By the Federal Milk Marketing Order formulas, the most important determinant of producer milk pricing is the NASS wholesale cheese price. Cheese inventories are rising as exports fall and imports rise. Rising inventories typically result in lower prices. This dynamic is really the key analytic as to what is driving the Class III milk price.
Below are the month-to-month changes in exports and imports of the commodities used to price milk. Butter is the most dynamic change on a percentage basis. Because butter dynamics were covered in the prior post, butter analytics will not be covered in this post. Cheese exports and imports showed the lowest percent variation, but those statistics are comparing a disappointing month to a prior disappointing month. Cheese exports and imports will be the examined in this post.
Domestic U.S. cheese inventories are growing as shown in the two charts below. If they continue to grow, wholesale cheese prices are bound to fall. Cheese production is up 2.5% and domestic consumption is up 3.0%, so the growth in inventories has no basis in domestic dynamics.
The growth in inventories has everything to do with global dairy dynamics and and their impact on exports and imports. Cheese exports, as shown below are well below the prior two years.
While Mexico has always been the primary market for U.S. cheese exports, the next two largest importers, South Korea and Japan, have found new sources, primarily from New Zealand. Below is a comparison of 2014 and 2015 cheese exports for the U.S. largest customers.
Imports were down slightly in September from the prior month. However, they are still at a record high for the month.
Cheese imports are coming from many countries. The majority of imports are from Europe and more recently, New Zealand. Why are these imports available? Russia is still holding to its embargo of European dairy products so there is an excess in Europe that needs a home. New Zealand was exporting significant amounts of cheese to China. The partial collapse of that market has left New Zealand with excesses it has to deal with.
DRY SWEET WHEY
One other event impacting producer milk prices is the collapse of the dry sweet whey market. Dry sweet whey is the basis for the pricing of "other solids" in the component payment system. Other solids were contributing around $2.50/cwt. to the Class III milk price. In October, the contribution was $.19/cwt.
Dry sweet whey is a co-product of cheese manufacturing. As cheese manufacturing increases, the availability of sweet whey also increases. The sale of dry whey is very dependent on the export market with 43% being exported YTD through September. However, these exports are falling and September exports were approximately half of the mid 2014 export level. Dry sweet whey is an excellent product with a dairy smell and taste. It contains lactose, whey proteins, minerals and vitamins. Production of American cheese is the primary domestic use of sweet whey today, but other uses as an ingredient are constantly being studied. It is impossible to determine when the dry sweet whey market will recover, but for now, the lack of demand and resulting low price is a significant negative impact on the Class III price.
Exchange rates do play a significant roll in making U.S. products competitive in the global market. The excellent recovery of the U.S. economy has a dark side. A strong USD makes U.S. manufactured products more expensive in the global arena. With the potential FED increase in rates in December, the USD may strengthen further. The conversion rates for the USD/Euro are shown in the chart below. While the exchange rates with the Euro has stabilized, the USD is still strong by historical standards.
Looking at the USD/NZD chart below, one is reminded of the 2008/09 swings from $20/cwt. milk prices to $10/cwt. milk prices. In 2008, the NZD was relatively strong and U.S. exports boomed. In 2009, there was a total reversal and milk producer prices dropped to $10/cwt. As we look at the right side of the chart, we see a similar scenario building. In October, the NZD did show some slight strengthening.
U.S. dairy exports/imports and global dairy dynamics are currently the main driver of U.S. producer milk prices. Future posts will continue to follow these international dynamics.