Today’s dairy market is global. In our latest episode of The Milk Check, we dive into the New Zealand and Oceania markets to understand how they may impact the U.S. dairy market. Join Jacoby and our two special guests Jo Bills, ag market analyst and director of global Insights at Ever.Ag, and Steve Spencer, managing Director at Ever.Ag as we dive into dairy.
- Tight global supplies of skim milk powder and strong demand will likely keep prices high through 2025
- New cheese plants in the U.S. market increase Class III supply and may drive cheese prices down and limit powder output, tightening global powder supply
- New Zealand enjoys tariff-free access to the Chinese market, but China’s economic woes have reduced dairy demand
- Lower Chinese demand pushed New Zealand to focus on skim milk powder, butterfat, and cheese
And lots more information on the global dairy market and our predictions 2025. We have a positive outlook for dairy in 2025, but cheese may be our wild card.
Get the market scoop from the Jacoby team, including Ted Jacoby, III, CEO & President, Cheese, Butter & Dry Ingredients; Josh White, Vice President, Dairy Ingredients; and Diego Carvallo, Director of Dry Dairy Ingredient Trading.
Podcast: Play in new window | Download (Duration: 33:38 — 46.2MB)
Subscribe: Google Podcasts | RSS
Intro (with music):
Welcome to The Milk Check, a T.C. Jacoby & Company podcast where we share market insights and analysis with dairy farmers in mind.
Ted Jacoby, III (T3)
Hello, everybody, and welcome to The Milk Check. This month, we are excited to welcome special guests Joanne Bills and Steve Spencer from Freshagenda to share their thoughts on milk production and dairy demand in Asia, Oceania, and internationally for 2025. Joining us from the Jacoby team are Josh White and Diego Carvallo from our dairy ingredients team. Welcome, everybody, and thank you for joining us today.
Steve Spencer:
Thank you, Ted. It’s great to be here. We enjoy these. We’ve done a few of these, so it’s always good fun.
T3:
We’re about to enter year two of China’s tariff changes regarding New Zealand dairy products and how they are imported into China. For our audience, many of whom are dairy farmers here in the U.S., why don’t you give us a quick overview of those changes? Then, we can discuss what that has meant for dairy markets in that region and how it affects dairy prices.
Steve:
In basic terms, New Zealand has tariff-free access to the Chinese market. That was preset for an extended period. They were on a slow rundown of tariffs over a long haul. A few years before that was due, they had a review, and it seemed to be that that was just a little period to push it out a bit longer, and that’s in the rearview now. So, we’re in a very tariff-free environment for New Zealand exports, which you’d think has freed them up to go wild. The only trouble is China’s not a market that is allowing many people to go wild right now because that’s come at the same time as China hitting a phase of the second wave after Covid; the second wave lockdowns were much harsher, much longer, much more damaging to the economy and so that’s crippled demand for dairy in many parts of the market because spending, consumer spending has been depressed and many things are contributing to that right now and that’s still a happening thing.
So, that has freed New Zealand up to grow its share of the market in skim milk, powder, cheese, and butterfat and they’ve certainly done that at a time when the import volumes are a lot lower. So, we’ve got to sit back and look at the overall trends in China. We think they’re just off the bottom regarding those import trends, but New Zealand has certainly picked up share, and their exports to China are falling.
You could take the story of product by product because the products that China isn’t producing or doesn’t produce, skim milk, powder, butterfat, cheese, a small production of those, really the trade is probably following the pattern of demand we’re seeing in that market. There have been some false starts, and some volumes pick up and go in slow again, so they’re seeing lots of volatility in the trade over time and whole milk powder; it’s about how much of a balance China’s got, how much they’re producing internally, what’s happening to their milk use across all categories, and then what role do imports play in that. That’s still a sad story. We have seen the whole milk powder trade over the last six months, but it is still 28% down year-on-year. New Zealand is exporting, and New Zealand has the dominant share of that.
T3:
Do you expect what’s happening in China with their import volume? Is this a new normal? Do you think we will stay down here or end up closer to where we were four or five years ago or somewhere in the middle? What should our expectations be going forward for China?
Joanne Bills:
Yeah, I think, Ted, it will depend a lot on what happens with their internal production. We have seen good growth in milk production over several years, but more recently, that growth has stalled. Raw milk prices are well down, and there have been rumors talk of the government starting to take action to reduce cow numbers. They certainly did that in the pig herd. We haven’t seen any follow-through in the dairy industry, but they’re very focused on getting that internal Chinese dairy supply chain rebalanced and aligned with demand.
You would have to think that they’ll still have some demand for, particularly as Steve said, the things that they don’t produce internally. Butter demand has been surprisingly good, given what prices have done, and there’s also been fairly steady growth in cheese. It’s really hard with China I think, Ted, to know what normal is because we’ve had all these levels of normal over the years that there’ve been such a dominant force in dairy, but we probably won’t get back to where we were in terms of whole milk powder demand and that’s probably why Fonterra is very much about diversifying into other markets and products.
T3:
And that was where I was going when I was asking that question. We’re dealing with a new normal when it comes to China and we’re going to be exporting less to China globally, which means New Zealand may be increasing their market share, but they’re increasing market share of a shrinking or at least a smaller market.
Joanne:
That’s spot on.
T3:
New Zealand’s dealing with this smaller import market in China for their products, even though they’re increasing market share, they’ve got to find new places for their product.
Steve:
I think they’re doing it with a brave face, Ted. I think they’ve done a good job. They’ve had some help. So, when the whole milk powder demand plummeted and charts and that are spectacular, I think they had to pivot towards skim and butter and hopefully build their cheese trade. That didn’t happen in cheese, but so they’ve had to put that milk in a different uses. Around the same time, we had a few problems in South America, so their whole milk powder trade was helped. They were able to push things into markets, push product into markets where the South Americans couldn’t supply, but now I think we’re seeing a adjustment to say, “Yep, that’s a market that isn’t going to grow much from where it is in terms of our whole milk powder requirements.” And now the focus for them is very much on protein, milk protein, high functional evaluating in that respect to use up skim solids.
Josh White:
Is that fair to say that during peak production there’s a certain amount of whole milk powder that always has to be made? It’s a shrinking amount it seems like every year, and we should expect it to continue to as we go into 2025, giving them more versatility as to where they can allocate the raw milk to in New Zealand. That being said, if China demands whole milk powder, they’ll be quick and the obvious ones to respond.
Steve:
Yeah, they can flex, Josh. I think they can divert tankers literally. It’s just which plant do they send certain tankers to when it really matters. I think the flex is still there. The hint about how they’re going in terms of their total book and what they’ve got in front of them is the annual GDT forecasts they put out of their total almond powder trade on GDT is usually a good sign for where their overall production and demand is in their book, and that hasn’t shifted much in this year. It shifted down a little. We think it’s probably a little bit up on last year even, but the peak is much stronger this year and we’ll come to that I’m sure, but that’s a different dimension they happened to manage.
Josh:
So, before we shift to talk about supply across the board, maybe touch on a couple other interesting data points on the demand situation. How would you describe the rest of Southeast Asia and then you mentioned a bit more about South America. Are we forecasting or expecting South American situation to change from a demand standpoint much or is that really all supply driven?
Steve:
Yeah, let’s start there first. So, the issues is how the America were about supply out of Argentina and Uruguay where their milk production really tanked down 10 or so percent for a period of time. The economies down there aren’t great either, so their domestic consumption has been impaired. Looked okay for a while, but that’s now coming back. So, they are putting more into whole milk powder now, but the whole economy is trashed. Input costs are very high for farmers, they were having to struggle through on very thin margins and difficult cash flow, different currency situation. I think it’s improving now. Production is back on par, year-on-year, so that is starting to ride itself. We talked about the China demand thing first. We talked about the supply side, supply chain balance, but the demand side and China’s still got, we think, a long way to go, Josh, in getting back to some sense of growth.
We’re certainly seeing it in a few little sectors, but consumer spending has been knocked around by the impact on housing. Household incomes or household wealth has been damaged by the property market being oversupplied, prices crashing. So, consumer confidence has been impacted by that. So, discretionary spending, dairy catches quite a lot of that discretionary spending, people doing impulse buying through convenience, gifting milk, there’s a whole lot of things where dairy is a prize product or a prize category that is damaged by the fact that people have less money and they’re less confident in spending money and they’re trying to rebuild wealth. So, that’s going to take a while to come back. I think retail sales are showing some improvements, but the last quarter of milk sales reported by the two big milk companies, they’re still down six or 8% year-on-year in volume, which is, that’s a lot of milk in anyone’s terms, so that’s got to go somewhere.
Those companies are talking about their use of milk is still good, they’re still processing more milk. I think what they’re becoming very good at is filling warehouses again with UHD containers. They reckon demand is coming back, they’re seeing resale sales pick up, so maybe the buds of growth are starting to return. So, that balance thing is really important. Cheese trades picked up a little, so fast food is probably catching more spend, because it’s cheaper. People are going out a bit, perhaps more. It’s a lower meal cost. Southeast Asia. Jo, what do you reckon we’ve got?
Joanne:
I think Southeast Asia, a lot of those economies were really quite badly damaged by COVID even though in some senses they were really good at controlling the spread of the virus. There wasn’t a lot of financial support provided in some of those key importing in Southeast Asian countries, so it has been disruptive to those economies. We’re starting to see them come back now. The tourism trade is certainly picking up in a lot of those regions and that’s really helping to support a bit more of a rebound in demand.
So, certainly at GDT events in the last couple of months we have seen them in and out, quite active in some auctions and then stepping back in others. We think we are starting to see that recovery in terms of demand, not just restocking supply chains, but actually a bit more demand pull through just as those economic conditions pick up a little bit, but it’s certainly taken a while just to get over that disruption of the pandemic, arguably a bit longer than in some of the developed markets.
T3:
What product are we seeing a pick-up in demand? Is it skim milk powder, whole milk powder or is it maybe some of the others like cheese or whey or butter?
Steve:
Whole milk powder came first. I think that certainly picked up in the last 12 months. Whole milk powder trade into the whole region’s up 13% year-on-year, and that’s starting to tail off now. I think a bit of price sensitivity might be coming into it, because we’re seeing quite strong prices again. Skim milk powder was really knocked around badly, but it is also back up or it’s trending back up. It’s not back to where it was. The two powders have improved quite a bit.
We’re seeing that different patterns in different regions, so some markets have been far more price sensitive due to spending. Philippines and Indonesia have taken quite a while to get back on their feet spending wise, but some other economies have been much stronger coming out of the blocks. Cheese is pretty good generally. So, cheese is a good reflection of some of that tourism fast food, more of that trade I guess, but cheese has continued on. It’s been reasonably steady. Butter’s been patchy and butter will be price sensitive and we’re seeing very giddy prices now, but surprisingly the last 12 months, even though where butter’s been and it’s only been the last few months where we’ve really picked up the effect of those higher prices, butter trade’s been flat in the Southeast Asia in the last 12 months. It’s a mixed story, Ted.
T3:
Steve, it sounds to me that the powders, year over year in Southeast Asia, it sounds like the imports have been strong versus last year we’re seeing a steady increase in cheese demand across the board we have for quite some time, and it looks like that steady increasing trend continues, but then butter is relatively flat. Is that a good way to sum it up?
Steve:
It is, yes. Yeah.
Josh:
When we think about that on a milk solids basis, is 2024 better than 2023?
Steve:
I’ve got an answer on that. It is up. Last 12 months, milk solids up 8%. A lot of that’s the powders. Whole milk powder is a big driver of that cheese also, obviously because of the full fat and protein impacts of that. Where it was down quite low, Southeast Asia, we missed them as well as China in terms of total trade. Yeah.
Josh:
The reason I bring it up is a year ago I think we were starting to feel confident that 2024 would be better than 2023 and 2023 was the low, but at least in this conversation thus far and listening to you speak about the climate in the markets, Jo speak about it, it feels like we’re gaining momentum on the demand side as we look ahead to 2025 and of course as us in the balancing of dairy products space and then looking at it from a global scale, you’ve got your milk solids, your milk production, more specifically the actual component value of that milk. You’ve got the demand by product and then of course you’ve got the processing product mix. And as we go into 2025, that can be a bit volatile in the U.S. with the cheese factories coming online, the general view on what U.S. milk production looks like, what the actual component value of that milk looks like and where that milk gets processed.
We’re expecting a lot of curveballs as we move into 2025. Feels like we’re going to be experiencing that at the same time that we’re experiencing a little bit of a rebound or gaining momentum in terms of global demand for dairy products. Is it safe to say that, I hear you say earlier that right now New Zealand is at least experiencing better than last year milk production or a strong peak or how are you viewing the climate out of New Zealand and then last year Australia was a bit of a story coming together with additional product. How’s that looking?
Steve:
Okay, which one do you want to take?
Joanne:
I’ll go New Zealand first.
Steve:
Mm-hmm. Yeah.
Joanne:
If that’s okay. New Zealand’s having an absolute, as they would say, cracker of a season. They had ideal calving conditions coming into this season. So, we saw the first few months up double digits and up very high year-on-year and that’s really continuing, particularly in the North Island, conditions are really good. Lots of pasture, lots of conserved feed. South Island, there’s been a few areas where it’s been a little bit wet and perhaps a little bit cold, but really overall it’s been a fantastic season so far.
We don’t think there’s been any big change in cow numbers, but just the yield per cow is going to be really strong through this year. Just in terms of, we said earlier that Fonterra was putting on a bit of a brave base. I thought it was interesting. They just increased their forecast for the payout to $9.50, so we’re getting up close to $10 New Zealand per kilogram milk solids in terms of the payout for this current season, which is really positive for Kiwi farmers, but they also sounded a little bit of a note of caution.
They did the usual, “We’ll be watching global supply and demand, but also the supply out of New Zealand in the second half of the year.” So, I think there’s a note of caution there in terms of if we actually have too much product, this forecast is going to come under a little bit of pressure in the second half of this season, because they are looking at placing that product very carefully. As we said earlier, just managing that whole milk powder supply and demand, trying to get a bit of that butter action, limiting skim milk powder. They’re putting a lot more into NPCs and some of that’s winding up in the states. So, it’s a real balancing act I think from here, from New Zealand, that they are going to have a really strong season and they’re going to be managing that product mix really carefully over the next few months.
Josh:
Do you believe that there’s any way that the increase above expectations or the current situation in New Zealand is enough to adequately fulfill the increased appetite for dairy products as we go into the first half of next year?
Joanne:
It’s hard to say, Josh. They will have plenty of product and it’s just going to come down to that price sensitivity in some of those markets that I guess we see swinging and out from time to time in the Middle East and Southeast Asia where that price and price demand situation winds up. But I think there will be a lot of products out of New Zealand, given the seasonal conditions, and there doesn’t seem to be anything in the way in terms of increasing supply. So, the last reading we had on New Zealand, it was up 5% in September. It will probably keep that percentage increase. I don’t know what our forecast is at the moment, Steve, for New Zealand, but it’s pretty strong.
Steve:
Yeah, there’s two effects I think this year. You talked about the early calving that’s brought some production forward, so because they’re able to get their cows out earlier, got milk earlier, there’s a bit of an earlier flush. So, New Zealand’s all about the shape of the curve and that is pretty locked in, but they’ve also had a bump in the amount of feed they’ve got. So, there’s two effects. As we got through the peak, the year-on-year growth is shrinking, because there was freakish early conditions has brought that bit forward, but I think the strength of the North Island will counter the weakness in the south. We think over the peak, probably three to 4% as it crests, maybe a little higher than that, but as we go later, now we get into more difficult weather situations because the La Nina is not so assured.
So they’re getting into this area where in the peak of summer they can run into some difficult conditions. It can be hot and they lose feed, but they’ve got a lot of stored feed in front of them. The second half has got some weird comparatives to look at, so our forecast is I reckon two to 3% up, full season. The front half, different back half effects, so it is complicated, I guess. We’re not trying to make it up into a complicated story. There’s a lot of different moving parts. You asked a question about what that $9.50 price translates to. I think it’s about a $21.50 per 100 weight roughly, about that sort of number.
T3:
Stay tuned. The Milk Check will be right back. If you’re a dairy producer or a cooperative looking for a better market for your milk or you’re a food manufacturer hoping to strengthen your dairy procurement or risk management strategy, please reach out to T.C. Jacoby and Company. We’ve been building worldwide relationships with all sides of the dairy supply chain for over 75 years. Tap into our expertise for unlimited free consultive support and we’ll develop a sales or procurement strategy that hits all of your targets. Please visit us online at www.jacoby.com to get started. Thanks for listening to The Milk Check. Back to the show.
Josh:
You have the New Zealand situation, which is much more weather-dependent, et cetera, but there’s absolutely an incentive to push as much milk out of the animal as possible. The margins are good, but there’s a limitation on the of animals. Same situation, different reasons. In the U.S. right now, there’s a limitation on the number of animals. Genetically we continue to show amazing component growth, and right now margins promote the best feeding practices possible. I believe there’s quite a difference in view across the industry and what that translates to for 2025 in terms of U.S. milk production growth, but are we looking at a situation where both the New Zealand market and the U.S. market is really pumping out more than they did in 2024, in your opinion? And then we have to end the conversation on Europe. Probably the most important in the skim milk powder trade.
Steve:
Yeah, I think we’re definitely looking at both New Zealand and U.S. and our ever colleagues of course have bumped up recently their forecast. That’s certainly our collective view that we’re going to see more out of the U.S., much stronger growth, chasing that new cheese capacity, filling that new cheese capacity and even more on solids obviously. And New Zealand solids will also be impressive, Jo. They’re going to be bumping out much more, because the feed supply is quite good. Good quality. Yeah. Do we want to go into Europe?
Josh:
Maybe quickly, are there any thoughts as it relates to inhibitors to growth in the Northern Hemisphere? Both the bird flu and the bluetongue?
Steve:
We’re more versed the bluetongue effect. I think across the affected areas. The flu is going to take a winter break, hibernates or it goes into hold if you like. It did this the prior year, so it flared up in ’23 and ’24 has had a very strong run. It has not been eliminated and will go into hibernation during the winter. It’s also moved into new areas. So, it will come back when the weather is warm enough, but that may not be until May or June. I think this year we didn’t see it flare up until June. So, Europe’s got strong milk prices, got some limiting factors around environmental restrictions. Some regions are under increasing pressure to reduce numbers. Netherlands, Ireland, Denmark, because of environmental regs, despite what’s happening in the politics. So, there are going to be constraints as Europe goes into the new year.
Just again, whether, Josh, whether they have a decent spring, whether they get a decent bump there, they’ve certainly got the milk price incentive out there in front of suppliers and that’s not going to back off soon, because the butter market’s looking strong through Q2 at least, which will keep payouts pretty brisk. I think in a global balance sense we’ve got a real limitation in skim milk powder in terms of availability in the Northern Hemisphere, and if we do see demand, strength of demand in those developing markets, continue, skim powder’s on a run, we are seeing pretty tight situation.
I saw a presentation from New Zealand that the SGX event recently in Singapore where there was a bit of an outlook given by their head of risk, Dave McGowan, who talked about how they’re seeing this play out on them and they’re looking very optimistically at the skim milk powder market and the higher value protein solids because of that demand uptick they’re seeing that come through, but also they’ve got to believe that, right? They’ve got more to sell. So, I suppose that’s part of that story.
Joanne:
But I guess the other part, Josh, would be when you mentioned bird flu, where bird flu is most prevalent is in California at the moment, and that’s certainly limiting nonfat dry milk and skim in your part of the world. So, Europe’s tight, the U.S. is going to be tight. It’s going to be a lot more solids when they’re available going into that cheese area. So, skim’s an interesting one that it does have the opportunity to move up pretty quickly if demand picks up again.
Josh:
Yeah, we couldn’t agree more. I think anecdotally it’s important to note that we’re getting a lot of feedback that the November impact, at least in California as a result of bird flu is pretty significant. So, I think a lot of people reacted when the October numbers came out, but I think the November is going to be very… Or excuse me, when the September numbers came out, we think both October and November has a real potential in showing noteworthy challenges, at least in that part of the world.
T3:
I can’t help but play a little devil’s advocate. Is China going to import? Are their imports going to be up in 2025, do we think or are they going to be weaker? And will that be enough to take the bloom off the road, so to speak?
Steve:
Our forecast suggests they’re up a little bit on ’24.
T3:
Okay. Even though demand seems to be down right now?
Steve:
Well, demand is down, but I think demand will start to recover.
T3:
Okay.
Steve:
I think we’ll see a little bit of an improvement. When they throw things at the economy, China can throw a lot at the economy to try and stimulate. I think we were in the fifth or sixth tranche of stimulus, I’ve lost count, but they are working very hard at getting spending, getting confidence to kickstart and it will happen. Trickling down to households and making them feel better about their own situation, that’s always tough. You see that in the U.S. right now, but it’s a similar challenge everywhere really getting them to feel like they want to go out and spend money. They’ve tried coupons, they’re trying to alleviate housing costs, it’s all sorts coming at them, so it will show up.
Joanne:
Yeah, I think that’s going to be the big difference, Ted. Last year they held off on that economic stimulus for a really long time. I mean for most of 2024 they were saying, no, we’re not going to go there, and then all of a sudden they went there and as Steve said, they’re throwing everything at it.
T3:
No, I think that’s a really good point, because what I’m hearing is China’s imports should be pretty strong next year. Southeast Asia’s imports have been strong and should continue to be strong. Milk production may be up in the U.S., but it’ll be limited. Milk production in New Zealand will be up, Europe relatively flat, but production of skim milk powders will probably be limited. So, we could see strength in the skim milk powder, non-fat dry milk arena, with demand just exceeding the global supply.
Diego Carvallo:
Something that I read today that was very interesting is that I saw four charts that talked about China’s milk production and stocks. One chart was whole milk production. The other one skim milk production, and the other two were whole milk powder inventories and skim milk powder inventories. It’s a chart of the past five years. All of those four charts are at their historical lows in the past five years. So, their inventories for both products are the lowest they have been in five years, and their production for those two products are at the lowest they have been in five years. So, I think I agree with Steve and Joanne. I don’t see a way China’s imports next year can be lower. I just don’t see that happening.
Steve:
Diego, stocks are low, but the usage is low.
Diego:
Sure.
Steve:
So, I think what we’ve just seen the measure of stocks to use, and I know the charts you’re talking about, the stocks to use is probably back to pre-2020. It’s back to how they were managing things before this all went through great turbulence. So, about 2018 and 2019, if you look back to stocks to use back there, we’re about back to that. So, we’ve had a bit of a clean-out and got ourselves back to normal.
Josh:
I agree. Yeah. What else are we missing? What else stands out as you guys look at your modeling and just listen to the market anecdotally on a global basis? What stands out as unusual as we look ahead to 2025?
Steve:
Well, we have to say butterfat, Josh. The other half of the solids, just how long the European market holds it together at this very elevated level. We did a little comparison last week when we did our little weekly video, looking at the seasonality of the correction. When you get to the correction in butterfat, it happens like clockwork a bit earlier in the U.S. this year, but in Europe, it hasn’t happened yet, and it typically happened in the last five and 10 years average.
The 14th of November was the day that the cream market or the butter market crashed for the C2 contract. It shows no sign of doing that. Cream prices are still going up. We’re really close to Christmas, and there’s a cliff coming, but there doesn’t seem to be much expectation in that market that it will change a great deal. It might be a fraction down when Christmas demand and cream is satisfied, and we’ve got a lot more sloppiness, and then a bit more butter comes, but milk has only just moved off the bottom of the trough. The seasonal low occurs in November in France and Germany, and that’s just starting to move, and there are some headwinds.
I think the cheese market’s also helping keep the situation tight. This cheese prices have come off a bit, but demand seems reasonably steady, and there has been no significant pushback yet. But I still do not believe that’s been thoroughly tested with end users and consumers for longer. So, we may see some pushback there, but I think how long butterfat stays elevated, whether New Zealand impacts that market with the product going into Europe or not, we’ve been talking about that for months as well. Not much has happened yet, but it’s a bit early. Yeah, I think the strength of butterfat in Europe is playing at a cheese that’s creating some engaging scenarios for exports out of the U.S. next year. If those European prices stay elevated, does that help the U.S. out with this new production? To some extent, so, I think those dynamics are really important.
Josh:
Well, that makes me want to move to another important piece that we haven’t touched and we’ve been bouncing around the world on both supply and demand, but the Middle East and North Africa demand, it’s my understanding that they very much helped out the Oceania heavy production season a year ago, when China stepped away by buying a fair amount of product. The first that you would assume is when they capture that market share, that that comes at the expense of Europe, and then, of course, the U.S. in the third position, but as you’re looking ahead to the early part of next year, obviously we have an earlier Ramadan period than we certainly had a decade ago. How does that look? What does that demand scenario look like as we look ahead to 2025?
Steve:
Very interesting, Josh. Yes, I mean a very price sensitive mark. We went there a year ago, and it gave us a great insight. It was nothing like going to Gold Food and getting on the ground there. We’ve taken a long time to do that, to appreciate what the products are that are in front of consumers, what their attitude to buying is when they’re supplying essentially it’s a big cheese market, a big beverage market, how they buy, what they buy on, who they look at sourcing from. That’s a real eye-opener, and I think while we were in Dubai you’ve got Saudi there, but you got reasonable flavor elsewhere as well. They’ll still remain. I think they’ve taken great advantage of when the prices were low; they came strong, bought up, stocked up well, and now, when prices are high, they’re backing off a bit, so the trade has slowed.
They very much work on the value of fat, and when you get the difference between whole milk powder and the skim butter equivalent, they’ll move across the whole milk, and they’ve done that lately. So, butterfat is… Everything’s price-sensitive. Everything is a numbers game. Most of that trade is done that way, and I think cheese, we were there looking at some cheese markets, and that is fascinating, because it’s what they call cheese is something with pretty low dairy solids in it. So, they’re buying all these different dairy ingredients to partly feed that market as well as buy cheese to certain extent, from whoever is prepared to meet their price and spec. And I think that continues, but it’s certainly healthy that it’s reasonable income growth for consumers. I think the stability of the oil market certainly being part of that, I think Saudi Arabia is a very healthy economy, that’s showing up in the way that food trade is then backing into what their volumes look like.
Joanne:
Yeah, I think what was interesting when we were there earlier this year, Josh, was that they’re really keen to push tourism, particularly in Saudi and the UAE, obviously in Dubai, and so that’s going to help a lot of that food service demand that will pull through cheese. So, they’re certainly interested in U.S. cheese. At the moment it’s at a price, and as you said, Josh, probably the third ranked at the moment, but there was a lot of interest in the cheese that will be coming out of the U.S. because they see limitations certainly out of Europe, and it’s going to be that issue of meeting spec, because they do have a strong preference for the grass fed cheese, just the look of it and the taste. But there is definitely an opportunity there for the U.S. to get into that processed cheese market, which is huge, like massive. Just low milk solids, as Steve said, and price sensitive.
Steve:
I think that’s the other stunning facts we saw that food service growth in that market is astounding. It is going to stay double-digit for the next five to 10 years. Their lifestyles are changing. I mean, reform in Saudi Arabia has talked about a lot and you get a lot of that, but on the ground, when you hear the dairy companies talking about what it actually converts to and how you see behavior and spending change, that is a very healthy growth market. Sure, it might be keen, but there’s also opportunities for higher value going in there too, because it’s not all commodity. It’ll create segments and become more affluent in certain parts of it, so there’s a bit for everybody.
The other part of that puzzle is Algeria, which is a very important powder market and always difficult to read as to the way in which the government wishes to attempt to feed the population or ensure the population is happy and contented and paying reasonable prices for food, because that keeps the angst down, keeps civil unrest low and that’s a huge priority.
That market has been a bit patchy, and I think we haven’t seen the consistency of large tenders coming out of Algeria. That’s probably been a bit disappointing. The other markets might’ve picked up volume that market’s been a little bit lower and North Africa is over the year, whole milk powder trade is down. Nearly 10% down on a yearly basis. Skim is up. I mean, they traded to skim, which is interesting to understand given the different… That’s probably just an absolute price of the powder, but a lot that trade’s small, but holding up, yeah, they’ve seemed to have moved away from whole milk to some extent, which is a factor for the South Americans and the New Zealand, because Europe is still in there with a little bit of that, but it’s mostly south hemisphere trade.
Diego:
There’s also rumors that there’s going to be a tender coming for Algeria, so let’s see how that affects the stock market mainly in Europe, because Europe is still at a steep discount to the U.S., so that’s going to be interesting.
Josh:
For skim milk specifically you’re talking about, right?
Diego:
Yeah.
Josh:
Yeah.
Diego:
Correct.
Josh:
This was good. We covered a lot.
T3:
We covered a lot in a pretty condensed amount of time. And just to summarize it up as we start to wrap it up, it sounds like what we’re hearing is demand’s going to be good in Asia, demand’s going to be good in the Middle East. Production may be good in Oceania, production may be good in the U.S., but probably not necessarily as good as it needs to be on the powder side of the business, especially from the U.S. with the new cheese plants being built. And so we probably can expect pretty decent skim milk prices either in the form of skim milk powder or non-fat dry milk going forward into 2025, at least in the first half of the year, and probably even butter as well and I think the big wild card is what cheese will do, because we will have more cheese. Before we wrap it up, I think I’ll throw that one at you guys, Joe and Steve. With more cheese being made in the U.S., do we expect international cheese prices to stay up or is that maybe one weak spot in the horizon?
Steve:
Yeah, we think that’s a weak spot.
T3:
Okay.
Steve:
Yeah. It’s where the export volumes are going to be satisfied, I think, because New Zealand is certainly counting on more cheese exports as well. The U.S. will have more. Europe, depends on their overall balance, but Europe likes to export cheese to keep balancing that internal market as well, right? And mozzarella is very important there. They’re very good at it. But the contested markets where the U.S., New Zealand and Europe go head-to-head, that’s North Asia, Japan, Korea, you get in the Middle East, you get Australia. Those markets, the U.S. has lost some share to New Zealand. Europeans have been out of that a little bit. They’ve lost a bit of share as well. Australia’s picked up share, can you believe? But I think that contested zone is where those marginal volumes will go and that I think that will be bought at a lower price. So, we think the export trade will be, chief prices will be under pressure.
T3:
Okay. I would say we agree with you on that one.
Joanne:
A little bumpy as that cheese comes online, I think. As that finds a home, it will be bumpy for the first half of 2025, you would think.
T3:
I think I would’ve to agree with you.
Joanne:
Everyone’s bracing for it. Yeah.
T3:
But that’s the interesting thing about markets, isn’t it? When everybody’s expecting something, it doesn’t always manifest it that way because of the plans that everybody puts together. Well, I thought this was a fantastic conversation, a little bit of hope or at least Class IV prices coming out of the U.S., a little bit to be concerned about maybe for Class III prices coming out of the U.S., but overall, nothing for us to go hide in a hole and bury our head over.
Steve:
There’s never a reason to go and hide your head somewhere. There’s always plenty of color.
T3:
There always is.
Steve:
Yeah.
T3:
All right, guys, as always with dairy markets, it’s going to be another interesting year. Well, Steve, Jo, thank you so much for joining us today. This was a great conversation and we really appreciate it.
Steve:
Thank you for asking us. We’re really happy. It’s great to see you guys. Thanks for the opportunity.
T3:
Absolutely.
Joanne:
Thanks everyone.
Diego:
Nice to see you. Be well. Thank you guys. Appreciate it. Have a good one.
Outro (with music):
We welcome your participation in The Milk Check. If you have comments to share or questions you want answered, send an email to podcast at jacoby.com. Our theme music is composed and performed by Phil Keaggy. The Milk Check is a production of T.C. Jacoby and Company.
