In our first episode, host Anna Donze, Ted Jacoby Jr. and Ted Jacoby III (we’ll call them Ted and T3 from now on) recap movements in dairy markets in 2017. It was an abnormal year for many reasons, capped off by an oversupply of milk and weakened demand that will depress milk checks for months to come.

You’re welcome to send questions and observations to podcast@jacoby.com.

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Episode transcript

Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Company, where we share market insights and analysis with dairy farmers in mind. Today is January 26, and I’m your host Anna Donze. With me today, we have Ted Jacoby and Ted Jacoby III, whom we’ll refer to as T3 to avoid confusion.

So now, we’ll get right to it. For this first episode, we’d like to talk about past events that have gotten us where we are, particularly in 2017. So first thing’s first, where are we?

Ted: Well, offhand, I’d say we’re in one hell of a dilemma. If we want to look at all the bad news we got, we just came off of a year where the prices started out relatively high and continued to decline the whole year. We’re in the middle of—the end of January, and the prognosis of everybody coming back from California is that the market is long and it’s about to get longer. And that’s in virtually all products. It’s gonna be in cheese, in powder, even butter seems less exuberant than it has in the past. So, the question, then, is where is it gonna go from here? Have we hit bottom or is it gonna get worse before it gets better?

T3: Well, I could jump in, and at least from the product side of the equation, 2017 was a strange year, I would say. We went into the year knowing that we were gonna be long on milk in the upper Midwest and the Mideast. You know, the idea that we had a lot of milk in Michigan, and we didn’t have the capacity for it was not a surprise. But what was a big surprise, especially on the cheese side of the equation, was that demand was not very good in 2017. We had an economy that seemed to go really well and seemed to be moving in the right direction, and yet cheese sales were up about only 0.5% through the year. And for the first six months of 2017, they were as flat as could be. And that follows two years in 2015 and 2016 where cheese demand was up almost 3.5% each year. And then, all of a sudden, we went flat. That caused, I think, cheese inventories to back up a little bit. Meanwhile, 2017 for butter was actually a pretty good year. But it wasn’t driven by butter demand in the U.S. Butter demand in the U.S. was also very lackluster. Fortunately, they had a shortage of butter in Europe that drove international prices for butter up very high. And for a while, pulled the U.S. butter market with it. And we got up to prices around $2.70 and eventually settled back down into the $2.10-$2.20 area. So, I think, butter for around 2017, was a pretty good year. Cheese? Probably a little bit on the disappointing side, and then on any of the powder side, I think 2017 was very disappointing. There’s a lot of inventory of non-fat dry milk and skim milk powder throughout the world, and we keep producing more. Europe has over a billion pounds of powder in intervention. And nobody’s interested in buying it, and now it’s almost two years old. Meanwhile, in the U.S., we have powder inventories being built up at the manufacturer level, at the trader level, at the wholesale level, and even at the end user level. And so, it’s hard to imagine that things are going to suddenly get significantly better on the powder side.

And then, if you look at the whey market, we pretty much started the year up in the $0.40s and ended the year down in the $0.20s. And so, it was a steady grind lower, and that certainly isn’t what we want to see either.

And so, as we get into January, we don’t have a lot of good things to say about what’s been going on in terms of where we are today.

Ted: I think of all the things that you just mentioned that the most troubling is the fact that demand seems to be lacking. Here we are in a very exuberant economy, and have been in a very good economy for the last year almost, and yet our demand for our dairy products isn’t as good as similar economies in years past. That, to me, is some sort of a danger signal, and I would like to know why that is. We look at McDonald’s and Arby’s and fast food which is always a significant portion of our disposition, and they don’t seem to be really increasing the price, the use of cheese that much, despite the fact that the cheese price has been volatile. They have an opportunity to buy quite a bit of cheese at low prices. So, the fact that demand isn’t perked up except for exports, I think is a matter of some serious concern.

Now, if we take a look at milk production, prices are gonna start to bite. And we probably are gonna see a reduction in milk production over the next six months vis-a-vis prior years. But the lack of demand, I think, is a matter of some concern.

T3: And I would agree with you. And I think, we’ve had a lot of conversations over the last 6-12 months about where the demand is. I’ve heard three different theories, none of which independently seems like the answer to the question. But I’ll put the three theories on the table just so we have something to talk about. The first is since Mr. Trump has been elected, the rhetoric about immigration has been not too great, and there’s pretty good anecdotal evidence that immigration into the United States has been down over the last year. And immigration used to run, as I understand it, at about 1% to 1.5% if you include both legal and illegal immigration. And while the illegal…there’s no perfect number that measures illegal immigration, but the anecdotal evidence that we hear from various sectors tell us that both legal and illegal immigration is down. And so, that could be one factor.

The second factor that we’ve heard a lot about has to do with the waste side of the equation. And I’ll give you an example. You go into the dairy case and you buy a 1-pound block of cheese or an 8-ounce block of cheese. How much of that cheese really gets into the consumer’s stomach versus ultimately, gets thrown out? Dried out, thrown out, they use half of it, and then eventually, they throw out the other half. The answer is it’s quite a bit. And the way that the consumer is eating cheese today, it’s not that the consumer is necessarily eating less cheese, but they’re probably buying less cheese. A great example of what I’m talking about is things like the Sargento Balanced Breaks. They’re—it’s a great product. I have to admit that I use it to get some nuts, some raisins, and some cheese, you know, as a good healthy snack. Me and my children, we’re all eating it. But think about that from a packaging standpoint. They’re putting 1 ounce, maybe 2 ounces, of cheese in each Balanced Break. And then you’re eating all of that cheese. But you’re buying the Balanced Breaks probably instead of the 8-ounce bar of cheese, you know, a 3-pack of Balanced Breaks probably has 5 ounces in it versus an 8-ounce or a 1-pound chunk of cheese. You’re cutting down on how much cheese you buy, but you’re not actually cutting down on how much cheese you consume.

The third discussion that I’ve been having with people about cheese consumption has to do with mozzarella consumption. And my understanding is that after about 40 years of fantastic growth in pizza, in pizzeria, and frozen pizza consumption, that they are starting to see the pizzeria growth really start to plateau, in that, you know, instead of being up 5%, we’re up maybe 0.5%.

Ted: Let me interject another item which relates to the demand side of the ledger. If you watch TV these days, you have continuous advertising for diet regiments.

T3: Yeah, but that’s nothing new.

Ted: It is new, because you’ve got one right after the other with four different advertisers. I can’t enumerate all four of them, but you’ve got Nutri-system, you’ve got South Beach, you’ve got another two in there that I can’t recall the names of that follow one after the other after the other, three minutes of advertising for diets, which cheese is not a diet item. And it could be that we’re looking, perhaps, at some retrenchment in people’s eating habits, and that might account for some of the changes in demand. In any case, when you put it all together, demand is not what it should be at this time of the year. And we have an excess of inventories and milk. If the dairymen are gonna go out of business, going out of business with a pile of corn salad sitting there that’s left over from last year, which isn’t gonna cost them anything if they’re gonna be selling cows. They’re probably gonna be selling cows when they get to about June or July, before the harvest. And then, at that time, I would expect that we have a good chance of seeing some change.

Anna: That looks like a good place to stop for now. Thanks for listening, and thank you, Ted and T3 for sharing your insights. We welcome your participation in “The Milk Check.” If you have comments to share or questions you want answered, send an email to podcast@jacoby.com. Our theme music is composed and performed by Phil Keaggy. The Milk Check is a production of T.C. Jacoby & Co.

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