Monday, February 16, 2015

2014 U.S. Dairy Exports - Another record, but a weak ending

Dairy is a global business and the U.S. is one of the three biggest players in the international dairy market.  Entering the global arena changes the nature of the U.S. dairy industry.  Global events and exchange rates play a big part in the dynamics of the international dairy market.  Because these international factors can bring big changes quickly, it has exaggerated volatility in U.S. dairy prices.

The U.S. has grown dairy exports quite significantly in the last decade and especially in the last five years.  There is no turning back to a U.S. dairy market influenced only by domestic events.  Learning how to compete and flourish in this changing market is the challenge for domestic dairy producers and processors.

Exports in 2014 began with great upward strength.  However, by the end of 2014, the strong USD and other global events made international competition less favorable for the U.S.

Overall in 2014, the U.S. grew dairy export volumes by 2% and dairy export values by 6%.   Most of this growth occurred in the early part of the year.

However, within the individual product categories, there were some major swings.  Cheese exports grew by 17%, butterfat decreased by 21%, and whole milk powder grew by 40%.  Whole milk powder, which has been a very minor category, is starting to gain significance in the U.S. export market.  However, pricing and volume are very volatile.


Individual export items that have a strong bearing on U.S. milk prices are discussed individually below.

CHEESE

Cheese pricing is extremely important, because it does provide the primary basis for Class III milk prices.   (See the April 2009 post to this blog for more detail on this relationship.)  Cheese exports have grown to 7.1% of U.S. cheese production and for the year 2014, amounted to 368,729 MT.  Cheese is the second largest export item by dollar value, only slightly behind NDM/SMP, and is the third largest export item by weight.  The U.S. is the largest cheese exporter in the world.


Most of the cheese export growth occurred in early 2014, and in the last quarter, exports fell below the prior year.  During this time the USD has strengthened and European dairy processors have had to find a new home for cheese previously shipped to Russia.  These factors are weighing on the hedgers and speculators that are active in the CME dairy futures.  The current future prices for cheese are around $1.53/lb. vs. the 2014 average of $2.16/lb., and the January 2014 price of $1.58/lb. 


A further analysis of cheese exports by country show where this cheese is exported.    The exports to Mexico are stable and represent U.S. brands that are recognized in Mexico.  The sales to South Korea and Japan are growing nicely with 44% and 80% increases in 2014.


The lost export sales in 2014 were primarily in some of the Middle East countries.   Those sales have dropped to the level where current volumes are so low that additional drops will have little impact.

As discussed in the prior post, cheese inventories are not above normal levels even with some contraction in exports.

A case could be made that the fears of cheese oversupply are over blown.  If sales growth to the largest customers can continue to grow, the important category of cheese exports may not experience a contraction.

NDM/SMP and Whole Milk Powder

Exports of NDM/SMP grew dramatically in 2013 as the U.S. became the largest exporter for the first time ever.  (See the February 2014 post for a review of this.)   Volume was down 2% for the year with volumes below 2013 for the last half of the year.


Export volumes to Mexico, Central America, and the Caribbean were all up and South America was close to 2013 levels .  Exports were down in the Middle east and China as competition heated up and prices fell.  Current prices at $1.02/lb. are well below the $2.00/lb. levels of early 2014.  Because the majority of NDM/SMP is exported, the domestic price is greatly influenced by the international price.

Exports of Whole Milk Powder experienced huge growth in  2014.  This is a huge market, but the U.S. has not typically participated in this market.  However, in 2014, the U.S. grew this market by 40% became an international player.  If NDM/SMP and whole milk powder exports were combined, the U.S. would show an export growth for 2014.  While whole milk powder has been and still is a very volatile market, it appears that the U.S. is now pursuing this huge market.

BUTTER

Butter exports have fallen and butter imports have grown.  As a result, net exports have taken a huge tumble.  At the end of the year, the U.S. was a net importer of butter.  This has allowed inventories to recover and prices to fall from the record levels in 2014.


Prices are expected to remain relatively high in spite of this turn around in exports and inventories.

Exchange Rates

Exchange rates are driving much of the decrease in export growth in the second half of 2014.  The Euro has fallen to $1.14 currently, a drop of more than 20% from early 2014.  This does give the European dairy exporters a significant price advantage in the International markets.


The same is true for the New Zealand dollar, but not to the extent of the Euro.  The NZD has dropped in value by nearly 10%, half of the impact of the Euro.  Nevertheless, this does hurt U.S. exports.



The strength of the U.S. economy does have a dark side, and that is the impact on exports.  Exports are having a very big impact on exports and U.S. dairy prices.  Exchange rates are now the most influential variable in U.S. dairy prices.

Exports will be followed closely in this blog.