February data on dairy imports and exports was recently released. While there is lots of discussion on dairy exports available from different news sources, there is not much discussion on dairy imports. Dairy imports are really the changing factor in demand for U.S. produced dairy product. Exports are still down, but the currently developing news is imports. When commodities like cheese and butter are imported, it reduces the internal demand for U.S. produced products.
Imports of dairy commodities have grown tremendously over the last year as dairy processors are taking advantage of lower priced dairy products available on the international market. The three charts below show the increase in dairy imports of cheese, butter, and NDM/SMP. These imports were up tremendously in 2015 and are continuing to grow in 2016.
Where are these imports coming from? A quick review of the three charts below identifies the changing source of imported cheese, butter and NDM/SMP. It is New Zealand. Cheese imports from New Zealand are up nearly 6 times the level of 2015 for the same time period. Butter imports from New Zealand are show a similar trend, doubling in 2016 compared to 2015. NDM imports are not up significantly, but they are up, and the source in New Zealand.
New Zealand is a major exporter of dairy products. They have approximately half of the number of lactating dairy cows as the U.S., however, as much as 95% of New Zealand's dairy products are exported. New Zealand is the world's largest dairy exporter. As well as increasing imports into the U.S., New Zealand has also taken export customers from the U.S., reducing U.S. dairy exports. While there are other major dairy exporters mostly in the EU, New Zealand is the primary exporter to the U.S. New Zealand has been hit with a huge reduction in sales of dairy products to China. The lost volume is being exported to other customers at significantly reduced prices. As a result, most New Zealand producers are losing money.
Exchange rates are also favoring New Zealand. From 2014 to the present, the value of the NZD has dropped nearly 25% vs. the USD. When measured in USDs, that has made New Zealand dairy products 25% less costly. This has created a strong incentive to buy New Zealand dairy products.
The U.S. has kept exports of NDM/SMP at high levels, but with significantly reduced prices. In U.S. has always produced NDM, but the global standard is SMP. The only difference is that SMP must have a proven protein content of at least 34%. The U.S. has responded to this with an increase of 20% YTD in SMP production and a 10% decrease in NDM.
Cheese prices are the basis for the Class III milk price. As discussed in the previous blog post, cheese inventories are high and the high inventories are depressing the domestic price of cheese. The biggest factor in this increase is the change in exports and imports of cheese. Below are three charts that show cheese exports, cheese imports, and the resulting cheese net exports. They clearly show that the biggest culprit impacting U.S. cheese inventories is the increase in cheese imports. Cheese net exports are now at a six year low. Domestic production of cheese has not reacted to this change and as a result, the inventories are building.
It will take months and perhaps the entire year of 2016 before cheese inventories are brought in line. Until the inventories are reduced, cheese prices and Class III milk prices will not improve.
This blog will continue to follow this disturbing trend and other changes as they develop.