Sunday, May 10, 2015

Exports Increase Significantly - But So Do Imports

February exports showed nice increases as covered in the April 12, 2015 post to this blog.  March exports were even stronger.  Interestingly, in March dairy imports were also up significantly for most of the dairy products tracked in this blog.

The export increases in nonfat dry milk, dry whey, and cheese were very strong.  Butter exports remained flat, as there is no inventory available for export.  (See the May 3, 2015 post to this blog.)

However, imports of cheese, butter and nonfat dry milk were also up substantially.  In the case of butter, the low exports and large imports made net butter exports negative.  In-other-words, the U.S. is now a butter importer.

In the commentary below, exports and then imports are examined in more detail.


Cheese exports, which were very strong in March, are key to keeping cheese inventories in line, and thereby keeping cheese and Class III milk prices high.  Exports of cheese to the U.S.'s second largest customer, South Korea, increased dramatically in March, bringing March cheese exports to the second highest level ever.  Mexico remained that most significant market for U.S. cheese.

Nonfat dry milk exports were a record high for March.  Prices have fallen in the international markets, but export volume appears to be holding and increasing.  The increase in nonfat dry milk exports went mainly to Mexico.

Butter exports were almost nil in January, February, and March of 2015.  As mentioned in the May 3 post to this blog, butter inventories are so low, that there is essentially no available butter to export.  This has kept the price of domestic butter and butterfat at reasonably high levels.

Dry whey exports continue to increase, but are still low compared to prior years.  Dry whey is largely an export product and the fall in exports have hurt domestic prices.  Dry whey is the basis for pricing "other solids" in the milk component payment system.

In terms of overall U.S. dairy exports, Mexico holds a strong first place.  The ties between the U.S. and Mexican dairy businesses are very strong.  As an example, the first national U.S. dairy company was Borden, which was started about 150 years ago by Gail Borden.  In 2009, the Borden milk business was acquired by Lala, the large Mexican dairy conglomerate.   

Mexico and the U.S. share a long border and Mexico, with a population in excess of one hundred million people, is a huge market.  The North American free trade agreements have largely eliminated trade barriers for dairy products between the U.S. and Mexico.   Mexican dairy operators and dairy consultants often attend U.S. schools and conferences and U.S. dairy consultants are frequently hired to assist Mexican dairymen in becoming more productive.    

Mexican consumers want dairy products and can increasingly afford them.  Commercialization of the Mexican dairy industry is underway, but has a long way to go to meet the size and economic efficiency of U.S. dairies and processors.

For these reasons, export growth of dairy products to Mexico will continue to grow and are less dependent on international affairs than exports to most other countries. 


When international circumstances allow exports to increase, typically, the same circumstances will cause imports to decrease.  In March, this was not the case.   The charts below, show the trend of imports for cheese, nonfat dry milk, and butter.  All are at record highs for the month.  This may be just a transitional coincidence, and if so, it will play out quickly.  Future posts to this blog will follow this unusual trend.

Cheese imports typically rise at year end, primarily composed of speciality cheeses for year end holidays.  The record imports that have occurred so far in 2015 are unusual and have reduced the cheese trade balance achieved by the excellent increase in cheese exports.  For the first three months of 2015, while cheese exports hit a monthly record (see chart above), net cheese exports (exports net of imports) have lagged significantly behind 2014.

Nonfat dry milk imports grew to a record high in March.  The increase in both exports and imports to record highs is not rational, and will continued to be followed in this blog.

As reported in the May 3, 2015 post, butter inventories remain very tight.  Imports of 4000 metric tons are very unusual.  This imbalance has made the U.S. a net importer of butter.  The availability of butterfat for butter churning has a lot to do with the availability of butterfat from nonfat dry milk production.  With increased nonfat dry milk exports, increased U.S. butter churning may reverse the need for imports.


When February export numbers were released, the April 12 post to this blog was entitled "February Exports Encouraging."  By comparison, this post could have been entitled "March Exports Very Encouraging."  With the availability of March export data, futures prices of cheese and Class III milk have risen.  The concerning new event is the rise in dairy imports.  Imports will be followed and reviewed in more detail in an upcoming post.

Sunday, May 3, 2015

Milk Prices Slowly Recover

On April 29, 2015, the Class and Component milk prices for April were announced.  The pricing was positive, although the changes were small.  The Class III milk price was up 1.6% on stronger cheese and butter prices.  Dry whey prices, which are very dependent on the international market were down causing a decrease in the value of other solids.

As a result, the portion of the Class III price attributable to Other Solids decreased by 1% with butterfat ticking up by 1%.  Milk protein continues to provide the largest piece of the milk check with a value of $2.56/lb. compared to $1.89/lb. for butter and $.27/lb. for other solids.

The increase in the Class III price and the increases in the value of milk protein and butterfat are positive movements, but in view of the long term trends, the changes are small.  Milk protein is still running well below the long term pricing trend.

The good news is that the concerns about falling exports of cheese causing inventory increases and falling prices are being diminished.  Inventories of cheese are staying in line with historical levels and futures prices for cheese are improving.  Butter inventories continue to be tight with low churning volumes.


Cheese pricing is closely tied to the Class III milk price.  The chart below shows the relationship, which has a 96% correlation, meaning that if you know the price of cheese, you will be 96% accurate in predicting the price of Class III milk.

The large drop in the price of cheese and milk, compared to the 2014 highs, has to do with export concerns.  The USD has been very strong which makes U.S. products more expensive on the international markets compared to other cheese exporting countries.  Currently about 6% to 8% of U.S. produced cheese is exported.  If cheese exports drop suddenly, there could be a U.S. glut of cheese that would reduce prices.  See the prior post to this blog for more details on exports. 

This concern seems to be diminishing as the futures market is now strengthening.  The April NASS price of cheese was $1.61/lb., the highest value in 2015.  The CME futures show cheese increasing to $1.80/lb. by the end of the year.  This would still be well below the $2.35/lb. peak price in 2014.

Inventories of cheese do not appear to developing a significant glut.  The chart below shows the most current data for natural and processed American cheese.


Butter prices remain relatively high at $1.74/lb. reflecting the tight inventory levels shown below.

The low inventory levels are caused by two factors, very high exports in late 2013 and early 2014, and contracted churning of butter.

Butter exports have now fallen to the lowest levels in five years, which has allowed a slight recovery in butter stocks.  However, the biggest factor for the low inventories is the reduced churning levels.

Butter churned in 2014 was .3% percent below 2013 levels.  So far in 2015, the same scenario continues.  California produces one third of the U.S. butter,  largely because of the huge volume of nonfat dry milk produced for export.  Butterfat is the co-product left when making nonfat dry milk.  The majority of this butterfat is churned into butter.  With the exports of nonfat dry milk declining due to world market factors, butter churned in California will likely also decline.  

The CME futures market portrays a similar picture with butter prices remaining around $1.80 through 2016.  Therefore, butterfat will probably continue around the current price of $1.89/lb.


The value of other solids is based on the value of dry sweet whey, which is largely an export item.  Exports have dropped from 70% of production to around 40%.  Needless to say, domestic inventories have grown and prices have dropped.

Dry whey at $.46/lb., is well below all prior year prices.  This will probably continue for some time as exports from other countries are plentiful and lower priced due to exchange rates and adequate supplies.


Class III milk prices are on the rise and are expected to be above $17/cwt. by the fourth quarter of 2015.  This is clearly driven by cheese prices, which are driven primarily by export volumes.  The events behind these movements will be closely followed in forthcoming posts to this blog.