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:
Welcome back to another episode of Let's Chat Markets! We have another fun episode for you today with not one but two special guests. It was a pretty light report week so we're going to focus on the US Cold Storage figures that were released at the beginning of the week. That means we're going to be focusing mostly on cheese and butter. Who better to cover those markets than our very own experts here at HighGround Dairy. We have Eric Meyer on to chat cheese and Austin Benthem here with us to discuss butter—a very exciting little show for our listeners. November has been a very volatile month for cheese prices on the CME. During the last week of October and into the beginning of this month, the market was sort of in free-fall-mode and now that the calendars approaching the end of November we saw a nice price boost at the end of last week but now, during this shortened holiday week, the market is a bit quieter. Let’s dissect this a little bit shall we, Eric?

Eric:
Of course!

Alyssa:
What caused that sharp rally last week to the upside?

Eric:
Well, we had two key reports or pieces of news that came out last Thursday afternoon. First was the October US Milk Production report which came in below the prior year, down 0.5 in the all-US with yet another downward revision from the previous month, as well as additional cows being removed from the herd. This was the first year-over-year decline since May of 2020 and I think it caught people a little bit off guard—perhaps thinking that it may have come a bit early. We have been expecting the potential for something like this to happen for some time but the market had been selling off and so sellers on the market had kind of gotten scared off and we saw a pretty dramatic rise to the upside, down both futures as well as on the CME block cheese market. So, that kind of helped bring things to where they were at the end of last week. In addition, the USDA also published a bid, or a solicitation, for over 19 million pounds of cheese for delivery between February and July of next year and that also was somewhat unexpected. We had seen the USDA leverage the Build Back Better Initiative as the budget line for that and so that appears to be some new money and that helped contribute to the end of last week's rally.

Alyssa:
So is this $1.75-$1.80 per pound range here to stay for cheese prices?

Eric:
Well, that’s a good question. We made our run and we’ve stayed up all week at the exact same price—at $1.85-75 but this was a really quiet week on the cheese market—there was barely any cheese trade for block or barrel. We also had a bearish Cold storage report, contrasting the bullish Milk Production figures was inventories that actually increased, natural American cheese inventories actually increased, from September. That's a pretty rare occurrence—we've only seen that three out of the last ten years—but I think what really stood out to me was the fact that October was kind of the high-water mark from an inventory perspective, is the heaviest inventories that came in in October and that has actually never happened before in any calendar year in the past. So, what that tells us is while milk production is coming off, we still did see increases in milk production in the Upper Midwest, we're probably making more cheese than we have before and demand was no good. So, we've seen cheese converters’ inventories are remaining inflated and so our feeling is that perhaps this choppy range that we've seen on the cheese market here in particular, on the blocks, is likely to come off here a little bit. Our expectation is to probably have 10 to 12 cents to come off here in December. That doesn't dismiss our bullishness here but it may be delayed or pushed off a few months as the market works through a couple of issues within the marketplace.

Alyssa:
Perfect. We put out a bit of caution or forewarning to our customers in our price forecasts that came out on the 15th–can you recap why the team thought that was necessary—specifically for cheese?

Eric:
Absolutely. So, I think from a cheese perspective, over the last month we've started a see data—fundamental data—from both the US, with milk production coming off, as well as globally, where we're just not seeing the milk. New Zealand had a couple of very difficult months and even getting back to parity, which is expected in November, would be a poor number. We're seeing milk production tempered in Europe and prices across the board, multiple commodities making moves. I know that Austin will be talking a little bit about butter but the fact that the class IV complex has been rising also lends a bit of support long-term into the cheese market. Then, of course, with high feed costs and a lot of inflation across the commodity complex, our expectations are starting to shift around that even though the cheese market is somewhat plagued by some short-term problems: opportunistic exports are difficult with port congestion, as well as cheese converters—those cut-and-wrap facilities—really struggling to move throughput because of labor challenges. Once those start to become better resolved in Q1, we're likely to see prices achieve a new range and so, of course, we would put out those warnings to our customers in the latest forecast.

Alyssa:
Thanks for that. I have one more very important question: what cheese is the most important flavor on your holiday cheese board this year?

Eric:
I appreciate that you asked that question, Alyssa! I actually have two varieties that I think are just spectacular. I am a sharp cheddar fan with three-year cheddar from the Upper Midwest in a few different select plants are amazing but that's an easy answer. There are two cheeses I think are spectacular to have on cheese boards over the holidays or really on any weekend when you're hanging out with friends. The first is a good 12-month aged Manchego from Spain—it’s delicious. And then second, really any cheese—like my favorite domestic cheeses are made by Sartori—but in particular, their raspberry bellavitano is incredible.

Alyssa:
Oh, I’m going to have to check those out, thank you so much! We're going to move on to butter. Austin, butter has been incredibly interesting this year as well, especially throughout the entire pandemic but most recently, and despite concern about heavier inventories just a couple of months ago, butter has shown upward momentum for nearly two months now. Let's talk about a result on Cold Storage first, Austin. What was the key takeaway there?

Austin:
I think the key takeaway for October was we slowed down a little bit. So, in August and September, we saw huge drawdowns in inventory, and the question on everyone's mind was, hey do we have frontloaded demand, or are we going to see record-breaking holiday disappearance? That really remains to be seen. I think the way October looks, it’s probably leaning a little bit more towards a frontloaded demand. Now, the attention shifts towards November to see what happens there. If we have a good pull through November, I think it cleans up a lot of the problems that really started in the pandemic and spring of 2020. If we can get those taken care of domestically, I think we’re going to see some pretty attractive prices coming into early 2020 too.

Alyssa:
One of the most common questions we get from our US customers, as well as our international customers, is, are we going to be able to ship more US butter into the rest of the world and if so, where would it be heading?

Austin:
So typically, our butter export partners are in the Middle East, North Africa. There's a lot of applications for US white butter in the Middle East and North Africa and, traditionally, they can use butter sourced anywhere on Earth—that's where we’re most competitive and I think it really depends on how our domestic situation plays out. If we are pretty snug here domestically, after the November report and after our holiday sales are made, our price has to get to the level where those importing US product isn't as attractive as it is out of New Zealand or the EU. Now, most likely we're going to have a pretty healthy inventory rollover and that's going to allow producers to be more competitive and to take advantage of higher international prices, especially in Q1. So, like we said on the Cold Storage report if we don't see good domestic disappearance in November, it's really not the end of the bullish story—we have another opportunity and we can strategically utilize the inventory that we don't use here in the US to position ourselves to be able to make export butter into Q1 and Q2. That's I think why traders and market participants really are so bullish—because they see the potential for arbitrage. One thing to add that I think might be new this year is Canadian milk is not as strong—neither is Mexican milk—so we might be able to trade butter and butterfat in North America, which isn't very common. So, really a lot of supportive factors for butter in the next 6 to 12 months.

Alyssa:
I have to do a little humblebrag for a moment because it was just great insight for readers. I know together, you and Lucas Fuess on our team, decided butter would hit $2 per pound this year, and here we are. If you missed, it there was a Cheese Market News article in which they asked the team's opinion. It's a really great read if you have the chance. But where do we go from here now, Austin

Austin:
I think $2 was the easy part for our team but where we go next is a bit tougher. As we just discussed, if November sales are disappointing, we might have a little extra butter to deal with and to negotiate into the export market. So maybe that resets prices a little bit lower and as we come off the holiday demand season and we start to rebuild those inventories, there could be downward pressure as these inventories start to build and as producers start to get net long again. As we kind of rotate into Q1 of 2022, logistics and port problems and backups start to be more of a concern. Can we capitalize on those export markets and how does that play out? If we can easily access those global markets, then I think getting back into the range of the $2.15-type numbers might be on the board. We do still have a lot of inventory that needs to work out so the $3 markets of 2015/2016, those types of years probably not in play because we do have a lot of cleanup to do but now is a great opportunity for the US butter industry to clean up all this inventory that's been hanging around since the pandemic.

Alyssa:
That’s perfect, thank you guys so much for coming on today. I'm sure our listeners got a great deal of wonderful information on the markets from you guys. If you celebrate Thanksgiving, we hope you have a wonderful time visiting with your loved ones this week. The markets are closed tomorrow and Friday—so that's the 25th and 26th—CME markets will be closed. Then, of course, with gratitude at this time of year, we do want to thank our listeners for their support and our customers tuning in for their business throughout these volatile times. We love providing insight and advisory for every one of you and we look forward to life getting back to normal in the near future to be able to visit with you again. Thank you so much and have a wonderful long weekend, cheers!

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