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Hoogwegt Dairy Spew
Hoogwegt Dairy Spew
Episode 15 - Cool, Calm & Collected
Calm Market? Boring Market?
Join us for Episode 15 as we discuss the Cool, Calm & Collected buying behaviour given the calm market and low prices.
In this episode, we discuss the Supply Outlook in EU, US and Oceania and then do a deep dive into the Demand in South East Asia as well as China. Lastly, we also discuss the Contango in the Futures Market.
Learn more about MyHoogwegt Portal and how it can be utilized to increase efficiency for you and your logistics team!
[00:00] Charles: There's no AC in Europe.
[00:01] Tom: There is of course the hotels that.
[00:03] Charles: They don't have any AC at all.
[00:05] Tom: No. There's also AC in Europe. We even have Nike in Europe. We've got Nike.
[00:25] Val: Hello. Hi guys. Welcome to the latest episode of The Hoogwegt Dairy Spew. Today we have friendly faces of Charles Lesmana.
[00:36] Charles: Hey, Val.
[00:37] Val: Tom.
[00:38] Tom: Hey Val.
[00:39] Val: Alvin HIV and Boh yo. So guys, I think it's been a while since we last recorded our last podcast. Quite a bit has happened. So I think today we're just going to do a roundup of the market. Everything the listeners need to know from the supply side to the demand side. Talk a little bit of China and we'll do a roundup of the market what we should be seeing or doing for the weeks to come. So guys, any thoughts, any observations from the supply side house milk production? Let's discuss.
[01:20] Charles: Well well, if we speak to our colleagues in the origin in Europe and in us, especially when it's still the decent time to produce milk at the moment, the topic of late has been the weather. And obviously always when we get to the Q Two season where most of the milk is produced in the northern hemisphere, weather is a big topic. But it seems like indeed in Europe lately there has been a lot more heat stress and that's been discussed as counterproductive for the cows to produce. I think we've seen also this season an earlier flush and a bit shorter flush. All in all, I think without going too much into the details, the production side is struggling on milk collections. We spoke already in the last few months about how we expected farm gate prices to keep coming off leading to worse margins for farmers. It is slowly coming down but overall it's very unclear from here where it goes in terms of farm gate prices. All in all what we can do is just do a forecast of the different regions in Europe. We do expect that milk production in Q Three onwards will not be as.
[02:32] Tom: Good but I think under normal circumstances if commodity prices are moving down you see an immediate reaction from farmers slaughtering cows. But especially in Europe circumstances are not normal because you've got kind of a political agenda that you don't want and because of all those environmental restrictions that you will be having and that you're already having. You don't want to slaughter your cows too much, you don't want to remove too many cows from the system. Next to that, the corporations, they are scared as hell of course that farmers are moving towards their competitors. So I think that $0.40 or, like, low in the 40 euro cents per liter, is kind of a floor floor to my point of view. And farmers definitely will disagree, of course, but $0.40 still is profitable. So I don't see the big argument that milk production should be coming off that fast and that drastically in Europe because of the reduction in farm gate milk prices. I think like weather is a very strong argument. Yes, but from a milk price perspective I still do believe that at can make a decent profit as being a European farmer out of the US.
[03:53] Charles: I think it's quite scattered. But in California production is struggling as well, which is a key export producing region, especially for non fat. For a skimmed milk seems to be flowing. At Midwest that's pretty good, but that's usually mainly used for cheese production and therefore more on the way complex. And then going down south to the Oceania region, things looks to be good early in the season. The grass is growing. I think the main thing there is that most producers are not coming into the season with a lot of stocks. Typically around the June July period where the financial year is closed, you tend to see a lot of stock cleaning exercises. This year doesn't seem to be the case this year. Most of the topic of discussion is more about valorization for the new season. And it seems like now with the challenges that whole milk powder exports are still facing this early in the season, it still looks like skimmed and fats will be prioritized over homo powder.
[04:53] Val: Just wanted to also mention that at the end of the day, whether Oceania decides to valorize more on the whole milk versus the skimmed and fats would also be determined by how China is doing. So maybe we'll spend some time talking about what's happening in China later.
[05:09] Tom: One thing about production I want to emphasize, and it's very early, but of course we all thought that that energy crisis was gone. European natural gas prices moved up with 95% of the last ten trading days, albeit of course from a two year low. But it's definitely something to take a look at and to follow closely. So perhaps the energy crisis isn't completely over yet.
[05:33] Val: What cost it actually the hot weather demand.
[05:36] Boh: Isn't the demand for AC and all?
[05:38] Tom: No, exactly. So energy is under pressure and that's why this is so remarkable that the natural gas prices moved up with 95%. Follow Javier Blas at Twitter. He is the guy covering commodities at Bloomberg and he wrote the most wonderful book, The World for Sale. Please read it. It's all about commodity powerhouses like Glencore, traffic guru, et cetera. Fantastic.
[06:02] Val: Read that's. A book review of the month. Thanks Tom.
[06:05] Tom: Another review. Scary, smart, all about AI. Read it.
[06:09] Val: This installment of a book review with.
[06:11] Tom: Tom Stevens used to have a bookstore.
[06:14] Val: Really? Your father really owned a bookshelf. Oh, fun fact of the day. Actually no, not talking on the supply side. We also have some news that a fire kind of happened in one of the Fishland campina factories in the Netherlands. Anybody has any insights to it?
[06:32] Tom: Yeah, indeed. It's the freeze and campina lochum factory, which is their main factory for production of Skip milk powder, whole milk powder and buttermilk powder. Also Fats coming butter and AMF coming out of Lochum. That is a different plant. Yeah, the fire happened a couple of days ago. We don't know yet what the impact will be. It could have quite a significant impact on European whole milk powder production because recent Campina and Loham especially is one of the bigger ones. Of course, also buttermilk. That's something to closely watch because Loham is one of the bigger buttermilk producers and Fries and Campina obviously one of the bigger customers as well.
[07:12] Val: So we will keep everybody posted should we get more information of this situation. But having said that, I think it's important for listeners to note that the milk is still being produced and there will still be spec capacities in other factories. So it's not like it's just going to be a huge tent in the supply, it's just maybe a rerouting of the liquids to different factories. So, yeah, on to other news on the supply side, it's quite interesting. I think in the recent couple of weeks and months we've noticed more and more suppliers joining the GDT. So well done, GDT. I think we have Valley Milk from the US as well as Solarrec from the EU joining in as suppliers on the GDT. Any thoughts, guys? What are your opinions on this? I think it's really positive and good development.
[08:11] Tom: Yeah, no, definitely. It's like GDT is turning now into a very serious platform and not only the Fonterra platform, but more like a global platform with supply from out of New Zealand, from out of US and from out of Europe. Of course, they partnered up with Ex a couple of months ago or maybe even a year ago. So the question is a bit what's next? And I personally do expect that more and more suppliers will onboard AGT and will offer part of their products at GDT as well.
[08:40] Val: I think just in general, this is really good in terms of price discovery for our customers. It's a good thing on the demand side. Guys, Elvin Bo, what are you guys seeing?
[09:00] Alvin: Personally, I do see a bit of demand coming back. If you compare the demand to the past few months, definitely there's a change of sentiments. There are more anchorage coming, bigger tenders opening and more customers closing. Of course, they are not all accepting the price level now. Now there's quite a big bid and up spread between the suppliers price and the buyers asking price. But if not, what we do see is definitely there's a change on sentiments. It's not as weak as a few months back. Buyers are looking out to see when they can buy next or even if they can cover further out.
[09:36] Val: I think that covering further out is a good indicator that a lot of our buyers or listeners are feeling the same, that maybe now it's the bottom or maybe we are already or nearing the bottom and maybe they should be covering a little bit more for Q Four, even Q One.
[09:53] Boh: From this side of things, I think it's interesting to note that prices, as we all know, hit the peak eight, nine months back. Now it's close to half or just slightly dipping below. This attracted a lot of inquiries. And even though on one hand people are afraid or still waiting on the sidelines for prices to come off further like it has been so the last couple of months, what you see on the other side is a lot of bigger buyers, few prices, are at attractive levels and are asking for Q Four coverage due end of the year. Some even q one. So I think that speaks a lot on their conviction on how the market are moving. Second note also you can see that producers are not so pressured into offering further out anymore when you are asking for longer term prices. Some of them probably add on quite a bit of premium to end of the year, but on the other side, quite a lot are also saying they are not selling far out. Yet again, that provides an additional conviction on how the protein prices are moving forward. Just a crooked example, I think for the high WPC. Let's talk about the WPC 80 onwards. Demand has been strong, driven by the sports nutrition industry. A lot of them who were covering two, three months usually are now asking further out. I think that provides quite strong signal as well. Slight different case if we look at the WPC 80 regular for food, it's more of a stable story and I think we definitely need to talk about the lower WPCs as well. And that's also more in line with probably what Val sees in her markets.
[11:46] Val: Yeah. So on the feet side of things, we do see WPC 35, 34 prices being very muted. Demand isn't very good. Food and mouth disease coming in in Korea with the ASF still not resolved in many countries. Yeah, we do see feet great, like Lectose feet great permits, really struggling to find some form of a stable price. The prices are actually coming off, not dramatically, but it has been coming off for several, several months and it's just not looking like it's going to turn anytime soon. So, yeah, feedside from the Southeast Asia APAC perspective is very weak.
[12:31] Charles: From my perspective, I think the demand, especially in a couple of past couple of months, have been really, really struggling. I think there has been massive oversupply in that sense, coinciding with the period of flush. What's interesting is indeed, like we mentioned just now in the supply update, we don't see a lot of those stocks floating around. So it's quite a question mark where they are. But there's no denying it. The one has been, I think, struggling at these kind of levels. If we look forward about what we expect in, let's say, coming four or five months. I think we're in between two very big topics when we talk about purely milk fundamentals. It just seems that with the supply getting tighter, and if the demand does come back to close to levels of pre COVID, prices should technically trade higher. We see this also in futures markets. There are big premiums for every month deferred, which is basically the market saying in later months the demand should recover from the current period of struggle. But I think if we zoom out a little bit and we look at the macro, there are a lot of challenges. I think many people are quoting recessionary forces as one of the reasons why consumers are not coming back. If we look at some of the data for Southeast Asia as well, and you plot it into a graph, the demand is just still significantly below mean, and it's even not easy to say when it will go back to the mean or the average, let's say, of the last five years. With that kind of input, it's difficult to say where milk prices should be. I think we're in really new times also because of a change in destocking and restocking cycles. Interest rates are high, and probably the trend at the moment is that it will remain high, even though the Feds took a pause in June. But it just doesn't make sense, I think, for end users to carry too much stock. So you start to see shorter restocking cycles and a lot more demand for spot months. So it's difficult to make a conclusion out of it, but everything will really, really depend on how the demand will look like after really combining the two, let's say the milk fundamentals, the factors in that, and the macro factors as well.
[15:04] Val: So I think we have quite an interesting mix of sentiments. On one side, Elvin and myself, we do see a little bit more inquiries, a bit more further out, but on the other hand, there's still a mix back of customers who would still be only looking at buying prompt. And also worth mentioning, some of them are citing the fact that logistics is actually pretty good. There is no real crunch in terms of execution. Suppliers are able to ship it up promptly, produce promptly containers. Rates are pretty good. So that's also something that buyers are holding onto. It saying that okay, if I need to cover something, like urgently, I can I can get it in like five, six weeks into Southeast Asia. And that gives them some comfort in knowing that it's not that bad, it's not that bleak, as compared to during that logistics crunch, during the pandemic. So that's also another argument, and I.
[16:01] Tom: Think it's a very good argument for me. There are two main topics. First of all, it's the destocking cycle. Completely agree with Charles and also with Uvail. There is no reason anymore to hold safety stocks for more than, let's say, three months. Supply chain issues are not there anymore. So supply chain is perfectly fine and interest rate is very high. And secondly, of course, everyone has been watching China and that big reopening story and the big reopening story that never, ever happened. And the big question is, what will China be doing? And you see the spillover effects in Southeast Asia. The Chinese international flights recovery is only at 20% compared to pre COVID. And that obviously has a big impact on markets in Southeast Asia and on demand in Southeast Asia. And if you combine it then with a very healthy or maybe a little bit too healthy local milk production in China, it is explaining why demand, especially here in the region in Southeast Asia, has been very, very poor compared to the rest of the world in the last couple of months. The question looking forward is yes, we do agree that supply will be limited and will be more limited than what we have been seeing in the last couple of months. Europe is a very clear story. US won't be outperforming. New Zealand is very weather related and should be pretty easy, of course, to beat last year's peak because of the fact that last year's peak was very poor. So from that perspective, yes, we do see kind of a bottom in the market.
[17:33] Charles: What's worth watching as well is that you're starting to see some also spillover effects on developed markets, consumer markets. So cheese consumption is, I think, starting to plateau a little bit. You also see a little bit more pressure on retail. That makes an impact because I think in previous additions when we discussed, let's say demand, we were mainly talking about exports, demand to Southeast Asia, which has been struggling. But I think in consumer markets, let's say in the US. In Europe, the demand was still pretty healthy. But now I think the macroeconomic situation have probably affected a little bit of those domestic markets and it's kind of trickling down into, let's say overall it puts more pressure on what happens to the milk. But again, like we mentioned many times, we do expect less milk in the second half. So. Yeah. Agree with Tom. I think the downside is very limited. The question from here is how much upside will there be?
[18:45] Val: Do you know that we have a My Hogreg customer portal? Basically, this is a digital communication portal which 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. And on top of that, there is also a monthly publication called the Monthly Market Move, the Vlog, where we share valuable insights. So in order to access this, please contact your export managers and we can log you into this portal. Voila. So Charles, how about China? I mean, we can't quite conclude demand discussion without addressing the panda. So what are you seeing in the, in the markets over there and what's happening with the demand?
[19:39] Charles: Yeah, I think the the key thing about China, as has been in a couple of previous couple of months as well, is a further delay in the recovery. I think. I remember when we were in Q One and we heard about the borders reopening, everybody was talking about, okay, q Two is that period when the Chinese consumers will start going out consuming dairy products as well, amongst other things. We'll start to see travels happen, as Tom mentioned, that's not really coming at the levels that we expected. So everybody in Q Two was talking about, okay, it will happen in Q Three. We are pretty much in Q Three now, I think, and I just don't see it in the short term. The interesting thing is, despite the imported stocks being not so high, the impact of the local production and because of the high local production, there have been a lot of reformulations going on as well with end users. It's part of the government's initiative for the medium and long run to keep Chinese self sufficiency at a high level. We see a lot less need at the moment for imports. So in the short term, it's difficult to say that in Q Three we will see spikes in demand. I think if anything, it's more possible to have it in Q Four, but that kind of also coincides with the new Oceania season, which is a continent that China is relying heavily on. Of course, also another big trend that we see is that maybe in the last two, three years, with less babies being born in China, you see the infant segment being quite a struggle there. And that affects a couple of products that are typically used in deformulation, so WPCs, but also affects general proteins, skimmed base powders, homo powder. Yeah. I think it will be a question for the next few years, how big of an import player will China be? No doubt will be very big, but I don't know if we will see the days where China imported 800,000 tons homo powder in a year. Given the strength of local production and the consolidation that's happening, the bigger players are all acquiring the small farms who struggle with the margins, who struggle with managing the farms. You will tend to see, I think, in future years, higher yields as well. So big question mark. But to your question on the demand in the short term, I think it will remain a bit subdued.
[22:07] Tom: And if you consider that local demand for milk is growing with approximately 5% per year, but local production has been growing with, let's say seven, eight, 9% in the most recent months. So that is emphasizing once more why the demand for import products is pretty limited. And until that 5% will be a stable number in the upcoming years, we need to see a change in growth in milk production in China in order to see more import.
[22:38] Charles: To my point of view, one more interesting thing as well is that next year, the FTA Free Trade Agreement duties in China will change. So at the moment, the Chinese importers are paying 10% for Oceania origin product. Next year onwards, it will be zero. So I think we expect to see a lot of trade flow change starting from Gen 2024 arrival product. I think not so much on home milk, because that traditionally has always been a New Zealand product. But I think on the skimmer powder, for example, I think you can definitely imagine Oceania schema powder taking more market share than European or US product. The question is then, okay, products that traditionally went into China, out of Europe and US, where do they go now? So I think we expect to see probably more competition in Southeast Asia, also in Middle East. Yeah, it's interesting, right, because then that creates really new relationships, new trading lines and stuff.
[23:45] Tom: Is the contango in the futures market, can that be justified while demand still is poor? And I think that's a good discussion to be having. Happy to hearing your opinions about that.
[23:57] Alvin: So while I do not deny that demand is actually quite bad now, but if you compare it to the past few months, I think it's better. And honestly, I don't think we need the demand to have a full rebound for the price to increase, because fundamentals is about the balance between demand and supply.
[24:19] Charles: Right.
[24:19] Alvin: And looking at the supply situation, like what we discussed earlier, supply is indeed not so good. Milk production is going down and foresee further drop in the coming months. And we do see demand creeping back up slowly. So due to this, yes, I can see the price going up. Probably don't have to be now, but in the next few weeks, next few months, there's a higher chance that it will go up and we don't really need a full rebound of demand. And to answer to Tom's question on the contango, I think this reason kind of justify the contango in the market, where we see the price in the later months higher than the current months.
[25:02] Charles: Yeah, I think for me it's the two main things to watch is just the timing and the upside. So I think kind of tend to agree also on the balance of supply and demand, that the market should recover at some point. But I think we've discussed the demand a little bit at length just now. The main thing is just when it will happen and how much upside there is. And it's very, very dependent. In the end, I think, on farm margins, if we do expect that farm gate prices come off further, you just simply need more of a supply response. I think what we're seeing now is farmers, for example, not giving supplementary feed not replenishing their cowherds. But I don't think we are seeing actively, at least at this moment in time, high slaughter rates. So I think if we need to see structurally higher prices, you need to see either more cows being slaughtered or you need to see less product going into the commodity sector. My feeling is that it will happen, the general consensus that it should happen as we trend towards the end of the year and maybe even the start of next year, then the next thing is when does that market kind of if everybody is thinking the same, then the timing will be important. The sentiment is needed as well to drive the market higher. It's hard to say when it is because demand projections are really all over the place. And then the question is, on the upside, are consumers still willing to pay for milk when prices go higher? And I think that demand elasticity at the higher levels have changed a little bit. So something to ponder about.
[26:52] Val: Everybody'S conclusions are kind of in the middle, on the fence really from whatever everybody has said. Everybody's kind of saying that, okay, it might be the bottom, but whether or not it goes further up really fast, nobody really knows. And there's just so many factors affecting the outcome and I think that really echoes the sentiments of the market as well. I don't think anybody has a very clear view of where the market should be trading and how fast should prices be moving up. And yeah, I think that by itself, our reaction and our comments by itself would already send a signal to a lot of our listeners that better to stay closer to the market because there are so many factors affecting the supply side as well as the demand side. When you think that the supply is going to drop a lot, we have another comment that, hey, maybe not because at 40 euro cents, prices are still pretty good for the farmers. And then coupled with a lot of other factors like environmental factors, interest rates, on whether or not buyers are able to buy forward that much and to stock. Does it make sense? Does it make sense in terms of putting so much cash on the table just to ensure that you have cheaper products in your warehouse but then incurring the warehousing cost and the fact that you still have many other ingredients to source for your end products. So these are all interesting arguments that I'm sure are part of all our listeners and buyers weekly, if not daily, conversations with the factory. So yeah, I think our conclusion is not much of a conclusion. What we can really tell you is that you should be reaching out and we can discuss on, say, your buying plans and we can strategize together what would be the best solution for your particular needs.
[28:55] Charles: Well, even if markets we think will go sideways, it doesn't move in a straight line, so it will go up and down. There will be volatility, I think, to use a technical term, it might be range bound. And that range can be anywhere from $400 to $500. Not also, counting FX changes, which has been volatile, we've seen the Euro dollar go from anywhere between 106 to 112 just in the last probably six months. Yeah, if we time it right. Even within that range, you can pick.
[29:29] Tom: Up good value and there's still some obvious trades to catch. Like if you take a look at, for example, buttermilk trading at a discount of, let's say, anywhere between 400 and $700 compared to skin milk powder. From historical perspective, that doesn't make any sense. And that will move back towards, let's say, a discount of 100 and $5200. So I think for me that's an obvious one. One of a well respected buyer summarized it perfectly yesterday and he said, the market is boring and we like it. For us, the market is boring and we don't like it, of course, as being traders, but I can imagine that for customers. Yes, finally a bit of a boring market, which is not that bad, but definitely do agree, market never will remain boring. You will have that vein spout and good luck and catch the nice levels, the nice entry levels.
[30:21] Val: So with that, we conclude the latest episode of Hoogwegt Dairy Spew. Thank you guys for gracing the occasion. Once again. Stay tuned for the next episode and if you have any questions, contributions, or if you would like to be a guest for a podcast, let us know. You know where to find us. So this is Hoogwegt team APAC. Over and out. Thanks, guys.
[30:44] Tom: Thank you. Bye.