markets because of the inventories. And then also we were just talking about European milk prices relative to U.S. milk prices. In the international market, U.S. cheese prices are also, you know, a good 20% above European cheese prices. That’s having a material effect on how much we’re exporting. We’re not competitive in the world market right now.

And so you’re gonna see high cheese inventories affecting inventory builders’ decision making process. You’re gonna see low export prices, low export volumes affecting it. And so even though we can talk about U.S. milk production and even say, “Hey, I don’t think it’s gonna grow that much,” and we can get into that in a second, I have concerns about the sustainability of this cheese market right now as we get into the middle of next year.

Ted: Well, I certainly agree with that and again, we referred a minute ago to the currency valuations and how it affects exports and also, how it affects production costs, milk production costs. That’s an anomaly which we’re a little unaccustomed to dealing with. And then you look at the feed quality in the United States and the fact that it may or may not be suspect. We have been of the opinion that this market will go to about where it is now. I think when we go…if we go back six or eight months from where we are, it’s ending up after a lot of gyration about where we thought it would. But we also thought that we’d be looking at $20 milk in 2020 and I’m beginning to question that a little bit for the reasons that we’ve discussed. But unless something happens with the juxtaposition of milk values in Europe versus the United States, it’s hard for me to say that the United States markets are gonna be strong next year. There’s a lot of things that can happen between now and then to give us strength and maybe feed quality, maybe increased departure of milk producers from the United States side might have an effect. But given the current factors and the way we’re looking at it, it’s beginning to be suspect that this market is gonna continue to move up as fast as we thought it would.

T3: It was interesting. There was—recently at a conference out in California, two back-to-back speakers giving their thoughts on the macroeconomic environment. The first one said that they thought the macroeconomic environment was going to be very difficult and milk prices were gonna suffer. Then the second one came on and said, “Well, the macroeconomic environment’s pretty good and we think milk prices will benefit.” Well, the difference was the first one was a European-based pundit and the second one was a U.S.-based pundit. And that just kinda says there’s a different attitude about the macro environment outside the U.S. borders as there is inside the U.S. borders. In other words, the world is not…the world right—most of the world right now is either in a recession or in the process of entering a recession at least in terms of the way people are thinking. Both in Southeast Asia, Oceana and Europe, that’s kinda the attitude right now of what they’re seeing out there. The U.S. is still relatively healthy but the question is are we gonna remain there. The general consensus of economists that I pay attention to are basically saying we’re gonna enter a shallow but lengthy recession sometime next year and it’ll last for a few years. It won’t be 2009, but it’s gonna be a kind of a slight, you know…let’s call it burdensome environment for a couple of years.

That…if we do enter that, that’s still probably enough to take the bloom off the rose in terms of $20 milk for the dairy farmer. Especially if we have decent milk production. My inclination thinking about it as a global perspective is I think macroeconomically next year’s gonna be a bit of a challenge.

Ted: I don’t think we’re heading for a recession next year. I do think our growth rate is not gonna be 4%. I think it’s probably gonna be down somewhere between two and three which will still be pretty good.

T3: Hey, if we have 2% to 3% GDP next year, to me, that’s good news for milk prices.

Ted: That’s good news and I expect under those circumstances that we will grow and maybe we can nibble away a little bit at the $20. But it’s not gonna be…we’re not gonna take it by storm. Unless something really inordinate happens.

T3: Let me bring up another anomaly that we’re paying attention to. Recently Trump administration announced that there were EU tariffs on cheese. You know, European cheese is being imported into the U.S. which actually includes butter as well. I don’t know if that’s gonna have a huge effect on domestic milk prices but there are small places where I think it could. One place that ultimately I think will be beneficial in that package for the American fairy farmer is in butter. You know, the talk had been about cheese but buried in there was also the same 25% tariffs on European butter.

The number two…I don’t know how many people realize this but the number two butter brand in the U.S. today is Kerrygold, Irish butter. Right now as I understand Kerrygold has a lot of butter in inventory they’ve already imported. You’re not gonna see a change in Kerrygold butter prices on the supermarket shelf in 2019 but as you get into 2020 and they have to reload their inventory levels it’s coming in at a 25% higher tariff than it did this year and that may be a positive thing for, you know…on the margins. Not huge but a positive thing for the U.S. dairy farmer. On the cheese side, it’s harder to say because I’m not sure how much European brie is gonna be replaced by domestic brie and things like that.

Ted: Well, I don’t think cheese will have any effect at all and the reason is, we export cheese. So what’s Europe gonna do with the cheese that doesn’t go to the United States? It’s gonna wind up somewhere else in the world market. So cheese that doesn’t come to the U.S. competes with us on exports. So I don’t see us having any effect because of tariffs on cheese. I don’t see that as an issue but I do agree with you on the butter. And I think basically the fact that butter fat is also included in the cheese price, it’s also a factor. So if the overall butter fat goes up and if you’re looking at 25%, you’re looking at $0.60, $0.55 per pound butter. That’s a huge factor. And if the butter price goes through the roof and really takes off, let’s say it hits $3.00 and so on, that will affect the cheese market. And it’ll affect the disposition of milk. You’ll wind up having more milk and butter powder and less milk and cheese. So that could have a big effect.

T3: So when we look at dairy markets in our office, we tend to discuss dairy markets in three buckets, let’s say. Fundamentals, you know, which is like milk production is this, demand’s gonna be this, therefore we think prices are gonna be this. That’s where you start. But then the second thing is, you know, we’re…we talked to a lot of different buyers and sellers, you know, throughout the dairy industry at various levels whether it’s on the farm level, whether it’s on the end user level because we’re trading a lot of dairy products. And so kind of that anecdotal evidence. Is everybody trying to buy or is everybody trying to sell? And that plays a factor in how we look at the dairy markets. The third way we look at the dairy markets is what you call technical analysis. Anybody out there who does a lot of futures and options trading, you know, has probably seen technical analysis when these futures brokers, you know, bring out their charts and say the market’s doing this and that and they talk about resistance lines and they talk about support lines and things like that.

In the technical side for butter right now in the last few weeks, butter has broken a critical support line. Butter had a…, it was like a seven or an eight year trend of steadily increasing pricing at a base level. And it’s no longer on that trend. And if the butter price which is…you know, again, early October sitting here around $2.15. If it drops any further, especially if it drops below $2.00, somebody who solely looks at markets from a technical analysis perspective would argue that the butter market has the potentially to fall all the way to $1.20. I’m not saying it’s gonna do that. What I am saying is there are some signs of weakness in the butter market that we’ve started paying attention to that we don’t understand yet, that we can’t necessarily talk about from a fundamentals perspective, but we’ve learned over the years to trust certain things when you’re looking at technical analysis and this is a strong one. And so internally, we’re kind of having our eye on the butter market and we’ve got some skepticism.

Anna: On “The Milk Check” podcast we tackle questions and share ideas that move dairy forward. Now we’re making it easier for you to get answers to your lingering questions. Do it with one click. Submit your questions online at

T3: Let’s talk a little bit about powder markets. So the nonfat market this year is another market that’s been confusing. And nonfat drives the skim solid side of the Class IV price. We’ve talked a little bit about butter but what about nonfat? The nonfat market started out the year kinda steadily increasing and things were looking pretty good and then it hit a hard cement wall and has actually been a very flat to lower market over the last four or five months. It took us…I’ll admit it took us a little bit to kinda get our heads around why because we felt pretty good about nonfat this year. Ultimately the reason ended up being pretty simple. If you look at European powder exports this year…I don’t know the exact number but I wanna say at least 250,000 metric tons over last year. But their production is flat versus last year. The difference has to do with the intervention stocks. There were over a billion pounds of powder in intervention in Europe and a lot of those intervention stocks mostly last year got bought and got taken out of government hands and into primarily European dairy trader hands.

What we’re pretty comfortable saying in retrospect happened was Europe was very aggressive selling powder in the world market. A lot of that either directly or indirectly with intervention stock powder. And it ended up having a negative effect on global nonfat prices. And nonfat dry milk…whey powder or nonfat dry milk are by far the most global of all the, you know, of all the domestic dairy products we produce. And so they’re very affected by international markets.

Here’s the good news. There are no more intervention stocks. Next year, EU is not going to export 250,000 metric tons more powder than they did last year. And so that bodes well for nonfat dry milk prices in the U.S. If there’s one market that I feel comfortable saying is more likely to be higher over the next 12 months than lower, I would say it’s powder prices, it’s nonfat dry milk prices because I think that the world market has…there could be some good international demand for milk powder and the intervention stocks are now gone.

And so, you know, we talk about anomalies, we talk about a market sending mixed signals. You know, I’m skeptical about cheese demand next year. I’m skeptical about butter demand next year. I’m feeling good about powder demand next year. But whey powder, we think it’ll continue to be a mixed bag and a hard market to predict. We had a discussion about the African swine fever that’s been kinda going through Southeast Asia, China and Southeast Asia over the last few months. That still continues to have a material effect on whey powder prices. Primarily, the non-protein side of the whey market, lactose and permeate. It is still having a material effect. There’s a lot of people who say, “Hey, it’s getting better. Maybe permeate prices are gonna start going up.” But there’s just as many people who say, “I don’t buy it. There’s still too much damage out there from African swine fever.” So I would say permeate remains to be seen, but it’s so low that it’s probably more likely to go up than down but that has a lot more to do with where the price is today than anything else.

Ted: Well, the whey price will be a damper on the Class III price. No question to that. $0.01 is $0.06 on the Class III, so right now the whey price is gyrating in the mid-$0.30s. So that translates basically $2.00 a hundredweight on the Class III price. If it goes down a dime, $0.60 difference on the Class III so it does make a difference. Although I’ve read a few articles that they’re starting to get a handle on the swine flu and that whey and permeate is expected to begin to pick up but it’ll be a slow process.

T3: And then finally, the protein side of the whey market. The protein side of the whey market actually was pretty good this year but just how we had that macroeconomic discussion about, you know…that may have an effect on cheese, you know, and how the economy’s going. I think the same thing can be said for the protein market. And so it…if we have a…if we get to that 2% to 3% GDP next year, I think the protein market will hold up. If things weaken, that protein market could weaken too.

Anna: Dairy markets move on an international scale. Buyers and sellers thrive when they think globally. Put TC Jacoby and Company’s 70 years of market expertise to work for your organization. If you’re looking for someone to help you market your products or you’re looking to source supply, get in touch with us now. Email or dial 314-822-5960.

T3: Finally, one last comment on Class I sales.

Ted: Well, I think Class I sales are holding up the fluent milk industry. They’re continuing to increase as the percentage of overall sales. I’m referring to whole milk Class I is increasing at 4% or 5% as a matter of the total. However, the overall Class I sales, which include skim and 2% and so on, continue to go down and drag it down. But there are several things with regard to whole milk sales, fluid. I’m noticing more and more whole milk products in the grocery store. We buy, in our house, kefir and that’s always been a low-fat, no-fat product. Well, Wallaby, which is Danon, at Whole Foods now has a 3.5% probiotic kefir and you look down to the competing products on the shelf and whole milk products are starting to show up there, too. And I think those products in the bottle like that are Class 1 products. It looks like whole milk is where it’s gonna be and whole milk certainly is more flavorful than the 2% and the skim. So it could…it has a possibility of turning it around as we go forward. And you can almost set a destruction date when people can’t qualify their milk because they don’t have enough Class I sales. I can see the graph now, the decline of 3% and 4% per year and how much milk is needed to qualify. It’s gonna be a collision course in a few years. No question about it.

Anna: That’s already ugly now. That’s already ugly now.

T3: Explain that a little bit. I’m not the milk guy in the office. I’m the cheese guy in the office, so I don’t understand what’s going on there.

Anna: So for [Federal Order] 33 for example you’ve got qualification months where you have to go to a Class I plant or a supply plant affiliated with them with a certain amount of your milk. Right now we’re in the middle of qualification. So for 33, it’s two days production for each producer has to hit one of those plants. If they don’t need it, they won’t take it and you can’t get qualified, you can’t participate in the pool with that producer for the rest of the year. Or you have to take it to a Class I plant every single month for the rest of the year.

T3: So what happens to that producer? He just falls out of the Federal Order?

Anna: Yeah, he just wouldn’t be pooled.

Ted: The producer doesn’t pick up the tab for that. His handler does. Generally, a co-op that’s still in the qualified.

T3: Are we starting to see reductions in…you know, for example, take the geographical area that covers 33. Is the percentage of milk that is actually participating in the pool dropping right now?

Anna: No, in this year it’s a little bit different. Last year was harder. This year hasn’t been nearly as difficult for qualification. Last year was tough though.

T3: Why do you think that is?

Anna: There just wasn’t the demand for it. You didn’t need as much Class I. So the point of qualification was always to make sure that the Class I plants had it in the months where they most needed it. And especially when it was…you know, in 33 especially when it was ugly over the past few years. They really weren’t dying to get more milk into a Class I plant.

T3: Oh, got it. So the…what happened was milk production tightened up which made it easier to actually get qualification spots.

Anna: Yes. Yeah.

T3: Got it. But if milk production grows again, that’ll get ugly again?

Anna: Oh, yeah.

T3: And as class 1 sales drop, that’ll get ugly too.

Anna: Yes.

T3: And eventually get to a point where you’re literally forcing farmers out of the Federal order because of the continual drop in Class I sales.

Anna: Which is why some orders, their qualification needs or demands are very, very flexible. They don’t…they know they don’t have the Class I demand so they’re not making you go in there all the time. Thirty is an example of that.

Ted: I think Order 7 is 10 days’ production, isn’t it?

Anna: 5 is one day’s production every month and I thought seven was similar. Maybe you’re thinking of the 10% because that’s the diversion limit.

Ted: Maybe I’m thinking of 6. It’s becoming more and more of an issue as the Class I sales decline.

Anna: Well, the other part of that equation though too is is everyone going to care if they aren’t getting qualified.

Ted: As are the PPD.

Anna: Yeah. And especially for orders where so much of the usage is class 3 anyways. Those PPDs are not sizeable enough for it to make a difference. And we’ve seen people jump on and off of…

Ted: Order 33 as an example.

Anna: Yes. And we’ve seen people jump on and off of 33 over the past few years. You know, if they’re riding a border between like 32 or 33, they might just stick with 32 because it’s cheaper to do the qualification.

Ted: And maybe the approach is just let it die. If we expect Class I sales to continue to decline the way they are, it’s gonna happen one day anyway. So we’ll see. Maybe being prepared for that or try to do some projections on that might be a fruitful enterprise.

T3: Lastly, I think it’s worth mentioning that in our next podcast we potentially have an opportunity to interview Tom Gallagher who’s president of DMI which…and he’d like…he wants to talk about the checkoff and exactly how the checkoff works. The, you know, 15 cents that’s dedicated from most every dairy farmer’s check. Tom Gallagher runs the organization that manages that money. And Tom’s been someone we’ve known for years and we’re looking forward to the opportunity to talk to him and if there’s any of our listeners who have any questions that they’d love for us to ask Tom Gallagher if we have him on, feel free to send them to us at…what’s the email address?


Anna: We welcome your participation in “The Milk Check”. If you have comments to share or questions you want answered, send an email to Our theme music is composed and performed by Phil Keaggy. The “Milk Check” is a production of TC Jacoby and Company.

Dairy cooperative support

We can put our insights to work for your operation. Learn more about dairy cooperative support services from T.C. Jacoby & Co.

Show Full Transcript


Dairy cooperative support

We can put our insights to work for your operation. Learn more about dairy cooperative support services from T.C. Jacoby & Co.

Listen to The Milk Check — the most comprehensive podcast in the dairy industry.

Listen to the Milk Check

Read our weekly market reports for the sharpest analysis on industry topics and trends.

Read Recent Reports