Thursday, August 27, 2015

Inventories Start to Rise

Rising inventories will result in lower prices.  The clearest example currently is crude oil.  The inventories of the commodities used to price milk protein, butterfat, and other solids are increasing.  The most important of these is cheese.  Below are graphs of the recently released data on cheese inventories.  Inventories of both natural cheese and American cheese are up significantly.


In the prior post, data on cheese exports and imports was reviewed.  Exports were down and imports were up.  While cheese exports to Mexico remain very healthy, exports to the next two largest importers, Japan and South Korea, are off significantly.  The focus in prior posts has been primarily on the decrease in exports, but the increase in cheese imports has also been impactful.

Through July 2015, YTD cheese imports are up 30%, or 12,237 metric tons.  The single biggest import increase was cheddar cheese from New Zealand, which for the first seven months of  2015 was up from 372 tons to 3,925 tons.  This was an increase of 3453 metric tons.  Similarly, New Zealand's "other cheeses" import category increased by 3181 tons.  That makes the total imports of cheese from New Zealand in excess of 6634 metric tons.  Clearly, the "majority" of the increased cheese imports are coming from New Zealand.

Converting from Metric tons to pounds, the year to year import growth amounts to 27 million pounds of cheese.  During this time, natural cheese inventories have increased 144 million pounds.  The increase in cheese imports are responsible for 19% of the total inventory increase.  Why are these imports up?  Simply because they can be imported less expensively than if they were sourced domestically.

The decrease in 2015 cheese exports amounts to 61 million pounds (July estimated) or 42% of the increase in inventories.  The combined impact of lower exports and higher imports are responsible for 61% of the increase in cheese inventories during 2015.  The higher cheese inventories, which will result in lower cheese prices and lower Class III milk prices, are coming from international events.  It would appear that unless cheese production is quickly lowered, lower prices are inevitable.

Butter inventories are also showing growth, but not to the extent of cheese.  Very little butter is being exported, but imports are increasing to recored levels.  As mentioned in the prior post, the U.S. is now a net butter importer.


For the first seven months of 2015, imports of butter from New Zealand have increased by 962 metric tons from 202 metric tons to 1164 metric tons.  Butter imports from France increased by 495 metric tons.  These increases are not as dramatic as the increase in cheese inventory and butter prices have a minimal impact on the Class III price, but the upward creep in inventories will continue to be watched.

Dairy is an international business.  There are always some who would like to close the door to exports and imports, but this is usually not a practical solution.  Most all commodities are becoming internationalized and the dairy industry must learn to work within this evolving trend of international competition.  Volatility will increase because more variables can impact milk prices.  Being a low cost producer is paramount to survival.