Let's Chat Markets is a weekly podcast presented by HighGround Dairy, hosted by analysts Alyssa Badger and Lucas Fuess. Every Friday, they sit down to recap the week in dairy markets and summarize recent reports and relevant news. The podcast can be found here, or wherever you listen to your podcasts. Subscribe so that you never miss an episode!

Alyssa:
Happy New Year to all of our favorite dairy fans! I missed chatting markets with you, Lucas.

Lucas:
It is amazing that the holidays are already behind us. Happy 2022 to everyone!

Alyssa:
Oh, and a hearty welcome back to our favorite friend in the dairy markets, volatility! Dairy commodities are trading at historic highs and global milk production doesn't seem to have a supply response up its leave to meet global demand. Volumes have been lower from New Zealand throughout their peak and then into the shoulder of their season. The U.S. is recording negative volumes and so is the EU for that matter. The U.S. has a lot more transparency, of course, on production and inventory than in most places around the world and we got some interesting data this week on where milk is heading and why do you know that the dairy products report is fresh in your mind Lucas why. Since we know that the dairy products report is fresh in your mind, Lucas, why don't you give us a rundown on the key takeaways in that data. Where is U.S. milk moving?

Lucas:
Definitely. It was a highlight of the week getting that November dairy products report on Thursday. A few key takeaways here: first of all in cheese. While total cheese output was higher versus prior year, it was notable that cheddar production was down yet again. I think it was the third out of the past four months that we saw weaker cheddar production–a bit surprising, I think, considering some of the capacity expansions that we have seen over the past year or so. Where milk was not pushed into cheddar, it was pushed into Italian style cheeses–mozzarella and parmesan–volumes up substantially versus prior year. Still plenty of cheese to go around and I do think that that will persist here in the coming months so even as milk kind of tightens a little bit there will be probably plenty of milk available for the cheese vat, especially in the Upper Midwest.

The other key takeaway here on the class IV side of the picture, of course, we have seen those prices kind of see additional strength here in recent weeks and even days with butter rallying strongly this week. I think that is kind of driven by some of this data that we got. Butter production is down 9.6% versus prior year–one of the largest year-over-year declines we've seen in the past decade. Part of that I think was driven by the Darigold plant fire in Idaho in October, reducing that butter output into the months that followed but a lot of that is driven by milk that is tightening, especially across the western states. There is just not as much product available to flow into the class IV channel.

Finally, here on the nonfat dry milk side of things, it was the fifth consecutive month of weaker combined nonfat dry milk and skim milk powder production. We did see volumes kind of seasonally climb in November but still well-below prior-year levels, keeping things pretty tight in that market. From the stocks-perspective there as well, continued declines–I think as expected. We peaked back in June but we’ve seen inventories declined steadily since then. Nonfat dry milk stocks dropping to their lowest levels of any month since October 2015. Certainly enough to keep that market well-supported here on a combination of that U.S. and global data.

Alyssa:
You’d think with all those bullish data points that you just explained to us that there'd be a bit more strength on futures heading into the weekend but not the case during this increased volatility and choppy trade environment I'm class III milk.

Well, other reports out from the team this week was the comprehensive breakdown of the Global Dairy Trade event in New Zealand, followed by the U.S. export report. Something we can glean from that U.S. export data is that the world is becoming increasingly reliant on U.S. dairy products to meet growing demand. That was a record number in November that we saw–U.S. exports have basically hit record levels every single month in 2021–10 out of the 11 reporting months so very impressive. U.S. exports to Southeast Asia were very strong, we reached record export levels into South America, trade with Mexico was notable. As a result, there was this kind of counter-seasonal lift in exports from October to November. We saw the biggest gains on nonfat dry milk as well as on cheese, but also strong in the form of fat and lactose, leaving U.S. borders.

Lucas:
Yeah, I think even with the volatility and some of the price behavior in the U.S., we still are competitive on a lot of those key commodities. Certainly lends some support to exports from November–the data that we do have–and then into the future months as well. Probably we will see some decent strength into December and the New Year.

I think, Alyssa, to close out today's episode, maybe a bit on Tuesday’s Global Dairy Trade event, the first of the year, of course. It was a bit underwhelming, though, to kick-off 2022. Cheddar cheese was the only commodity that posted a truly bullish result, in HigherGround’s opinion. It stretched to fresh all-time highs on the auction platform. Skim milk powder settlements were neutral across all regions but there was notable demand from Southeast Asia and Oceania as the region secured the most skim milk powder in exactly two years. I think fat products as well were a bit unimpressive against expectations for slightly stronger results.

Alyssa:
Yeah, that whole milk powder result was definitely bearish vs. SGX trader expectations but support does remain overall at current price levels until there's a sufficient milk supply response from the world market which seems to be the case for all key markets right now, not just on GDT.

That does it for today! We hope everyone had a beautiful start to 2022 and that you and your family remain healthy during these wild and uncertain times and we look forward to coming on next week to chat dairy markets with you, Cheers!

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