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, everyone and welcome back to another episode of Let’s Chat Markets. One of the more interesting developments on the CME this week was a class IV milk push above class III milk settlements. The two products were neck and neck for a bit but the premium is very much prevalent as U.S. cheese prices move lower and butter and nonfat dry milk remain strong. In fact, nonfat dry milk prices lifted over barrel cheddar values for the first time since January of 2014. As nonfat dry milk is the most globally traded product, international fundamentals surrounding tight milk outside of the U.S. as well as tightening supplies in the U.S., of course, are taking center stage. Speaking to global markets, there was also a pretty bullish Global Dairy Trade auction on Tuesday that has confirmed further support on dairy commodities. I think it's best to talk today and kick off the episode to talk about dairy product production data as that's fresh on everyone's minds given the data just came out yesterday. Lucas, now that you’ve had some time to absorb those numbers, what are some of the most important takeaways for U.S. markets on that report?

Lucas:
Thanks, Alyssa. Always a lot of data in this report so we’re talking about September this month with total cheese production up yet again as expected—I think it’s important to note that cheddar volumes recovered versus prior-year levels. There's a slight dip lower into August which was a little bit surprising but with the expanded production capacity we are seeing stronger output of cheeses in most varieties, actually. Really notable is cheddar cheese production up more than 10% versus 2 years ago which kind of speaks to some of the production capacity and expanded volumes that we've been noting lately. In butter—a little interesting—I think it was the third consecutive month of weaker production. Butter volumes have been pretty decent so far this year. We’re a little bit lower versus prior year on a year-to-date basis but overall there was an attitude that there was plenty of butter being produced across the country. Notably, that has shifted a little bit, though, in recent months as you mentioned milk is tightening up and that is keeping product from flowing into class IV plants. I think it's a little bit supportive to the butter price overall but what is a key driver there has been the very strong inventories that we had throughout most of the year until recently when product is being pulled from storage at a quicker than expected pace. Dry whey is aligned with trend overall, still slightly weaker output. Whey markets have been supported in the lower $0.60 per pound range over the past few weeks at the CME Spot Market. No huge changes there as dry whey stocks also a little bit weaker versus prior year and prior month levels. Finally, maybe most importantly or most supportive in this report was nonfat dry milk and skim milk powder production is still down sharply versus prior year—down more than 10% on a combined basis. Stocks as well weakening, lower versus prior month. It is slightly higher versus prior year but overall there's firm support here in nonfat dry milk. I think that this data would be supportive and bullish if we hadn't seen CME Spot values climb into the $1.50s here in recent weeks. Overall I think it underpins these markets coupled with the firm global demand, will keep nonfat dry milk supported for the indefinite period moving forward. So, some exciting data there in the dairy products report.

Alyssa:
Making a transition into international commentary, U.S. September trade figures were also released yesterday. They were very strong despite continued chatter from the industry that it remains very difficult to move product in a timely manner. It's very possible that a lot of the strong exports were booked during the early summer months and just set sail in September. There are some concerns that destination markets will eventually overbuy to compensate for shipping delays but given the tight global milk atmosphere, this isn’t expected to create a downturn in the market in the near-term at all.

Lucas:
Just to add there, Alyssa, some really impressive export numbers into September so I think your point stands well, even with all the port issues and logistical challenges, this is likely product that was booked at some point earlier in the summer and is finally moving away from U.S. shores.

Cheese exports quite strong, up more than 20%. Even fats—butter and AMF both departing U.S. ports and nonfat dry milk, of course, still on track for a record year of exports. Each month over the past several months we've seen record volume for that specific month and September was no change there. I do think going forward, though, as port issues intensify, we could see some challenges pop up here in some of this data but that will be not revealed for a few months here as we wait for shipments throughout Q2 to show up in the data.

Shifting here just a little bit onto the GDT. November's first auction recorded a 4.3% jump versus the prior event—the biggest gain in 8 months. Support derived from most products here yet again with powders and fats, even cheddar seeing a significant increase there. On whole milk powder, it was kind of expected to see further strength—the gains were pretty much aligned with what NZX expectations had shown. Skim milk powder, though, bullish there from most regions, weighted average prices jumping 6.6%. Fonterra climbing sharply into a multi-year highs there and just continues to be impressive as global demand remains firm. Finally on fat maybe a trend I think over the past few auctions but fat defying expectations and climbing sharply—bullish moves there as well. It’s been interesting to look at where that product is going and who the key buyers are at GDT. Alyssa, do you have any insight on that?

Alyssa: 
Yeah it was pretty interesting. Africa is paying a premium to secure dairy commodities and that included cheddar's, skim milk powder, and anhydrous milk fat (or AMF). That underlines the tight supply situation that we continue to hear about as Africa is likely short and now has nowhere else to turn. Additionally, European purchases on the platform were the strongest in two years as supply concerns are prevalent everywhere you look.

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