You don’t need technical analysis to tell you that dairy prices are low right now. But stocks are still high, which suggests demand is weak.

The questions are: What gives? And when?

In this episode of The Milk Check, we talk through the feeling that our current bearishness points to a strong price rebound later in 2022 or early 2023. But not before Trading Strategy Director Jacob Menge takes us through technical charts on dairy products and macroeconomic indicators like copper and the dollar index.

In the end, Jake suggests that a “max pain” moment would be necessary to kick off a violent upward price swing, and the team talks through what “max pain” might look like for different products.

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Jake: I’m going to start just with one thing. For those of you that were on the call last Friday with Alan, that ITR economics presentation, we actually had talked about this exact graph, the consumer loans and how it’s a pretty eye popping number. He basically said it’s nothing. It’s really irrelevant. It’s more or less on trend, and I agree completely. That’s what we had been saying for months now, that this is showing up in a lot of newspapers, ignore it. The one thing I do have to add that I’ve actually learned in the past couple months, just talking around, that there is something to pay attention to on the consumer loan side, that is just not in this graph at all, and I had no idea about, frankly. It is buy now, pay later. Buy now, pay later was a 2 billion market in 2019. Anybody want to guess what it was last year? Any brave soul going to stick a number out?

Joe: 5 billion.

Don: 50.

T3: 30. 30 billion, isn’t it…?

Jake: Ted’s closest. Ted’s closest. It’s like 25. Okay, so we went about 10 x on the buy now pay later market, and it’s still going up. And here’s the rub. Of all buy now pay later users, about 10% have a credit card, the other 90% don’t. And that tells you they probably have such poor credit, they can’t even access the formal credit lending market with protections on it. And so, this is the exact kind of thing that preceded 08, where they basically had not enough checks and balances on a certain credit lending market, and eventually, it got overworked. And you know the rest of the story. So that’s the kind of thing to pay attention to. There are things in the background that are kind of sketchy. There’s a million apps that you can do buy now pay later on literally anything now. So it’s kind of interesting.

Now, it’s 25 billion. You look at total revolving credit here, which is 900 to a trillion. We’re not talking a huge percent, just call it two to 3%. Okay? Not huge, but still, it could be a domino, that starts some ugliness. Because the valuation of these buy now pay later companies is massive. The regulations around it are basically nothing. It does not show up on credit reports. So literally, you could have $2,000 a month in buy now pay later and go apply for a home loan or go apply for a credit card, and everyone pulling your credit report has no idea that you have these other bills outstanding. So that’s the kind of thing that, even though officially credit cards don’t look risky right now, how much else is tied up here? This is not the big one or anything to me, but it’s just something that I thought was kind of interesting and kind of indicative of the economy as a whole, that people are starting to really ramp up use of products like that. Over to the fun stuff here.

Going to start with cheese. We talked about this. We haven’t done one of these charting meetings in a while, but we talked about this buck 93 level, which I think, in Class III, was… What was it? Like 1980? We were right on that line, and that has been a sticky, sticky support or resistance line for a long time. And we cruised right through it. There’s a little bit of hesitation, but we are firmly below that now, and there’s just not a ton of support anywhere up until like a buck 80, I would say. So something to look at there, but this is a pretty notable change from the last time we had this meeting. Butter is funny. We’re on a hundred week moving average, and it’s really liked staying above that hundred week moving average. So that’s kind of bullish. The bearish thing to me, and this is the thing that we talked about last time, absolutely no volume here, none, between this $2.30 and $2 level, you really $2.10, call it.

You get one big player willing to throw some volume at this. I just don’t see any way it doesn’t continue down to at least 2.10, but it’s going to take that player. In the meantime, while we’re just trading sideways, this is probably bullish. In a kind of no pressure market, I would lean towards the upside of because of the moving averages there. And we’re oversold on relative strength and stuff like that. Hopping over to whey. Whey’s just cruised through this area of no volume. It just didn’t even stop for a breath, and now, we are at a point of a lot of volume, that 35, 36 level. It really kind of sticks out historically. We can scroll back, and the further we scroll back, we just get more and more volume trading around that 35 cent level. So I’m kind of thinking we’re there on whey, would be my 2 cents.

Nonfat? Not the same, actually. We stopped for not even a day at 1.25, which I thought we would at least pause there, because we paused there on the way up. But we didn’t. I could see it maybe retesting this, but I also could see it continuing down to 1.10. That’s the only technical indicator I could even point to right now, because everything else is just blown out, saying “sell, sell, sell.” But as far as some kind of a stopping point, yeah, 1.10 technically is it. Could it happen before then? Who knows? Sure. But I’m grasping at straws. If I had to point to some technical, that’s what I’m looking at, 1.10 or 1.25 as kind of your range, anything on these charts. Head on over here to our other charts. What is kind of interesting is our spot versus our calculated Class III.

So this basically takes all of our components, our butter, our block, and our barrel cheese, to calculate an implied Class III price, and then, it looks at the Class III futures. This is a long-term chart. This goes all the way back to 2019 back here. That’s actually 2018. We’ve been in this range though for a long time, for a solid two years now. I would be a little surprised if we break out of this range anytime soon, but what’s notable, in literally a one week period, we went from the upper end of the range to the very lower end of the range. So this thing’s been kind of volatile lately. The only reason I’m bringing this up is something probably has to change on either the auction or the futures, where we’ve either got to come off a little bit on these futures or the auction has to firm up, which could be in the form of barrels catching a bid, which we saw today, and blocks just stopping. But that was kind of notable.

But reverse barrel spread also pull up just for some perspective, hanging out at the upper end. This was a heck of a head fake, when we saw it pull back to the middle of that range. I, and I think a lot of others, probably would’ve bet, “okay, we’re probably going to go back to more middle range area around 15 cents.” Nope, right back up to 34 cents area and hanging out there, so keeping an eye on that. Going to talk about our non-fat carries. I think it’s amazing how volatile it was. We’re officially, I would say, in a carry. Again, not great, but holy smokes, what a dip there. That was just an insane two month period, really three, from June to the end of August. That was an impressive dip. I don’t know the last time we ever got there. I would have to go back way more on the chart.

So it would’ve been 2014. This was a violent, violent move on a carry, so worth paying attention to that. Finally, just for you, Josh, here, we got our whey non-fat ratio that we’ve been paying attention to. Nothing to note. Hanging right around that same level, implying probably still want to use non-fat. I would expect, before this is all over, just guessing at this point, that, if nonfat were to really collapse, again, I just don’t see whey continuing to move lower. That would actually pull it quickly back into the range. That is what I would expect, to quickly come back into the range, so worth paying attention to that. Really not much to say on eggs. Corn and soybeans both looking the exact same at those kind of lofty levels. We’re in the mid sixes on corn, really upper sixes on corn. Beans, we’re in the, I think, 15, yeah, 15, 25. Not much to say. Nothing weird going on with the correlations. The correlations on this broke down, as I said, maybe three, four months ago. So not much to say there.

T3: So while dairy’s bearish, the grains are showing stability?

Ted Jr: Can you pull up that Class III corn oil screen again?

Jake: Corn’s been outperforming oil and Class III for a little bit now, really since July. Oil and Class III have been moving together though nicely.

Ted Jr: Isn’t that amazing how close that is?

Jake: Yes, but as the numbers show, on a long enough timeline, there is just not correlation. They correlate in short periods, but it’s not like there’s any correlation you can depend on in the long term. Anything else on ags? Otherwise, I really didn’t have anything too much. I guess I will show copper and the dollar index. Copper is a classic economic indicator. That’s like the go-to that a lot of people always look at. I’ve never looked too close at it, but it, back in June, was kind of in panic mode. It retested this support level a number of times as resistance level, and then, just last month, really a couple weeks ago, had a really big move higher. And it actually went above its hundred week moving average. So somebody’s buying a lot of copper, which I don’t know what’s going on there.

I’m not a metals guy, but it peaked my attention. Because that’s economically pretty good, a good sign actually. And then, yeah, the dollar index is the one last thing I’ll show here. It seems like we finally found a bottom on this move lower. I thought maybe 1.04 was kind of our bottom. It kept going even lower, but there’s a lot of things, like volume coming into the dollar, stuff like that, that is making me now think this is the bottom, but I was wrong a few months ago. Could be wrong now. So we’ll keep an eye on it, but I think that the worst of this fall is probably over. What else? Any requests?

Don: Lumber, please.

Jake: Classic. It’s a disaster, I think. Oh, it popped. Had a move higher. I have no idea what caused that. Now, I need to go look.

Don: That would be correlated with copper, right? If you think of expected building starts maybe. I don’t know.

Jake: But I thought starts were poor.

Joe: Yeah, housing starts have been down.

Don: I know, but expectations of three to six months out, right?

Jake: Hey, I’m with you. What else? Any others?

Diego: Mexican peso?

Jake: Yeah, that’s right here.

T3: That’s been pretty impressive that the peso has been strong relative to the dollar over the last year.

Diego: When was it the last time it was this strong, Jake?

Jake: Just before the pandemic.

Diego: Okay.

T3: Do we have any good measurement regarding China, whether it’s economic activity or even just the renminbi?

Jake: Yeah, we can do the currency. I can put it up, but I will really caution against reading into it. It is such a managed currency relationship is the way I’d put it.

Ted Jr: If they’re trying to manage it, they’re sure not doing much of a job.

Jake: Well, that’s the thing. Sometimes they want it up. Sometimes they actually do want it down, as weird as that is. They have an agenda and they tend to be pretty effective at implementing it.

T3: I wonder if it would make more sense to measure the New Zealand dollar or the Australian dollar versus the US dollar, since that would be an indication.

Jake: Yeah, here, let me pull this up. So these are called risk on pairs. That’s typically what people look at when they’re looking to add risk to their portfolio, and they’ve been flat. The market is not particularly keen on risk, but they’re not shedding it either.

T3: Okay.

Josh: I think that we’re kind of done with the main discussion, but is anybody else starting to get the vibe, that that whole bearish train’s really slowing down and about to start shifting the other way? Here’s what I’ll cue in on, from the demand side, people aren’t talking about it getting worse. Now Jake’s showing some indicators, like some just general consumer spending type indicators that aren’t as gloomy, just a simple thing way, like whey. If whey does bottom out, I’ve said it, now Jake said it, from a totally different standpoint, and maybe it trades through that, that’s an early sign. Talking about China starting to get stimuli, but it really feels like this thing could turn a lot. Well, I think violent, we’re all agreeing that, when it turns, it could violently turn, but I’m wondering if it’s going to turn a little faster than we even think.

Jake: I still think you need what is typically in the equity space referred to as a max pain event, where you just cause a lot of pain. I think us having a violent move is actually predicated on a max pain moment, where you have people literally saying, “I can’t get any money for my Class III. I can’t get any money for a Class IV.” It’s just everything looks bleak, and then, you turn and rock it higher. I don’t think we felt that yet. That’s my 2 cents.

Josh: Is there any scenario where cheese gets shocked and just plummets? Because to me, if cheese were to plummet, that stimulates the biggest demand user. I do think people will buy more cheese domestically. That same thing would happen in Europe. Is there any possibility that that happens in your guys’ mind? Like a 50 cent cheese drop, it just boom…?

T3: Well, frankly, if blocks drop to where barrels are right now, in the $1.50s, you’re in a max pain place.

Brianne: Yeah. I think if we missed out on some export deals, because Europe’s been more aggressive the last few months. And domestically, we start making… Actually, we finally start filling up warehouses, then yes, I think it could happen.

Josh: If you get cheese and adjusted for inflation, let’s go back to pre-inflation days, you get cheese that drops into the lower somewhere at like the 1.25 mark globally, now maybe you adjust that to 1.50 today. I’m not smart enough to do this on the fly. Then all of a sudden, I think you stimulate a lot of demand growth. You put Europe in the US consumption back in recovery mode, you slow milk production even further, quicker. All of it lines up to a quick recovery.

T3: The one thing I’ll say, and this is kind of similar to what I was pushing Gus on, that max pain event, you can’t just hear dairy farmers talking about how bad it is. You actually have to see some go out of business. That has to happen first.

Josh: Does it though, if we drop low enough that we stimulate a bunch of consumption again, at the same time that Europe reacts before us? Could we just continue our milk production growth on this 1% and just skip right through it, because the equity was there? That’s kind of where my head’s going is, can you have a situation right now where it happens so fast you get a drop, Europe adjusts, New Zealand adjusts, demand recovers, and we just skim right through it, from milk production standpoint?

T3: If you argue that the max pain event was what China just went through, perhaps.

Josh: Each conversation over the past month, I’ve become a little bit more bullish to what’s coming. Is it that possible that we don’t have a production response here? It’s purely demand recovery, globally.

Jake: So Josh, I guess I have one question for you. Is the drop from $1.35 to $1.20 on nonfat, is that this really painful drop?

Josh: No, I don’t think so. I think we got to go to a dollar, which I think adjusted for inflation is more like $0.85. And then, I think that, at a dollar, and we stay there for a minute, I think we stimulate demand in Asia. I do.

Jake: I am not making the argument that we can’t just basically be done dropping and go higher from here. I’m just saying, for a really violent move higher, I think you also need a move lower, where people are kind of panicky. And that, we have not had in my…

T3: Where I think you and I are in agreement, Josh, is I think we’re at a place in both Class III and Class IV, where we’re loading a slingshot. The lower we go now, from this point on, the higher we’re going to go later in the year. We are loading a slingshot right now. That, I agree with.

Jake: I don’t want to get into the theory of it. Max pain is actually a theory related to options, and it goes, once you basically go beyond the protection level and you can look at options, open interest, that’s when you achieve max pain. And so, for non-fat, you can see puts are basically owned at $1.20 and $1.22 a little bit. Almost nothing is owned for the rest of the year, below $1.20 though. If you get down to $1.10, literally not a single person owns a put out… Okay? A single person owns a put in May and June. I shouldn’t say not a single.

There are two puts, two puts that are owned at $1.10. You go below there, people are going to panic. Truly, that will be panic. No one is covered. Class III, lots of puts are owned at $17 a ton, 500 a month plus, at 17 bucks. If we were to really quickly charge to 16, people panic. So you kind of have numbers in the back of your mind. I would say we’re pretty much there on nonfat. You get to $1.15, no one’s got coverage out there. So those are the numbers that I would look at for when the panic sets in.

T3: All right, any more thoughts? Questions? Cool. Great conversation, guys.