Our pre-ADPI outlook and thoughts on 2024


The 2024 ADPI/ABI Annual Conference starts next week and will likely move the dairy markets. What does Jacoby predict for dairy production and demand for 2024? Join Ted Jacoby III and our guests Jacob Menge, Vice President of Risk Management and Trade Strategy; Joshua White, Vice President of Dairy Ingredients; Diego Carvallo, Director of Dry Dairy Ingredient Trading; Gus Jacoby, President of Fluid Dairy Ingredients and Dairy Support; Joe Maixner, National Sales Manager of Dairy Ingredients; and Ted Jacoby Jr.

We discuss:

  1. Jacoby’s predictions vs. results for 2024 YTD
  2. Factors impacting prices for Q3 and Q4
  3. Continued downward pressure on milk production and lackluster fluid milk demand
  4. The impact of the Avian Flu on dairy production

Plus, is whey the new canary in the coal mine? Find out more on today’s episode of The Milk Check.

podcast title card

Ted Jacoby III (T3): Hello, everybody, and welcome to the Milk Check. It’s April 22nd, a week before the ADPI meeting in Chicago. And I thought this timing would be right for us to have a market discussion going into an annual conference that does have a tendency to be a bit of a market mover.

Today with me, I have Jacob Menge, our head of trading strategy and risk management, Joshua White, head of our dairy ingredients group, Diego Carvallo, our head trader for non-fat, dry milk and other dairy powders, Gus Jacoby, head of our… President of our fluid division, milk cream, UF milk. Joe Maixner, head of our butter trading, and my dad, of course, joining us to give his thoughts on these markets.

Welcome, everybody, and let’s get to it. I was looking at our markets this morning, getting ready for this podcast and I kept asking myself the question, where did we think we’d be this week when we started the first week in January. And I don’t think in any of our markets we really were thinking that we’d be dealing with what we’re dealing with right now.

So, I think, maybe, what we’ll do is we’ll start with cheese. Jake, when we were entering the year, if I remember correctly, we were pretty bearish the cheese market, and if we were talking about what we thought the second quarter was going to bring in cheese, I didn’t think it was a market that was going to be up 8 cents today and in the seventies, and probably, going higher over the rest of the week.

So, what do you think is going on in cheese, and compare and contrast what we thought would happen at the beginning of the year and what we’re seeing right now?

Jacob Menge: I would say cheese has probably been the most in line with our expectations of all our commodities from where we started the year. We were bearish, and I would argue we saw that bearishness, right? I mean, we were in the 140s for a while in both blocks and barrels, and so, I think, yeah, we’ve seen a pretty good push the past week or two.

But otherwise, I think cheese, more or less, went in line with what we expected. Demand’s been off a little bit. We’ve seen exports numbers are starting to look pretty good, but in general, sluggish has been what it’s felt like for most of the year up until the past few weeks.

I’d say cheese kind of went along with what we expected, and it’s been this cycle that we’ve seen for about a year now, right? We get a good push higher. Last year in July, we saw a pretty good push up into, I think, the upper 180s, and then, we seemed to kind of kill demand [inaudible 00:02:57] we’ve been getting to those levels. And then, we’ve fallen into the 130s, 140s, low 150s, that generates some more demand, and we yo-yo from there.

So, yeah, I wouldn’t say anything too crazy from expectations on the cheese side.

Joshua White: You asked at the beginning of the year, would we have expected prices in our market conditions to be where they’re at now on April 22nd? And I just did a quick look back right when you asked that, just to see what our commercial meeting notes and what our dialog and discussion are.

And where I was expecting it to be significantly different, comments from Diego and from the group at the end of 2023 were, basically, along the lines of range bound price, maybe a little bit more upside than we’ve experienced, but the risk that the flush and lackluster demand would keep us in the range bound with limited downside price movements from the channel just because of the fundamental supply situation.

And I think maybe the only material difference from where we expected to be and where we’re at right now at the end of April is, I think, the top end of that was compressed even more than we expected, largely because demand was just taking even longer to return, or even poorer than maybe we expected. But for the most part, not a huge surprise.

T3: And you’re talking specifically non-fat, correct?

Josh: Yeah. And whey, I think. I think if you look at our whey notes, it’s sort of similar.

T3: Okay.

Josh: I don’t think we expected the market necessarily to run away. We expected to find a little price resistance because demand globally just isn’t that great.

T3: But what about this past week? It looks like everybody’s suddenly quite a bit more bullish. What’s going on?

Jacob: Yeah, I think we got some exports done, if I had to guess, when we got to those lower prices. It’s been a fairly thinly traded market on the CME recently, with only a few players on either side, and that’s nothing new. But I think there was one player in particular that kind of was the driver of the price is lower, they stepped away, and the bulls kind of took charge.

And I would say it was a justified push, especially out of the 140s, and then, the 150s, that… Again, always got to keep in mind, with our cheese markets, they’re 30-day, it’s a fresh cheese market. So, even though there might be decent stocks out there, it’s the price of what 30-day or younger cheese is priced at.

And I would say that market is tight, that fresh cheddar market, in particular, is tight right now. So, not a surprise to see it has come off those lows.

T3: Milk production’s been down about 1%. Is that playing into it at all?

Jacob: I think it is, and I think we’ve brought this up on the podcast before. I think that certainly is playing a factor, but at the same time, it has felt like demand has been off, whatever milk production has been off or more. And so, even though milk production seems contracted a little bit. That demand piece, which we just don’t have great visibility, it seemed really soft, except for a few markets.

Cheese going into Mexico has been really strong and continues to be strong by all accounts. There’s certainly pockets of really strong demand, but otherwise, just kind of so-so. And so, even though milk production’s been off, I think the effect of that in cheese in particular has been muted by… And really, across all our commodities, we’ll hear from the other traders, but has been muted by just kind of lackluster demand.

T3: Got it. Okay. We’re talking about supply a little bit. Gus, I’m going to pivot to you, on milk. We’re down 1%. There’s been discussion in the market lately about the HPA1 avian flu virus that’s been going around.

Are we expecting that to affect the market and what are we expecting milk to do over the course of the rest of the year?

Gus Jacoby: Oh, Ted, I can’t really tell you. I don’t think anybody really can how this bird flu will affect the market going forward. I mean, we know that the older cows that it affects pretty much takes them out of the herd. The younger cows seem to bounce back pretty quick. The infections started in the southwest, they’re kind of moving throughout. It’s already tight down the southwest and the west.

It still seems like there’s ample surplus in our spring flush in the upper Midwest and Mideast areas and northeast areas to a degree. So far, I don’t think it’s really affected those three regions. I guess, how it unfolds here over the next few months is yet to be determined.

T3: What do you think just milk production in general is going to do for the rest of the year?

Gus: Well, I don’t think farm economics provides for anything good on the farmer end. I mean, the heifer supplies are short, so cow numbers really can’t take any significant increase without impacting what would be an older herd, right? So, you start to question what the dairyman’s wherewithal is to continue with strong yields per cow as the herd starts to get older.

And that’s what I see as we struggle as an industry here to get an ample supply of heifers into the national herd. We’re not going to have the same number of heifers come into the herd as we’ve seen over the last decade, and therefore, we’re going to call less as you’ve seen in the slaughter numbers. And with that less calling, I think it’s safe to say that, at some point, yield per cow will be impacted. Is it going to be soon? Doesn’t seem like it. It seems like Jeremy had figured out how to increase that, if you look at the numbers and the reports recently.

But if you look at the statistics on cow numbers and heifer numbers and heifers that are prospective to come online over the next six months to a year, really, they’re limited. So, that means I continue to see, and we don’t look at… beef prices are very strong, too, so it makes it very difficult for a dairyman dealing with adverse farm economics to continue to hold on to cows in this climate.

I think they will, because they have to if they’re going to stay in this business and they’re not going to want to stray from being short barns and risking some economies of scale that they typically have gained over the years. But nonetheless, I can’t see any credible growth, unless it’s a short-term thing with weather or whatnot that might help the cow, in the short term, produce more milk.

What I see is a struggle to keep cow numbers up as a US industry, a struggle to keep the age of cows in your barn relatively normal, and therefore, at some point, the yield per cow being impacted. And therefore, all I can see in the near term is contraction. At the end of the day, I do not see any ability for national herd to grow anytime soon.

T3: So, what you’re saying is milk production is going to be constricted for some time?

Gus: I don’t think we can avoid it, Ted, yes.

Jacob: Ted, I think that ship has sailed. The supply side part of the equation is a slow moving ship. It just does not turn all that fast. And the direction of that is really, really, it’s clear. This is a demand market. It’s really just a matter of when does that demand come back.

I’ve heard people make the argument it won’t be till early 2026, and that seems like an eternity way with the prices we’re looking at, if you’re a dairy farmer, right? I think you can make the argument it’s this year, it’s probably somewhere in between those two. But, yeah, that’s supply side of the equation. The math is kind of written in stone there. I think this is a demand market.

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Thanks for listening to The Milk Check. Back to the show.

T3: You think there’s a particular product in our dairy portfolio that’s the canary in the coal mine, that if this market starts to get tight because demand’s coming back, it’s indicator that the whole market’s shifting?

Gus: Whey has been the canary recently for the past few years, I would say. I want to believe that it is still that canary, but it’s been facing some headwinds with manufacturing issues and just some other things that might upset it from kind of being that leading indicator this time, but I would let Josh kind of further comment on that.

Joshua White: As it relates to your question, as Jake mentioned, the past few cycles, you could argue that whey led the cycle, and I would maybe make the argument that whey protein led sweet whey powder, the rest of the products and the dry portfolio nonfat dry milk, et cetera, for our followers.

I don’t know this time, sweet whey powder prices increased, diverged from Europe, and have since, turned a bit bearish again. I don’t know that I’m ready to concede that that’s a reversal in the market, and that we’re oversupplied sweet whey powder for a number of reasons. First of which is the higher whey proteins, I believe, are a little top heavy at the moment, but I’m not ready to say that they’re oversupplied, and that’s going to force the whey stream back to sweet whey powder.

I think the recent move that forced convergence had to do with the production issue in the country, that forced somebody to switch to sweet whey powder production temporarily.

How temporary that is, I have no idea. I don’t know the answer to that. But that immediately, then, with extra product that was not, that wasn’t budgeted, that wasn’t being offered out there and hitting the market and hitting the CME spot call, that forced us to converge with Europe. There’s Japanese tender this week. I think that’s going to answer a lot of questions about where the international whey support price is. So, we’ll know a lot more later in the week.

That being said, I don’t know that I would call it a bullish market either right now. I don’t know if it’s a hold the ball under the water situation where it’s going to bounce right back up, or if we’re just going to stay in this sub-forty cent per pound price channel that’s a little bit more competitive with Europe and that’s demand related.

And so, the big difference between I think our cycles of the past few years looking at whey as maybe the first to move and this cycle is exactly what Jake and you guys were referring to earlier, this isn’t a supply situation, this is a demand situation. And I wish I was better equipped to forecast what the demand climate will look like on the consumer end later this year. I think there’s massive challenges in doing that.

When you talk about our dry products, milk powders and whey powders, a good portion of those go into consumer packaged goods at a low inclusion rate. They’re not driving the price of those consumer products. So, the cycle for the commodity price to reach the consumer is a very, very long one. And tomorrow, perhaps, we turn the page on new budgets and new pricing at the retail end that moves more volume or not. And that’s the part that’s difficult to forecast.

Now, when we talk about some of our products with shorter distance between producer and consumer like cheese and butter and even like whey protein, for example, that has a larger percentage of the utilization that goes into something where it’s a driver, those products, I don’t believe, have great elasticity right now. I don’t think the retail price is moving at the same rate as the commodity price.

So, when the commodity price drops, I think margins are just better for those supplying the retail end. And when prices move up, their margins get worse. I don’t know that the consumer is the beneficiary of those price movements. And until we start to see that, these supply movements aren’t going to have a material change in demand for a lot of our products on the domestic side of things, and I think that’s probably true in Europe as well, where I do think that you’re still seeing price elasticity is in Southeast Asia, maybe Mexico, but definitely, Southeast Asia, and that market has been slow.

And I really would love to get anybody’s opinion on what will change the Southeast Asian demand curve later this year or even into 2025.

T3: Well, let’s go to Diego. Diego, what are your thoughts on that?

Diego: It’s really hard to tell what’s going to change the demand outlook, but one of the main reasons why the demand has been so lackluster is China. China’s local milk production has been trending, at least, 5% up versus last year. And the previous year was also something like 10% above 2022.

So, if the biggest market, the biggest destination is not importing as much as they used to, you’re obviously going to see lower amount of loads going that direction.

T3: You think that market’s coming back anytime soon?

Diego: If you look at China, most of the consumer data has been better than it was at the beginning of the year. So, there seems to be some light at the end of the tunnel, but when it comes to dairy consumption, it’s improving, not imports.

T3: This is a demand-driven market. You look at some of the statistics on nonfat, our market has moved lower even though our domestic inventories of nonfat dry milk are 20% lower than where they were last year at this time. That’s how bad demand is.

I think we’re underestimating how bad demand has been internationally for non-fat, because China hasn’t been buying. Fonterra had to find new places to move their product, and they were taking markets away both from the US and Europe, which forced Europe to get more aggressive as well. And the US has kind of just sat out that market.

And then, as our milk production has decreased, we’ve really been taking it mostly away from Class IV rather than Class III. But it’s created a situation, where I would say non-fats are canary in the coal mine, because if demand comes back for non-fat, we have taken away all inventory buffer to an increase in demand, and that market will skyrocket higher. But we’ve been waiting for this demand to come back for over 12 months now, and the big question is when’s it going to come back? Is it going to come back?

Jacob: We, and I would say almost everybody else, has kicked the can on when that demand comes back. Probably, two times, at least, now, we’ve been, as a market, dairy has been just historically poor at predicting the change in demand and when it’ll occur. So, any prediction we make right now about demand, I think, has a big asterisk next to it.

Josh: I think we should also start to do our best in discussion to break out what we mean by demand. Because an upward price movements, demand is both consumer and stocking, and in downward price movements, it’s both consumer and de-stocking. And I think that if we want to add, at least, a positive upside potential for this market, I do believe that customers globally using many of the products, particularly, our powdered products, have de-stocked.

So, at the first signal, that consumer demand is outpacing budget or some metric driving purchasing decision making, there is an opportunity for a short covering price move to the upside, for all the reasons you mentioned, the stocks, I believe, we’ve de-stocked all the way from manufacturing stocks to consumer stocks working inventory.

T3: And every month that goes by that we don’t see demand pick up enough to really move that price higher, we’re actually digging a bigger hole, because milk production is down 1%, which means, we’re making that much less. And because of all the cheese plants that are being built, milk production is down 1%, and it’s mostly getting taken away from Class IV, rather than Class III, because that milk is going to Class III.

And I think one of the reasons, we’re starting to see maybe some of that milk getting pulled away from Class III into Class IV, but it’s nowhere near enough to solve this non-fat inventory problem. When that consumer demand comes back, it’s going to get really interesting really fast.

Jacob: I don’t want to distract from the conversation at hand, but something interesting that you mentioned about more cheese, more cheese supplies coming online that we’re really starting to see clearly now, is we are really pretty much in lockstep for the past decade with cheese demand increasing at roughly the pace of cheese supply increasing.

You know, there’d be stair steps in there because you don’t bring new plants online overnight, and so, they wouldn’t go hand in hand, but they were trending really well together. And it’s becoming pretty clear over the past year they are starting to diverge, historically, diverge, where cheese production is now well outpacing the increase in demand from the consumer.

So, something’s got to give there, and I think that plays into what you were just mentioning, that, maybe the price of Class IV products, right, demands that we send more milk there, and it’s not as easy as that. We know, moving milk between the classes in different states and all that, it’s not as pure economically as somebody like myself would like it to be. Something has to give on that production versus demand on the cheese side. Maybe, we should kind of stretch that rubber band far enough. Right now, that something gives.

T3: I would’ve to agree with that. The one product we haven’t talked about yet is butter. And then, butter may be the one product which we went into the year bullish butter, but did we really think we’d be at $3 butter in April, Joe?

Joe Maixner: No, I was bullish, but I was definitely not this bullish. This has been a market that, despite all attempts, has continued to surprise me throughout the year so far. We’ve continued to have higher highs, higher lows, higher highs going against a higher than average inventory builds.

Demand has remained steady, product is moving even at these levels. There’s no real reason right now for any type of pullback.

T3: Are we building enough butter inventory?

Joe: I have my hunches, but the question is is are we building enough of the right butter inventory? And unfortunately, we won’t know that, because the cold storage report does not tell us what type of butter is being put in inventory. It only tells us that there is butter in inventory.

That is the million-dollar question. What I will say though, is that the higher we get now, the more reserved I become on how high we get second half. We have to be getting to a point where we’re going to start getting pushback on the demand side when we’re this high this early in the season.

T3: So, it sounds like you’re describing an anticipatory bull market, which means, we go to a place right now to kill demand, and then, anticipatory bull markets end up having long tails. Is that how you think this butter market might play out?

Joe: I think that this market can remain higher than it should for longer than it should, if that’s what you’re trying to imply by the long tail. But I also believe that… End of January, everybody was predicting $4 butter by second half this year.

I have a really hard time believing that when we’re already where we’re at. It just feels like, with inventory builds, the lack of demand in Class II has been pushing a lot of cream into the churns for the past three months now. It feels like we’re going to be sitting on a lot more butter in the second half than a lot of people are thinking that we’re going to have, which, to me, feels like it’s going to kill that upside potential.

Now, I will preface that with we are not, I don’t believe that we are capped out where we’re at. I do believe we still have the potential to go higher. I just don’t think I am in the camp of $4 butter this year.

T3: Dad, you’ve been listening to this conversation. You’ve been watching these butter markets, these dairy markets for a long time. What’s your takeaway right now?

Ted Jacoby II (T2): Well, I think the current situation is very confusing. In fact, in our recent discussions, we used the word goofy. I tend to agree with that. The demand picture right now, it’s definitely true, we don’t have the demand for cheese products. We do have some demand for butter, and we don’t have the demand for nonfat. And I suspect that exports are up as we’re all suspecting.

I tend to feel that, as far as the dairy industry is concerned, we haven’t reached a point at this point where any dairymen are going to be expanding their barns. We may see some marginal increase. By a marginal, I mean, less of a reduction month by month in production loss. But I do think we’re going to continue to see production levels erode, and that ultimately should lead to higher prices.

Jacob: I think inflation has almost become a word that people are sick of hearing of like COVID was back during the pandemic. But paying attention to the breakdown of the inflation numbers, I think it’s actually going to be really important for dairy farmers of all products, because our CPI is averaging like 3.5% or something like that, but it is feast or famine in the breakdown. Right? We’ve got, at the top, our insurance numbers up 22% year on year in inflation.

Meanwhile, we have airfares, down 7%. There’s a whole lot of different metrics that are taken that make up this CPI number, and the really hairy thing, food is up 2.2. So, we’re close to that average. It is important to note, food away from home is above the average at 4.2. But the interesting thing is the Fed is pulling all these strings trying to make the economy have the soft landing or whatever you want to call it. They’re pretty much looking at that average CPI number, you got to think. They’re not digging in to the various categories and saying, well, we’re not doing this. So there’s going to be winners and losers in there, right?

If your airfares, airfares are down 7% this year, if you’re an airline and rates are being held high because that average CPI is being drug up by something like car insurance, you’re feeling the hurt on both ends. Your actual revenues are going to be down, because you’re deflationary and you’re borrowing costs are still high because the Fed is saying, “Hey, we’re still inflationary”.

And so, what you really don’t want to see is food kind of tick to feel what airlines are feeling right now. Inflation is really important, we still got to pay attention to that, because the Fed is going to make moves based on those CPI numbers, and they can be really deceiving when you actually look at the breakdown.

T2: Yeah, you’re certainly correct on that. But we’re competing for the consumer’s dollar, and obviously, we’re not competing very well. The money’s going elsewhere right now. Now, maybe, the last week or two have changed that, maybe we’re going to see a pop in April, which is unusual. We’re competing for that consumer dollar, which supposedly is inflated, and we’re not getting it.

So, where’s the money going? It ain’t going to us.

Jacob: The Fed’s making it tough, right? When they keep rates high, that’s just a vacuum sucking up dollars. And so, that’s exactly what my point is. If that… Food could go deflationary, but if the Fed’s going to keep those rates up, that’s a tough, tough market.

T3: The one thing that has me a bit surprised on this demand side though is we are still at full employment, and that surprises me that dairy demand is lackluster the way it is. Because I would think there’s other things, if money is tight, but everybody’s full at full employment, that would go before dairy demand would go. You know, I would expect it to be durable goods like refrigerators. I would expect it to be home remodels. I would expect it to be things like that that would weaken first.

We haven’t seen that. That brings me right back to your point, dad. These markets are just kind of goofy, and I think they’re hard for everybody to get their head around right now.

Josh: I think we also got to pay attention to the production and sales cycle. Home renovations, you don’t sign those contracts every month. Those are longer term contracts. Building new dairies are multi-year decisions based on an assortment of things. Food is maybe a little bit quicker in certain instances.

And so, I think, as you start to see some of these things shift, they should be an indicator that everything that has a longer sales cycle, perhaps, might shift along with it. It’s a little bit more difficult to reverse the trend in certain areas that are heavily, heavily labor-based, right? Because those rates aren’t coming. Labor costs aren’t coming down quickly.

T3: That’s a really good point. I didn’t think of it that way.

All right, well, hey, we’ve had a great discussion. Before we wrap up, does anybody have anything that they want to add to the discussion heading into ADPI?

Joe: It’s going to be an interesting meeting.

T3: I think it’s going to be very interesting meeting. I’m very curious to hear what everybody wants to talk about.

Well, before we say goodbye, there is one thing I want to do. Dad, I want to congratulate you. Last week, we were up in Milwaukee, Wisconsin, and you were awarded the Industry Champion Award by the Wisconsin Cheesemakers Association. Well-deserved award, and very proud to be your son to watch you on stage receive that award. Congratulations.

T2: Thank you. Thank you. I appreciate that.

T3: All right, everybody.

T2: Take care, guys.

T3: Take care.

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