On struggling dairy markets: How did we get here, and where are we headed?

The Milk Check

On June 12, we brought a group together to share perspectives on the dairy markets, along with thoughts on what we might expect moving forward. And there wasn’t a strong consensus. Josh thinks supply-side factors point to a relatively quick supply-side response playing out over months that produces some price upticks to offer some cover in the short term. Ted Jr. thinks price recovery will be slow and has his own counterarguments against the expectation of further production slowdowns. Jake feels bullish about spot prices on every product right now, but bearish in relation to current futures prices. Gus thinks dairy prices would need to climb above current futures prices to $19 or $20 milk before dairy farmers started feeling good again. And T3 worries that any recovery in the second half of 2023 will act as a “head fake” leading into fallout from macroeconomic weakness in 2024. T3: Welcome everybody to The Milk Check. Today we're recording this Milk Check on June 12th. The reason I'm giving you the date is because we're going to have an old-fashioned market discussion today. I've asked Jacob Menge, our director of trading strategy and risk management, to join us. My brother Gus, president of our fluid milk group, my dad, and Josh White, our vice president of dairy ingredients, to join us. In all of those markets, prices are low. I think probably the number one question dairy farmers are asking right now is, okay, these prices are really low. Are these prices going to stay down here for a long time? What are we dealing with? Jake, I'm going to ask you the first question. Where did demand go? Are these prices low because we're having a demand problem? If so, how'd we get here? Jake: I think pretty indisputably it is a demand problem, or at least that's a significant contributing factor. There's lots of little data points that support that, some anecdotal, some not. I know internally I've tossed a few of these out before. But exports out of China, way down. You look at foot traffic in stores like Target, that is significantly off. Those are things that are hinting at poor demand. I mean you can go as far as to look at the amount of cardboard boxes produced in the US, and it's a number that is significantly down year on year. Demand is notoriously hard to measure, but it's kind of like a black hole. You can't measure a black hole by looking at it directly, but you can measure it by looking at what it's doing to things around it. So looking at the things surrounding demand, they're not good. They're trending in the wrong direction, I'll say that. T3: How long do you think these demand issues have been happening? Has it just been 2023? Has it been the last couple of months? Jake: It's interesting. I think it's probably actually started in 2022, and it's something that just takes a long time to feel on the supply side here. When you have a push on one side of the market, it takes a while to feel that on the other side of the market. So my feeling is it probably actually started last year. We saw the stock market have a really negative year last year, and, so far, especially over the last two months in 2023, we've seen the stock market go gangbusters a little bit, and we haven't necessarily felt that bullish on the commodity side yet. So it's just got a long tail. T3: So even though we have a demand problem, unemployment's still pretty good. It's still quite low. Sounds like the Fed is still talking a more ... That it's more likely going to raise interest rates next than lower interest rates next. That seems to be a disconnect to me. How can demand be bad, yet the economy ... At least the Fed seems to think it's good? Does it mean demand is going to continue to be bad until something does break and the Fed has to start reacting to it? How do we get to a point where demand comes back? Jake: Awesome question. Wish I had an equally awesome answer for you.