Modeling the milk landscape with our friends from Freshagenda

The Milk Check

With August’s milk production report in mind, the trading team gathered for another monthly mass balance and charting meeting. This month, though, we were blessed by two special guests: Steve Spencer and Vuko Karov from Freshagenda. Don kicked the meeting off by modeling domestic milk production and mass balance expectations for the rest of the year, with special focus on Q4. Then, we handed the reigns over to Steve and Vuko, who guided us through a workshopping version of their Dairy Trade Simulator (DTS). The Freshagenda team tested some ‘What if?’ questions on their model and argued that market fundamentals suggest that we should see cheese futures over $2 soon. T3 countered with some points about difficult domestic freight and contractual obligations forcing cheese from high-growth areas. Then, to shift perspective entirely, Jacob suggested that historic correlations driving market fundamentals could break, and that there may be reason to feel bullish Class IV and bearish Class III after all. T3: Welcome back to The Milk Check. This month we return to our mass balance discussion with Don Street and the rest of the trading gang, and this time we have a couple of special guests: Steve Spencer and Vuko Karov from Freshagenda, an Australia-based supply chain and market analysis firm with some great data about how milk production and pricing may evolve in 2023. Welcome to this discussion, let’s get started. Steve: Thank you. Vuko: Thanks so much. Steve: Thanks for having us in your meeting. We appreciate the opportunity to join the discussion, let's have some fun and see what it brings. T3: That sounds great. So Don, why don't you go ahead and lead us off. Don: All right, here we go. Balance update, August, 2022. So in spite of Ted being more accurate than I am on these projections and winning bourbon from me, I just want to say that if USDA would get the cow numbers right the first time, I'd be much more accurate. But June was revised downwards to where it was flat. I had actually had a negative 0.02 prediction, so I think that's reasonably close. And for Q2, which we finished down an average of 4/10 for a percent on milk. July finally goes positive. If that holds through the revision, when August is announced again, I was 2/10 of a percent over the 3/10 that was actually reported. Steve and Vuko, these are all 24 state numbers, not national numbers. I think I'm reasonably dialed in spite of the revisions, which brings us to August. I'm, at this point, thinking we'll be up 1% on milk, but the bottom line is that the cow herd will, in the couple of months, be higher than prior year instead of lower than prior year. Instead of being 60 or 78,000 cows below a year ago in August, when we see the numbers, we're going to be 25 to 30,000 cows below a year ago. And in September, we're going to more or less be equal. And then we start to see whether this grows or not. We're going to have more cows than we did in the prior year, which will contribute to higher milk production numbers. I've tried to recast this a little bit to just show you the impact, because June, July, we're up 8/10, one full percent on milk per cow, but fewer cows is the offset. In August, I think we'll be a little bit higher, mostly because of the poor performance of August '21. So I think we'll be up 1% on milk for August, but then I don't want to say that we're just going to continue to move higher but these changes in milk per cow are going to be 1.2, 1.3, maybe 1.4, but we're going to be something over 1%. And then you start to add more cows. And this is of whole certainty, unless we all of a sudden see a shrink in the herd that we don't anticipate because slaughter rates still seem to be lower, not higher. You're going to wind up with 1.4% more milk, maybe as much as 1.8 but somewhere in that range, but it'll be a marked difference than what we've experienced so far this year. Maybe just to take a look at components.