There’s milk everywhere: more milk in the U.S., Europe and New Zealand than a year ago, soft Class IV, and Class III futures that could slip into the $13s once you plug in today’s spot cheese and whey.

With a long milk wave crashing over the dairy industry, will farmers start culling cows and leaving stalls empty?

Inside the episode, the team churns through:

• Why strong balance sheets, paid-down debt and high cow values could delay a production pullback


• How lower feed costs shift the breakeven – but can’t fully offset falling milk checks


• Why Western and cheese-focused regions like the Pacific Northwest, California and Idaho may struggle first


• How WPC 80, WPI and clear whey proteins have become the lone bulls – and why capacity constraints limit the industry’s response


• Why there are limits to what customers can pay for whey, and where substitution is already happening

It’s a barn full of bears on butter, cheese and fluid milk, but the protein complex is still flexing. The question is how long that can last?

Tune in to The Milk Check episode 88: One bull in a barn full of bears to hear how our traders are navigating a market that’s bearish on volume but still bullish on protein.

Got questions?

We’d love to hear them. Submit below, and we might answer it on the show.

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Ted Jacoby III:

Welcome, everybody, to The Milk Check.

It is December 5th. We’re gonna talk about markets today. And rather than boring you and having the same conversation we had three weeks ago, everything is still bearish. There’s milk everywhere. There’s milk all over the U.S.

There’s milk all over Europe. There’s milk all over New Zealand. There’s a whole bunch more milk this year than last year. Things are long. It’s very likely things are gonna get longer before they get shorter.

Today we have some of our usual suspects. My brother Gus has joined us today.

We’ve got Josh White, we’ve got Joe Maixner, we’ve got Diego Carvallo. And, of course, myself. Looking forward to a great conversation.

So, rather than discussing how bearish we can be on these markets, my question, and I’m gonna start by throwing this question at my brother, Gus, is Gus, how long do you think it’s gonna take for dairy farmers to start culling cows and for this milk [00:01:00 ] production to slow down?

Gus Jacoby:

I feel like milk price and farm economics are completely contingent on that and how bad those farm economics get with respect to the milk price. Class III is still relatively high. Obviously, Class IV is pretty poor right now. The way I see it, dairymen, at this moment in time, still have fairly strong balance sheets. So, the recent low prices haven’t affected ’em all that much. So, I don’t expect their behavior with respect to culling and whatnot to change. But I think in five, six months from now, assuming that the milk price is at or lower, and quite frankly, I think Class III probably does need to get a bit lower, you’ll start to see some of that behavior change. If I had to guess, either as early as early summer, but as late as maybe mid-fall, if farm economics don’t change, we’ll start to see dairymen begin to leave stalls open. I mean, they’re gonna cull a cow, collect that beef revenue that they can grab, and not necessarily buy the expensive heifer.

Ted Jacoby III:

You’re thinking it’s gonna take about six months for dairy farmers [00:02:00 ] to get to the point where they feel like they need to increase the amount of cows they’re selling in order to meet their cashflow needs?

Gus Jacoby:

That’s my best guess. And again, that can be either expedited or slowed down depending on where the milk price goes.

Ted Jacoby III:

Corn prices have really come down this year. Do you think the lower feed prices have lowered where that break even point is, or how low we need to go in milk price in order to really send those signals in a strong way?

Gus Jacoby:

Certainly, feed prices being lower are gonna be helpful to the farm economic model.

This becomes a milk price discussion. If the cheese price continues to have that downward pressure and gets low enough, those feed prices won’t be low enough. It’s always related to their inputs.

And certainly, cheap feed helps their cause to extend growth in the milk production model.

Ted Jacoby III:

Right now, on December 5th, the Class III prices for the first quarter are right around, let’s call it $15.50, but if you use today’s cheese price on the spot market at the CME in today’s whey price, you’re probably looking at something closer to $14, 14 and a quarter.

[00:03:00 ] Is that low enough or do we need to go lower?

Gus Jacoby:

It’s low enough. But not low to expedite anything. Maybe that takes us into the late summer, and remember, it depends on where we’re talking here in the country.

Milk production costs are different depending on where you exist in the country. And also payouts are a lot different in a lot of places, depending on where you exist in the country. So, some regions might struggle sooner than later.

Ted Jacoby III:

Which regions do you think are gonna struggle first?

Gus Jacoby: The West, Pacific Northwest, I think California, areas like Idaho that are strongly cheese based. If you’re paying on a Class III price and it stabilizes, which I don’t anticipate here, then perhaps some of those regions might hold on longer. My guess is predicated on the forecast of Class III going a bit lower.

Ted Jacoby III:

I guess I’d have to agree with that ’cause I don’t think $14 a hundredweight is enough. Because we’re still in front of Christmas, and I think the market’s probably gonna get worse before it gets better. My hunch is we’re gonna see $13 milk this year. We’re gonna see it in Class IV, and we may be already [00:04:00 ] seeing it in Class IV as soon as December.

I think we’re gonna see a 13 handle in Class III, probably most of the first quarter.

Gus Jacoby:

If you’ve got a Class III at 13, and Class IV holds as low as it is, which I would expect certainly in the first half of the year, and then you have your standard freight and other deducts in those milk checks, dairymen are now getting to an area that is very adverse.

Ted Jacoby III:

Even though we’re talking about really low prices, I think there’s a lot of dairy farmers out there that are in a pretty healthy place.

Gus Jacoby:

I would agree.

Ted Jacoby III:

They’re healthy in two ways. One, I think that many of them have been able to take the last two years and really pay down their debt.

And so, they’re in a really good spot financially, just on the balance sheet alone. But the second thing is those cows, they’re worth twice what they were worth three years ago. And so, not only have they paid down their debt, but if they need to borrow more, they’ve got more collateral to borrow against because those cows are usually the collateral for the banks when the banks lend dairy farmers money.

It’s [00:05:00 ] usually the cows and the land. My hunch is that this may go on longer than we expect because of how healthy dairy farmers are financially today. Not saying they’ll be healthy in four or five months, but they’re healthy today. And because of how much bankers are probably willing to lend them based on those balance sheets.

Gus Jacoby:

I agree that the balance sheets are strong at the moment, even after a couple tough months. But I would also add, that that can change fairly quickly if the milk price gets low enough. And it’s certainly a ratio of farm economics over a certain period of time and milk price.

If it gets low enough and makes those farm economics adverse enough, it can expedite the issue, which is a plausible scenario right now.

Ted Jacoby III:

Mm-hmm. I would agree with that. I think the hardest thing, especially when you have a falling market like we do right now, is to try and figure out exactly where the bottom is.

About a month ago, the bottom was about a $1.40. Well, guess what? Cheese price is already below a $1.40 Now, we’re hearing it’s gonna be [00:06:00 ] somewhere in the $1.20s. What I’m scared is we’re gonna get to the $1.20s, and somebody’s gonna start talking about maybe we need to go into the teens.

I don’t know if we’re gonna go that low, but we’re definitely in that scenario right now, where you have a market that’s falling and nobody has a really good feel for where that bottom is.

Gus Jacoby:

I agree. Cheese and butter right now, their outlook over the next six to eight months does not look good.

Ted Jacoby III:

Yeah.

You mentioned butter. Joe, I’ll ask you: we’re below a $1.50 in butter. Butter feels like maybe it’s caught a temporary