Talking dairy supply with the fluid milk team


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 necessarily tight right now. We do anticipate that’ll happen when we get into later in the summer and this fall. Feed prices look to remain high.

Heifer prices aren’t going to rebound anytime soon. And the cost to build any new facilities has really gone up with all the inputs, whether that be steel, lumber, concrete. So it’s really a strange year. I’ve been at Jacoby for 10 years, and this has been the least long that it’s been since I’ve been here. We still have milk moving some distances where there’s some deficit areas. And typically, you’re begging for homes this time of year. And we don’t see that a lot so far this year.

Gus: Greg, I think where it’s really interesting is that heifer supply you mentioned, right? We have, I think some USDA data that shows this might be the smallest Heifer supply that will come into the US dairy herd since 2009. And that’s pretty significant when you really think about how much we’ve grown since then as a dairy industry and as we move forward.

Greg: We’ve had ample supplies of heifers in the past. We’ve had sex semen. We’ve had an ample supply of heifers. You had a lot of producers breeding to beef last year to help when prices weren’t as good. And when beef prices were still good, they were breeding a lot to beef. So we just don’t see the heifer supplies that we have seen in recent years.

Gus: And I think what we have is likely already high milk prices, but likely higher milk prices as we move through the year. So if a dairyman wants to expand and he’s struggling to get heifers, what’s that mean?

He’s going to hold on the more efficient cows which eats in now to the margin that they normally would have and makes it a little more difficult for them to increase supplies and be as resilient as the American producer has been for the last eight years, right? So that might exasperate things for a period of time, from a standpoint of getting production back to where folks might think it should be,

Greg: Right. And we watched the corn price, the soybean meal price, the hay price, that’s all going to limit anybody’s ability to add on milk, even with high milk prices where they’re at today.

Gus: I agree. One area though, where the Milk Check has been pretty attractive is in that butter fat spot, right? I mean, it’s carried the Milk Check a lot of different years, but I think this particular time it’s been an interesting dynamic.

And we mentioned at the beginning of the podcast and that not only are we down milk and down milk a fair amount more in the Eastern half of the country, but then we also added a nice sizable cheese plant that has soaked up a lot of butter fat.

And I know that has really slimmed up the cream supplies in the entire region. Jared, you want to speak a little bit to what that means and how you’re drawing supplies for your customers and trying to meet their demands as best you can?

Jared Miklasz: We have certainly not seen, and not to echo what Greg just mentioned, but not typically as long as we’ve seen it in past years during the flush. And when I mention manufactured liquids, I’m talking different condensed solids, and then also cream.

Cream market is tightening in the Midwest and out East as cream cheese and ice cream manufacturers are adding cream to their production schedule. As we sit here at the end of May, cream is still available out West, but looking at increased fuel prices and limited tanker and driver availability, it’s going to make it a challenge to travel that cream West to East.

And then you couple that with the [inaudible 00:06:23] St John’s plant that Gus has alluded to, more fat is being added to that plant. And not as much milk as flowing into the butter powder plant, which of course is tightening the cream supplies in the Midwest. Those few things together is definitely going to make for a very tight cream market here as we get into the later summer, all timeframe here.

Furthermore, we’re seeing some cheese makers fortify their VATs with various fluid, condensed solids due to the current powder prices, which is also adding to tightness in the marketplace. My team, we’re currently trying to work on different avenues to bring different solids back East. But as I alluded to earlier, we’re going to see some challenges with the current diesel prices where they at today.

Gus: Yeah. I mean, that cost to haul product is pretty substantial.

T3: I got a question for you.

Jared: Yeah.

T3: I mean, the butter price is…

Jared: $2.80 today, I think.

T3: Yeah. It’s $2.80 today. This time, last year, it was what? Probably $1.60? Not quite doubled, but it is significantly, significantly higher than a year ago. With the diesel prices up, with the increased tightness, even with these higher prices of butter fat on the East coast, are you seeing multiples higher as well? And so it’s the double combination of both higher butter prices and higher multiples for cream?

Jared: Certainly for this time of the year. We’re seeing multiples in the high 130s when in past years, we were down lower in the low 130s in the Midwest specifically. Second half of the year contracts are locking in a higher multiples than we’ve seen in years passed.

I think people are worried about the tightness in the marketplace and went out and are willing to grab supplies when they can, because don’t want to be the last one coming to the table here in the fall and trying to grab that last load of cream. And I think at that time we could see multiples get all the way up into the upper 150s here, come this fall.

Gus: Another big thing you touched on earlier, Jared, is that Class IV, Class III relationship right now that we’re seeing, and the desire by cheese makers to get protein into the VATs via fluid in lieu of powder. If you just look at the numbers, your announced protein value relative to what it would be in powder, there’s a fair amount of discrepancy there.

So yes, that means cheese makers are willing to pay a premium on that protein, but then you got that issue with freight that can eat up that discrepancy rather quickly. But nonetheless, you got some condensed solids, skim solids moving to cheese, I assume.

Jared: Absolutely.

Gus: So interesting dynamic, but I think us and everybody else in our industry, we’d love to see these diesel prices go down.

T3: And the reason Gus, that these cheese plants want those solids in fluid rather than in dry form, is because when they buy it in fluid, they pay a Class III price basis instead of a Class IV price basis. Is that right?

Gus: That’s correct. If they pay for the nonfat, they’re going to buy it at a powder value, which is Class IV based.

T3: And when they buy it on Class III base, that protein price is derived basically from the cheese price?

Gus: Yes.

T3: Okay. That’s interesting, because what that also means is that’s just diverting that much more milk away from nonfat dryers.

Gus: That’s correct. In the middle of the flush, we’re seeing quite a bit of solids move that direction. Now you can start to talk about what the dynamic is going to be here in a couple months when the heat kicks in the summer and the milk really starts to shorten up. And the reason why I bring that up is because I think while we might not be there yet, I think there comes a point when people are going to start fighting over solids.

And how does that affect the marketplace? Because if you’re of that philosophy that the market always represents the last load traded, it could really elevate prices. And I think a lot of people that I’m talking to when we talk through that scenario, feel that ultimately that means milk could spike to a pretty darn high number by fall.

T3: Who, in your opinion, do you think, you talk about the last load traded. If things get that tight who ends up going without, or how does supply get rationed?

Gus: Well, T.C. Jacoby & Company will serve their best customers first, Teddy. That’s the first thing I’d like to say. But the reality is, is that it’s going to go to the guys who are willing to pay for it the most. Right? And in that scenario, you’re going to have at some point folks that will back out because the price is too high.

When you’re looking for a cream load to fill an order, or you’re looking to get more cheese because your cheese orders are come and due and you need more protein in the VAT or what have you, we’re going to be in a position to just figure out who the highest payer is and we’ll sell accordingly.

T3: When do you think that moment will hit? And I know it’s hard to guess, but do you think that’s something that happens in August? Do you think it’s later?

Gus: Well, I think it really depends on how the market unfolds over the next few months. So the markets today are more anticipatory as they ever have been. And I think there’s some folks that are smart enough to stay ahead of it. I think there’s some folks also that may not want to believe it.

Because we haven’t really seen a tight year like this in quite some time. And when you get into that scenario, it has to play out to see what level of folks are on either side of that fence. I don’t think demand really starts to show itself fully until that September, October, really November timeframe when we’re filling holiday demand.

So even though we could have some pretty tight supplies and pretty elevated prices through the summer, I don’t know if we see it at its highest point until maybe October or November. Under that scenario, you’re now in a situation where you have folks really searching hard, define the cream or the condensed or the milk and they’re going to pay premiums for it.

And if they aren’t going to pay premiums on that side of it, then they’re going to pay premiums for the commodities derivatives of the milk price, whether it be bulk cheese or butter or whatnot. And they’ll drive those prices up, which ultimately drives the milk price up.

Ted Jr: Gus, let me address a question to you. And you mentioned the period that I’m concerned about is September, October and November. That’s just when dairyman are going to make a choice as to whether they want to feed that corn to the cows or sell it on the market at $8 of bushel. Between you and Greg, if you were doing that today, what would you do?

Gus: Tough decision.

Ted Jr: I guess, that’s the point. When that choice is sitting there come September, October, how do you handle that choice? Let’s assume the milk price is where it is now or slightly higher.

Gus: Well, if it’s only slightly higher, I mean, dad, it’s a math game and we’re talking about hypotheticals. We don’t know where the corn price is going to be yet. If you’re going to really put pen to paper, it’s going to depend on what your return on milk is, net return relative to what your return on corn is going to be.

The way I would look at that as well, I do believe it’s going to be a tough decision for folks because you’re still not going to have all the information in front of you at that time. What you’ll never know, even though the milk price might be close to $30 for a short point in time in the fall, you’d like to think that isn’t sustainable.

But we don’t know that. And if you’re a dairyman, you got to bet on that, because that decision’s going to be basically okay, is corn $8 or $9? And is my milk going to be 28, 29 dollars on an average or is it going to be 22? And what’s the mass say on what my decision should be?

Ted Jr: Greg?

Greg: I agree with that. But I mean, you’ve already put up your corn silage. By the time you’re harvesting your corn, most of the dairy men, if they had their choice, their set up, they’re going to feed that corn through their cows. Now there could be some at the margin that sell corn rather than milk a few additional cows or push their ration to that limit. But I think if all things are close to equal, they’re going to milk cows, because they’re set up to do that.

Ted Jr: Even when the corn price is eight or nine dollars, and the price of milk is something below, let’s say 27, 28?

Greg: That could definitely limit some of the top end of production on some of these herds where you sell some of your corn and maybe your rations aren’t quite as good because you’ve sold more of your corn. That definitely could be a limiting factor for milk production going forward, even for the next year.

T3: One of the questions I keep asking myself, the tightness in the market in the spring has been to me, the big signal that things are really tight and will stay there. The other thing that we’re hearing from some of our especially international customers is they have no inventory because they haven’t had any interest in buying at these prices, yet things are still tight.

That actually is very bullish because it means they’re going to need to buy more than they usually do in the second half of the year because they don’t have the inventory to draw off that they usually do. My wonder is how much of this tightness is going to cause spot prices to spike or the basis, the price that people may pay over and above the federal order price and how much of it will simply translate into much higher federal order prices as a result of higher non-fat butter or cheese prices?

Gus: Well, Teddy you’re already seeing both. We’ve talked to a number of folks that we do business with who have plans to push the premiums up. And I think if you’re on the producer’s side of the aisle, cooperative side, whatever the right term is to represent that, you’re going to say we’ve had nothing but a push down on premiums for the last eight or nine years. It is time to fix that.

And to a certain extent, they’re going to have that opportunity to do that over the next eight, nine months and certainly going into 2023. And I think we are going to see higher premiums and a lot of processes are going to appreciate. But on the flip side, Ted, I mean you look at the derivatives of milk, which ultimately sets the actual USDA announced values.

Those are going to go up too, mainly because not just in the US, but around the world, we’re going to have shortages. It’s not like the US is the only spot that’s going to be down on milk. The EU is down, Oceania’s down. So I think powders naturally you think would go up, butter naturally is going to even go up further. But then you look at the cheese side.

Even with so much additional capacity, can we fill the demand? I think there’s going to be areas of the country as well as certainly the world that are not going to get the cheese they need just because of the milk production being limited this year. And that will be driven up at some point as well. That’s at least the perspective I have. I think it’s not a question of it going up, it’s a question of how much, and we just don’t know that until the demand peaks at fall timeframe.

Ted Jr: Let me weigh in on that a little bit, because I think you’re underestimating the upside potential. Even though you know it’s there, you don’t really realize what happens because you haven’t seen it in 10 years, almost, nine years. When a cheese baker is sitting there and he needs to cover his orders, he doesn’t want to lose his customers. And nobody’s trying to gouge him necessarily.

But if he needs another load of milk a day for six months or whatever, in order to make sure that he’s covering his customers so that his customers aren’t buying from someone else, he’s going to pay whatever it takes to get that milk in.

Now, from our standpoint, we want the maximum return for the dairyman that we serve, but we also don’t want to lose customer six months to a year down the line either. So you’ve got this juxtaposition there. But when milk was long and outlets were difficult, it could be just the opposite in terms of premiums rather than discounts for a three to six month period.

You got to watch it as to what, because you’re going to hear all these stories floating around about these humongous prices. And yeah, there are some, but you have to balance what’s in the overall best interest of the organization and the customers that you’re trying to serve at the same time. That’s what’s probably got to happen.

Gus: I’m inclined to agree with you and lean toward the crazy bullish side where we’ve underestimated to a certain degree and we’ve underestimated it because we’ve been spoiled by long milk for as long as we have. And I think there’s a certain, I don’t know, perspective within procurement folks around our industry that, “Hey, yeah, it can get really tight, but I always seem to get what I want.” And quite frankly, they probably have over the last seven, eight years.

Ted Jr: Even the old dogs like myself, you get used to it.

Gus: Yeah.

Ted Jr: Over a period of several years. And you just have it in your head that it can’t change and go the other direction again.

Gus: Yeah.

Ted Jr: Just about the time that becomes ingrained is when all hell breaks loose.

Gus: Yeah. I’m inclined to agree with you. I don’t think we’ve seen the circumstances like this in quite some time. And I think there’s a lot of folks that think, “Okay. Yeah, it’s going to be tight. Yeah. Prices are going to go up. Premium’s going to go up. Whatever. But I’ll get what I need. I’ll figure it out.”

And then it goes back to that old philosophy or cliche, however you want to name it, where is the price representative of the last load traded? Because if it is, those that underestimated the market will be the ones that set the highs of our pricing here come second half of this year.

T3: This conversation is a very supply based conversation because supply is tight. It’s going to really feel like a really bullish conversation, which it should be. Because I think from the supply side, things seem really bullish. But the next conversation will be about stagflation.

And that’s going to feel like a really bearish conversation because what’s going to happen if all of a sudden, because of high gas prices, because of high interest rates and all the other things, all the prices of everything going up, all of a sudden people can’t afford to do everything they’ve been doing? What gets cut? Durable goods is the first thing.

But then the next thing that’s probably going to get cut is how often they go to the restaurant. And it becomes a question of, if people are going to the restaurant less and staying home more, is that net positive or net negative dairy? And the good news is we already learned that when the pandemic started.

Ted Jr: Stay tuned, huh?

T3: Yep.

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