Hoogwegt Dairy Spew

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Hoogwegt Dairy Spew

Episode 14 - Bottoms Up!

April 18, 2023 • Hoogwegt Singapore • Season 1 • Episode 14

On our 2nd Anniversary of The Hoogwegt Dairy Spew, we bring the focus back to the Far East.

Tune in to Episode 14 as we discuss the question in everyone’s minds – Where Is The Bottom?

Upon request, we have also started adding transcripts of this podcast episode.

Enjoy!

Val: 0:00

What's on the headlines recently?

Tom: 0:02

Chat GPT. I just read a book. Scary smart. Wow, man, it's amazing. AI is taking over the world. It's a big recommendation to read it if you're interested in how the world will be looking like in a few years from now. Very concrete, of course. Honestly, it's a bit scary and I'm very much wondering what we will be seeing of that. Chat GPT and of all the AI developments within our business.

Val: 0:32

Yeah, but the good thing, and the silver lining would be that to record a podcast, we genuinely need to be human beings to sit around a table and record it's. Okay, guys, episode 14 of The Whole Great Davies View. We are plugged in and back online after a short hiatus. Hope you guys enjoyed episode 13, recorded by our colleagues from Hogreg US. We are bringing everything back east again for this episode. So with me here today we have Tom hey, Vel, Charles, Lesmana hey, Bell.

Boh: 1:19

Bo Yo Yo, Val and Elvin.

Alvin: 1:22

Hi Val.

Val: 1:23

So, question from all my buyers, where is the bottom? Where is the bottom for skimmed? Where do we see the markets moving? How much more can we see prices slide? Explain, expound, and let's discuss maybe we can start this discussion a little bit from the production side. Why are we still seeing supply? Why are farmers still producing skimmed whole milk? Whey? So maybe Charles, can you maybe explain a little bit to us, please?

Charles: 2:07

Yeah, well, so from the production standpoint, I think it's pretty simple. At the moment, farm economics are still very positive. Prices that are being paid to the farmers, especially in Europe, are still above break even point. Their cost of production. Obviously that changes all the time. With the movement in prices of natural gases, fertilizers, feed prices, the cost of production does change quite a bit. But at the moment, as it stands, the prices that are being paid are still higher. So in a simplistic way, that is the reason why farmers are still maximizing production as much as they can. But I think on the other hand, they also see that in the past few months, these prices that are being paid to them are dropping really, really fast. In the past few months it's been dropping at a rate of roughly about 10% per month reduction in prices. And it's trying to catch up quickly to what the equivalent of commodity prices would be today. So let's say farmers today are being paid$0.45 in Europe and their breakeven point is thirty five cents. And that reduction is at month. So by expected, let's say payouts in June, we expect that farmers are already going to be paid only where they're breaking even. So when we talk about production, will we see a turn, like you said correctly, during the flush, I think it's very difficult for farmers to kill the cows. Right? The flush is the period where the cows are milking the most. If you are a farmer, you don't want to be culling cows during that period. But as we expect there will be a supply response due to the insufficient demand in the current time. That after the flush. So in July more farmers will think, okay, the weather has now turned into a different season. I'm not really making money from my cows. They have to reduce their herd size.

Val: 4:05

Yeah, so that's pretty much from the EU perspective. Right. But in the meantime we also have the powerhouses Oceania as well as the US. And it does seem that availability out of the US has been very, very good as well. So what we see from a destination perspective is that suddenly there's just more than enough EU product, more than enough US product being offered and then you throw in the ocean up as well. So that's basically what is causing prices to fall.

Charles: 4:36

Actually. Good point about the US. The US farm economics at the moment is actually a bit worse than Europe. Meaning the farmers are not making as much margin as they are in Europe. So in US it's quite fragmented. There are farms that are more or less just making a small margin and there are some that are not even making margin. So if you talk about it from a production standpoint, if prices drop further in terms of farm gate prices being paid to the farmers, there's actually more risk in the US that milk production could turn more than it is in Europe. Ocean is a bit of a different story but we've seen, let's say in the last fonterra announcements of milk prices that it will be dropping. We've seen milk prices at least on futures trade up to $10.03 months ago. At the moment milk futures are in the $7 $8 range. I mean, doceania seasonal production will only hit again in somewhere in Q three, Q Four this year. So I think for the discussion of the near term that's not as relevant. But the story is clear that farm gate prices are dropping and a supply response will come. The question is when will that supply response coincide with demand? Give us an idea of where prices should be at the end of the day. Yeah.

Boh: 5:49

To add on the point about what farmers will do, think we have seen some movement already from the US side. The cow slaughtering has been increasing thing over the last month. March figures are showing that it has been above the three year average of dairy cow slaughters. The new EU figures have been out. Also think majority of the countries have soon been showing quite positive cow slaughtering figures. Again this shows probably that the returns from the cattles and the meat are much better than keeping the cows for longer term where the expected reduction in the farm gate price may not be as positive than what they can get in cash upfront at the moment.

Val: 6:48

Talking about a supply response. I mean, as you mentioned, we did also notice that, say, Fonterra chose to produce less whole milk this season and a bit more on the skimmed, and that's also putting pressure on the skim prices. So shall we talk and discuss a little bit about valorization and what we see, say, coming out from the EU? What will the farmers choose to produce? Is it still skimmed and fat or whole milk? Given whole milk prices today, I doubt. But shall we discuss a little bit more about this?

Tom: 7:18

Yeah, good point. Difficult one to answer. I think this season, of course, from out of a New Zealand perspective, already is gone. Nothing to choose anymore on Terra Day will keep producing a bit of skimmed, little bit of whole milk powder for next season. It's still open and not sure what will be happening. If you see the lost GDT is that the fat prices, especially AMF, are dropping like a stone, then it should be leaning towards more whole milk powder production. But between now and September, lots of things still can be happening. I think from a European perspective, more whole milk powder shouldn't be expected, more leaning towards SKIMS and fat. But also from that perspective, you never know what will be happening in the upcoming period from a federalization point of view. So it's something that we always closely watch, that we closely follow and trade accordingly. And referring to your questions on supply and where that bottom is, I think it's an interesting one. But if everyone is bearish, then it's better to watch out.

Val: 8:27

Charles, do you know that we have a My Hogreg customer portal?

Charles: 8:31

Oh, wow. I heard about it. But can you share more?

Val: 8:35

Yeah. So basically this is a digital communication portal, which team at Hogreg created. And over there you are able to find contracts, shipment related information where you can track and trace your shipments. That's pretty cool.

Charles: 8:49

Wow. So it's like when I buy stuff on Amazon, I can go to my orders and track it. Is this the same if I buy milk powder?

Val: 8:54

It's the same, but better.

Charles: 8:56

Wow.

Val: 8:56

And on top of that, there is also a monthly publication called the Monthly Market Moo. Well, okay. It's a blog whereby we share valuable insights on a monthly basis with our My Hogwecked customers. So in order to access this monthly Market Moo, please kindly contact your commercial managers or your export managers and we can basically log you into this portal. You get a user ID, you set it up and voila, you have Joergen and Alfrink hosting the monthly Market move and talking about the market. And that's really, really useful and informative. Very positive feedback coming from buyers. Super cool. I do have that question, as you mentioned. Will we ever get to the intervention levels? And maybe we can try to crack this one a little bit and explain a little bit more to our listeners about how it was very different in 2018 2019 versus current situation in terms of cost of productions, in terms of the economics behind why and how we're.

Tom: 10:08

Producing the powders and in terms of sustainability. Don't forget that one.

Charles: 10:13

Yeah, I think when we talk about intervention, it's three main factors, right? Pretty simple demand, production and stock. So at the moment when we talk about demand, it's clear that the current demand is not sufficient for the amount of supply there is in the market. When we talk about supply, then it goes back to what I spoke about earlier, that the rate of farm gate price decreases at the moment will trigger a supply response. The question is when will that happen? And the last part is about stocks. At the moment, we don't see excess stocks, at least in major producing countries in Europe, stock levels are not that high. So for intervention to happen, it needs to be a further severe decrease in demand from current time in order to trigger prices to drop €500 from now. Then intervention can start.

Tom: 11:07

And that's the remarkable part. And I think it's a very strong comparison and correlation with, for example, the equity market that people start to become very bearish when prices already drop with 50%. Like it's trading at 50% lower than what it did last year. So how much downside is there? Of course there still is downside, but there already is a discount of 50% towards the top of the market. And we saw it with equity, we saw it with crypto stocks, we saw it with everything as well. So it's remarkable that people become extremely bearish while prices already are trading at a huge discount. And that's something for me, something to watch and also is something to consider, to dare to take the opposite view and to look at the upside instead of down.

Charles: 11:54

So the question, I think that's also kind of addressing what you asked earlier, where is the bottom? We always speak about this internally, like how much is demand going to drop further from today? Right? I mean, when we speak about three months ago, everybody was clear that we expect some demand destruction. Different people give different numbers. Some people say okay, 10%, some 15, some countries maybe 20, some, some say 25, some 30. It's difficult to say what, as an aggregate the world has faced as a demand reduction. But I think prices have come down a lot from three months ago. I think we were still trading about 500 $600 higher from today. So the question is from today's prices, when we say where is the bottom? Yeah. How much more demand destruction will there be? I think from where we're standing today, there's still some downside because I don't think we've fully priced in everything. But to say that we are going to intervention levels, which again is a further 20% reduction in price from here yeah, will we see demand destruction of more than 20% from today? I think today's demand already is kind of showing that the world finds dairy prices a little bit too high at the moment. But I'm not sure about a 20% reduction from here. So I think intervention cannot be completely ruled out. But the chances of it happening is extremely, extremely unlikely, especially if farm gate prices keep dropping at this rate, because farmers will be very practical. If it's not profitable for them to produce, they just wouldn't.

Val: 13:39

For all you listeners out there, if you have not yet signed up for our Hogwek Horizons newsletter, let us know. We can add you into our mailing list. Or you can also go to www.hogreg.com. Hit subscribe. There you get a monthly newsletter written by the editorial team. It touches a little bit on futures, a little bit on Whey, a whole lot on milk production, as well as certain key products.

Alvin: 14:14

Just to build up on the demand part. Like Charles mentioned earlier. Yeah, there's no doubt that the demand is very big, especially in Southeast Asia. Here, many buyers, they are talking about reducing their production rate, holding back buying because they still have SS stock. Many buyers are experiencing the same thing. I'm sure even our listeners experiencing the same thing as well. So there's no doubt about that. But exactly how much worse the demand can get? I don't think the demand can get any worser than this. Don't forget, last year was a very bad year for everybody. Now that there's not really lockdown happening anymore, demand should be increasing, but it's not increasing as much. But can it get worse than last year? I don't think so. Demand is bad, but that doesn't mean that there's no demand. Customers are still buying, but just at lower rate, a lot of supplies available. So that's the reason why the price has been going down. All the traders, all the suppliers are fighting for the same growth buyers.

Tom: 15:10

And that's fighting for the same buyers especially. That's the big advantage for our buyers here in Southeast Asia. Because in Southeast Asia you have that competition between New Zealand in certain countries with duty discount between US and Europe. And that's why current situation for buyers in Southeast Asia is ideal, because every single origin would like to sell something. So it's one big combat. We see a completely different story. Middle east. Middle east is more dependent on Europe. New Zealand is not playing any significant role over there at the moment with the big freight disadvantage. So Southeast Asia, yes, it's for buyers and ideal scenario three major origins fighting for the same business, so customers make use of it.

Val: 15:56

Could it also be not a lack of demand or not a further drop in demand, but a change in buying behavior and buying patents from the Southeast Asian buyers? And even with the MNCs, because I do see quite a big shift between how they were buying, say for 20, 21, 22 season versus 20, 22, 23 season. Previously you would see some MNCs coming in and buying like two, three quarters forward. But now we see customers coming in with smaller inquiries, but I would say more frequent. And that basically shows me that they really are trying to keep a pulse on the market. They're trying to follow the market more closely simply because of the market volatility and uncertainty. So that is also something which, from the trade perspective, we observe, and we are acclimatizing to such new buying behaviors, which is refreshing and it's very smart of our listeners and buyers. But yeah, I think doesn't mean that demand is going to be down that much more. It just means that our buyers are acting differently the way they approach asking for RFQs, asking for prizes, asking for offers.

Tom: 17:12

And I don't want to sound overly bullish because especially on the short term, I'm not overly bullish, but this is exactly the reason that if the market is turning, it's reaching that turning point that buyers will have to cover, like all of them are short term covered point. Or if we're coming closer to that turning point, you can see quite some significant moves in the market.

Charles: 17:34

Yeah, I think you hit it on the neo valve with regards to change in buying behavior because just now we spoke about reduction in demand, let's say be it between 15% to 25%. Nobody really knows exactly what to aggregate. But if you combine a reduction of, let's say, 20% in demand, real reduction in demand, and you add the fact that buyers who in the past, for example, keep stocks of four to five months and now they're keeping two and a half months, two months worth of stock, just pure for safety. The rest they buy hand to mouth. You come to a real demand in buying behavior of a reduction of 50%. More than that maybe. And I think clearly that's what we see. The question is, when the market turns, will they revert back to their old practice of going back to, in this example, to five month stock? If that happens, you see an increase in demand back to previous levels, 20%, you see the buyers doubling their buying behavior, it will change pretty quick. So I think, as we mentioned earlier, there may be some near term downside, but I think everybody needs to be a bit more careful in just thinking that this market is just going to keep dropping like a stone. Especially with what we discussed earlier about the changes that we see in farmgate prices in producing countries.

Boh: 18:56

Thing regarding WPC, let's look at the WPC 80. I think that's something that most people are looking at. On the WPC 80, we've seen prices already halved since let's say the last eight, nine months, when it was reaching the peak close to August last year. So that's where prices have already moved. Question how far more will it continue to drop? Currently what we see is that quite a lot of buyers have been coming forward and also considering to cover to end of the year. This gives also a strong signal that they think prices are at a very comfortable level and the downside potential is much lower. They also understand that when demand starts to come back, everything will move up. So quite a lot of them have been coming on this note. Secondly, from us point of view, we also see that quite a lot of us producers are well sold for Q Two and there's not much pressure to move as well. At least that's what we hear. That also provides some stability in that sense. Of course, I think with the overall dairy complex there could still be further room downwards. But I think the bigger question is whether that is worth the risk to wait longer or really to consider covering further out already. So there are some observations that we see smaller buyers or mid sized buyers are still on a hand to mouth approach. Bigger buyers have been considering to cover further out already.

Tom: 20:47

But do we see similar things happening in Whey powder and other products?

Val: 20:51

Well, from the weight perspective, we do see availability from the EU for liquid Whey concentrate. But that conversation would also be does the producer choose to produce sweet Whey powder simply because it's just one product and done, or do they continue trying to produce WPC 35 80 and then have to deal with the permits and the lactose? I think this is not yes no answer simply because some of them just have that infrastructure to produce WPC despite falling prices. And we do hear from Bo that the demand is slowly coming back. So in terms of streetway powder, we do think that as it is correlated to the skimmed, it does trade in similar fashion. But in the last few months we'd also realized that it's always a more muted response coming from the way. So we've seen skim prices come off 500 $600, but for way it's been held relatively stable. But the next question is when and when will it bottom up? So it's fairly similar. If you notice that Tay isn't on today's podcast, that is because got some announcements to make. Tay has been posted to Pacific Dairy Ingredients in Shanghai, so he's starting his new journey in our sister company PDI, officially the 1 May, but he's already shuttling to and Fro. And so we're very, very excited for Tay. Congratulations. Hopefully with this move we get more insights into this big market of China and we'll be happy to share more information and insights to our listeners on Hogwick Davis Pew. Okay, thanks guys. I think it's been quite a fruitful discussion we've had today. So just to summarize, we started the podcast asking the question where's the bottom? Shall we just go around and everybody just share. Quick summary or where do you think markets would be trading, say, in the next one to two months?

Tom: 23:10

Yeah, I'm pretty optimistic in terms of a price increase. I do believe that that turning point will be reaching rather sooner than later. I think most of the negative news has been priced in. Recession has been priced in, lack of demand. We already discussed that. I don't believe that demand will be dropping much further compared to that 20 30% reduction that we already see. And given the fact that we will be reaching those break even levels from a farm gate price perspective very soon, I do believe that we see that turning point within, let's say, the upcoming four or five weeks.

Charles: 23:44

Yeah. If I had to put my money where my mouth is, I would kind of follow that line of thinking as well. The European and the US. Milk flush is kind of underway. It will continue to be optimal at the moment to produce milk in the Northern Hemisphere. So I would say in the short term, there's definitely possible downside. But in the longer term, if you look at the supply response that will come, it will bring prices higher. So the turning point, if I had to guess, will happen somewhere in the next two months.

Boh: 24:12

Yeah. From my side on the turning point expectations probably, and May June period, I.

Alvin: 24:19

Feel that demand is still quite weak now. Supply is very strong. We are in the middle of flush now, but of course this can go on forever. So my take is that as long as we are not flush, I feel that the farmers will produce as much as possible now before the price drop further. So I think within the next two months, price will correct and most probably will go up from there.

Charles: 24:38

One last thing to keep in mind as well is that we're not the only ones that see or expect that farm good prices will drop. So farmers themselves, they've seen it for the past four or five months, prices dropping five cents a month, let's say in Europe. What do they see in the coming months? They know it's coming next month it will be down by five cents. The next month after that, down by $0.05. So if you are a farmer in, let's say, Europe, you are already planning what your herd size will be, that you're going to phase out some of the older cows, you're going to stop.

Tom: 25:08

Giving excess feed, slaughtering like plus 5% in January.

Charles: 25:12

Yeah, farmers are getting ready for it. What I'm trying to say here is that it's not going to be let's wait and see. In terms of production, it will come. It's just a matter of how optimal the conditions are to produce. Now, during the flush, they will not do it in a massive way, but after the flush, they will do it. When we talk about turning point that's another additional factor. It may come a little bit sooner than later. Whereas actually, when you look at the big picture based on just purely supply and demand, it's maybe meant to come a bit later. So that's something to kind of consider as well. And I think if you are an end user of a dairy product when these warning signs are on the way, it's worth considering that you should reduce risk. This is now no longer the time to just purely focus on hand to mouth, but to come up with a strategy of how to plan your purchasing for second half.

Val: 26:02

But, yeah, I think there you have it, listeners. Keep a pause on the market and just follow the market and buy a little bit entrenches as the market moves along because nobody wants to miss the boat, nobody wants to put all the eggs in one basket and get it either super right or super wrong. And let's discuss your Q three, q four. I mean, there's no need to pounce, but there is certainly some sagely wisdom behind being prepared. I think that's that's key message for our listeners out there.

Charles: 26:41

We do a lot of business in countries where the customers celebrate this holiday, so we want to wish you in advance happy Idol fishery, happy Hari Raya, happy Eat mubarak, wish you have a good festival.

Val: 26:56

That's all we have for today's episode. Thanks very much for listening into Hogreg Dewis View. We hope to bring you more new episodes from the US as well as from China. Right, so stay tuned, everyone. Wishing everybody love and light. This is the Hogwick Davis Budcast team signing off. Over and out. Thanks, guys.