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 Friday to all of our favorite dairy fans. U.S. CME dairy, as well as international dairy markets, maintained impressive strength into this week. There's a slight sell-off on class iii milk heading into the weekend but the momentum is generally still to the upside so let's get into the reasoning behind that. The week started off getting confirmation on European milk production in August as well as export volumes followed by a nice deep dive into what US domestic demand has looked like. Tuesday, there was a relatively bullish Global Dairy trade auction. China then released their September trade figures, and then the market absorbed a bullish US milk production report. Quite the whirlwind for our team of analysts. Lucas, how did domestic US demand look during August in that commercial disappearance report and what did the September of milk production data tell us?

Lucas: Yeah, we did kick off the week with that disappearance data. I think the biggest takeaway was in the butter numbers which continue to be quite impressive. Both July and August total butter commercial disappearance well above prior-year levels and if we do consider the pandemic’s impact, it didn't really make a difference on the gains, though. Butter disappearance was up versus 2018 and 2019 as well. It was the strongest year-over-year gain since February actually and the highest butter August disappearance on record. I think we'll continue to see some seasonal strength here, of course, monthly disappearance will build as we reach the peak demand season here with the holidays at the end of the year. But, if we do continue to see demand at these levels, we will draw our stocks down quite nicely for what I think could be a nice little reset in the butter market as it moves into 2022. On the cheese side of things, decent strength there as well with total disappearance higher versus prior year--both domestic and export demand stronger. That was driven by American cheese disappearance that was slightly higher but, really, it was non-American styles that drove those numbers. Whey was just a little bit weaker but I think that's probably more of an availability or supply-side issue. On nonfat dry milk, domestic disappearance dropped sharply into August. We kind of attributed that to perhaps in the very initial parts of the price increases some users may be taking a wait-and-see approach to see where the market was going to settle. Clearly, not winning on that play as values are at quite high levels--still 7-year highs here in mid-October.

You also ask about milk, Alyssa, and I think this was a key report that we got this week on Wednesday afternoon. Showing us that milk production just eeked out a slight 0.2% gain. Pretty bullish number there--we were expecting something around the 0.8% mark so a little bit weaker versus HighGround expectations. That is kind of driven by two things: first, that US herd size is declining sharply. It is almost stunning to see how many cows the herd has shed here over the past few months--we were down 25,000 head in September. August and September, it was a two-month decline of 70,000 cows, so, if we continue at this pace, which it's likely that we will, we’ll see the herd size slightly slip slower versus prior year into October or November. Yields struggling as well--milk per cow down for the second consecutive month, down 0.1%, versus prior year. I think if we look on a regional basis, states across the West kind of struggling a little bit. It was New Mexico and Washington that lead the herd size decline. New Mexico production down 12.5%. The Midwest was kind of the only region that really carried the US as a whole. Milk in Wisconsin showing decent percentage and volume gain versus prior year. I think, at the end of the day, milk is tightening a little bit more than expected and largely supportive to dairy prices here in the near term.

Alyssa:  Yes, and milk is not just tightening in the Midwest. The August data from Europe was
pretty decent but milk availability dropped off more aggressively into September and October throughout Western Europe. Demand from both within the EU as well as from the global market remains pretty robust. And with muted growth expected from the EU as the calendar approaches the holiday season, sentiment generally speaking throughout the entire Northern Hemisphere remains pretty bullish.

Lucas: Switching to the southern hemisphere, commodities kind of all across the board in the green at the global Dairy trade event on Tuesday. Whole milk powder seeing a neutral climb overall. The increase was aligned vs. trader expectations, Fonterra c2 climbing 2% kind of speaks to the decent support that this market continues to see. On the skim side of things, both US and European products seeing heavier than expected gains. Fonterra kind of still supported but also as expected. I think the most bullish takeaway was on fats with butter and AMF of climbing opposite expectations. Some interesting data here and we've been talking about this for a while but China's market share is still weaker as the country purchases product off auction, leading them to not necessarily need to turn to the auction for demand. This has left other regions who are still probably short on product turn to buy GDT and keep these values supported. I think there are end users in many many regions around the globe that remain short on a variety of products, and this coupled with New Zealand milk production that I think is weaker versus prior year here as we moved in to peek. Over all the data kind of lends support to global dairy values, yet another supportive piece of the puzzle here. Alyssa, any more defined details there on GDT?

Alyssa: Yeah, and you mentioning New Zealand milk production--those anecdotal figures that we’re hearing from people on the ground there are pretty supportive throughout peak. So, while North Asia remained the largest butter buyer at the GDT event, I just wanted to highlight that the Middle East stepped in to procure really strong volumes--it was the most regions purchased on the platform in nearly two years. That represents about a third of total volume sold. This increase in purchasing followed a really weak Q3 and suggests that the region is likely undersupplied.

Speaking of North Asia, that Chinese import data during September was very impressive. The industry continues to sort of speculate on when China's Dairy demand will eventually wane but the uncertainty in global milk production and the shipping disruptions continuing to be seen around the world are expected to just keep pushing them to buy at a record pace from the rest of the world.

Lucas: We did quite a bit of writing this week! If you are a customer don't forget to log in and read our opinion and more detailed analysis of which can be found on our dashboard. If you're not, as always, feel free to just reach out to us and get on a free trial today for our comprehensive opinion, thanks everyone!

Alyssa: Cheers.

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