Tuesday, January 12, 2016

Exports down - Imports up

The first chart below shows the change in dairy exports November vs. October 2015.  The only positive number is a 36.9% increase in butter exports.  Unfortunately, the base is so small that the 36.9% is very small volume.

The second chart shows increases in dairy imports for all four of the commodities underlying U.S. producer milk prices.  As will be shown in this post, the U.S. is becoming a net importer of dairy commodities.  Low international prices create opportunities for dairy processors and wholesalers to buy their needs from sources outside the U.S.

Globally, there is more supply than demand for dairy products, and the strong USD makes U.S. dairy products more expensive compared to other dairy products available (more details on this below).

As covered in the prior post, cheese inventories are increasing because exports are falling short of prior levels.  The three charts below show the declining cheese exports and the increasing cheese imports.  Together, they are bringing net cheese exports to near "0".  If cheese producers continue producing at current rates, the inventories will continue to grow.

The Class III price is closely linked to the price NASS price of wholesale cheese.  The price of cheese largely determines the price producers get for their milk. Therefore, cheese supply and demand and international cheese pricing should be followed closely, especially if one is hedging forward milk prices.  The natural and American cheese inventories were covered in the prior post, and showed a concerning build in inventory levels.

Butter exports and imports show a similar picture.  Butter exports are near "0", and imports continue to grow.  The U.S. has been a net butter importer since the first quarter of 2015.  The global price of butter is nearly half the price of U.S. butter.  So of course, there are no buyers for U.S. butter at domestic prices.  When butter is needed to meet domestic demand, it is imported at bargain prices.

Nonfat dry milk and dry whey (the other two dairy commodities that influence producer milk prices) are largely export items, and their prices follow the international prices.  Inventories are not out of line.  Nonfat dry milk exports are not off terribly from prior years.  Dry whey is off, but inventories are stable.  For those reasons, this post will remain focused on cheese, butter, and exchange rates.

Exports of cheese to Mexico are up YTD, but cheese exports are down for all other major countries.  It makes sense because Mexico is geographically close to the U.S., so freight is low.  Also, branded products known in the U.S. are known and favored by consumers in Mexico .    Sales to Japan and South Korea have dropped significantly because these countries are close to other major suppliers like New Zealand.  Exchange rates, covered below, also have a major impact.

Cheese is being imported from many countries,  but the 2015 increases come primarily from Italy, New Zealand, and Lithuania.  As long as there are excesses in these countries and prices are low, they will find their way to U.S. cheese processors.  Specialty cheeses from France are common in the U.S., but imports are unchanged from prior years. 

As the demand for butter in the U.S. is increasing, that demand is being filled with imported product.  The chart below shows the biggest import partners; Ireland, Mexico, New Zealand, France, Australia, and Canada.  Imports from all are up significantly.  As long as cheaper butter is available from other countries, it will be used to satisfy domestic U.S. demand.  It is unlikely that additional churning capacity will be built to meet domestic demand as there is no ROI for new facility investment.


When the USD is strong, U.S. produced products are more expensive compared to products from countries with weak currencies.  The charts below show the USD compared to the Euro and the New Zealand dollar.  Europe and New Zealand are two of the major dairy exporting regions.  As can be seen, there is no current trend showing any reversal of these exchange rates.  For that reason, any major increase in exports is unlikely.

Mexico and Canada are the geographically closest import/export partners.  Mexico has always been the largest importer of U.S. dairy products.  In both Mexico and Canada, product from the U.S. has become about 30% more expensive due to the strengthening USD.

There is no reason to expect any near term change in dairy exports.  As mentioned in the prior post, in order to keep U.S. cheese inventories in line, cheese production must be reduced.  Changes to these concerning current conditions will be followed in this blog.

Wednesday, January 6, 2016

All Dairy Commodity Prices Drop

On December 30, Class and Component prices were announced for December 2015.  This report covers the four week period ending December 26, 2015.  The remaining days of December will be included in January 2016 data.

The commodities behind the producer prices all fell.  This includes cheese, butter, nonfat dry milk, and dry whey.  In the Chart below, there is one item that shows as positive, milk protein.  The price of milk protein was up only because butter prices fell more than cheese prices.  For a more in depth analysis of this complex relationship, see the November 8, 2015 post to this blog.

Cheese prices are the most important factor in Class III milk prices.  (Read the August 23, 2009 post to see why.)  Cheese is primarily a domestically consumed product, however, the reduced export volumes are influencing domestic inventories and prices are falling accordingly.  Below are charts of  natural and American cheese inventories as of the end of November.   The inventory levels are obviously bloated.  Domestic consumption is normal, but because exports of cheese are down, inventories are up.

In spite of a reduced export demand, cheese production has continued at levels supporting higher export demand.  A reduction in cheese production is the only way to bring supply and demand back in balance and deplete these high inventories.  If exports increased to 2014 levels, it would prevent a further increase in inventories, but only a reduction in cheese production will allow these excess inventories to return to normal.  Because it is unlikely that cheese exports will quickly resume to higher export levels, additional pressure on reduced production is needed.

Butter and butterfat prices are finally beginning to fall.  Butter is down 8.2% to $2.57/lb. and butterfat is down 8.7% to $2.91/lb.  These are still very high prices compared to historical prices.

The current price of butter is still well above the international price for butter and will probably continue to decline in the coming months.

Butter production continues at levels below prior years and this is keeping inventories stable and U.S. butter prices at high levels.

Dry whey prices drive the price for other solids.  The December price for dry whey is $23/lb., the lowest price in five years.  By the time the whey is dried, the cost near equals the selling price.  Other Solids are now worth $.035/lb., down from $.50/lb. in 2014.  Because other solids make up nearly 50% of the solids in milk, this is a big factor weighing on the Class III price.  Dry whey is primarily an export product and as a result, is priced based on international values.  No change is expected in 2016.

Nonfat dry milk is the basis of Class IV pricing.  When the Class IV price is higher than the Class III price, it is the basis for Class I pricing.  Currently, Class IV is more valuable than Class III.  (See the July 16, 2014 post to this blog for more details on this relationship.)

What does this mean?  For those paid on the advanced system (mostly Class I milk), it is a direct advantage.   For those paid on the component system, the higher Class I and Class IV pricing will come into play with a higher "uniform" price (an average of the four classes) and it's benefit will come from a larger producer price differential.

There is one other revenue stream for the four Federal Orders in the middle of the U.S. (Upper Midwest, Mideast, Central, and Southwest).  There is a premium paid for a somatic cell count under 350,000 cells per milliliter.  The somatic cell count adjustment is based on the price of cheese. The price of cheese in December was $1.57/lb., down slightly from the prior month and was the second lowest price in the last two years.

When data is complete for 2015, a special "Review of 2015" post will be made to this blog.