Sunday, February 7, 2016

Prices Continue Downturn

On February 3, 2016, Class and Component prices for January were announced.  As predicted in prior posts, butter prices fell significantly.  Global prices for butter are still well below U.S. domestic prices so additional declines in butter prices can be expected.  Currently international prices for U.S. butter are $1.70/lb. compared to the $2.18/lb. for U.S. NASS butter prices.  Milk protein prices increased by 33.6%, solely because of the decrease in butter prices.

Class III milk prices were down 5% to $13.72/cwt.  Any improvement to this price will depend on the wholesale price of cheese, which is influenced by domestic inventory levels of cheese.  Domestic inventory levels are in turn largely influenced by cheese exports.  As covered in the prior post, U.S. 2015 exports of cheese are down in all countries except Mexico.


The pie chart showing the breakdown of component values in the Class III price still shows butterfat providing the most value although it is shifting more toward milk protein.  In November butterfat made up 73% of the milk check.  Currently, it makes up 59%.  Expect this trend of falling butterfat prices and escalating milk protein prices to continue.


Other Solids made up only 1%, or $.21/cwt. of milk.  Other solids is priced based on the value of dry whey which has dropped in price with a significant decrease in exports.  The latest data shows that 32% of dry whey is being exported compared to 51% a year ago.

CHEESE

Cheese is the most important parameter in the pricing of Class III milk.  Cheese exports are the most volatile component of cheese demand.  Cheese exports were 5.2% of production in November 2015, the most recent data.  For the year of 2014, exports represented 7.2% of production.

However, production of cheese continues at the normal growth rate without any adjustment for the decrease in exports.


As a result, cheese inventories are growing.  The growth is approximately equal to the decline in exports of cheese.  Clearly, no decrease in production has been made to compensate for the drop in export demand. It is unlikely that cheese exports will rise significantly in the coming months and if production of cheese does not decrease, the inventories will continue to grow.  As the inventories grow, the wholesale cheese price and the Class III price will decline.  Declining cheese exports and continued high production are the biggest factors in the declining Class III milk prices.


BUTTER

Butter has had an unbelievable run.  In September of 2014, butter hit $2.85/lb. and in November 2015 it was valued at $2.80/lb.  The current price of $2.08/lb. is well below these highs, but is still high compared to historical levels and international values.  


While butter inventories are still in line as shown in the chart below, international prices are well below current domestic NASS prices.  Exports of U.S. butter are nil because the domestic price is still well above the international prices.  Imports of butter continue to climb and production of butter in the U.S. remains stagnant.  


Production of butter has remained consistent year-to-year for five years while domestic consumption has increased.  


In order to meet the domestic demand for butter, imports have increased tremendously as shown in the chart below.


Logic says that if these trends continue, domestic butter prices will continue to fall until they reach equilibrium with international prices.  During that time imports will continue to grow.

These trends for butter have little impact on the Class III prices (see a prior post for the math behind this) but will continue to shift the mix of making up the Class III price.  Butterfat will constitute a lower percentage of Class III price and milk protein will make up a larger percentage.

NONFAT DRY MILK

Nonfat dry milk is the basis of the Class IV price.  The Class IV price can also influence the Class I and Class II prices.  Nonfat dry milk is unique in that export volumes are strong and larger than prior years. Unfortunately, prices are not as strong as prior years.  The current price of $.78/lb. is far below the $2.08/lb. of March 2014.


The good news is that with the strong exports, inventories have remained in balance.  Only a change in the international value will change the domestic price of nonfat dry milk.


For a review of how nonfat dry milk influences producer cash flow, see the July 16, 2014 post to this blog.

WHOLE DRY MILK

One interesting growth product for the U.S. is dry whole milk.  Whole dry milk is much more difficult to package than nonfat dry milk.  Whole milk contains fat that can become rancid as the fat molecules accept oxygen from the air.  Whole dry milk is typically packaged in cans or other materials that are good barriers for limiting oxygen transmission and the container is nitrogen flushed to remove oxygen in the container.  China has been a huge buyer for dry whole milk, but this market has decreased.  Nevertheless, the trend for production of dry whole milk continues its growth, which has doubled production over the last nine years.


The production of dry whole milk, while still far below production of nonfat dry milk, is creating another outlet for U.S. dairy products.  This growth will continue to be followed in future posts to this blog.

The next post will provide a summary of the year of 2015.