Sunday, November 27, 2016

Election Impact

On the second Tuesday of November, American citizens voted for state and national leaders.  The results were surprising and are well known.  What is the short-term impact on the dairy industry?  There is good and bad.

The impact of the Trans Pacific Partnership agreement (TPP) on the U.S. dairy industry was covered in the October 16 post to this blog.  Recent statements from the President-elect indicate that the TPP will be rejected in its present form.  While there are opposing opinions on the impact of this agreement on the dairy industry, by the analytics reviewed in the October 16 post, the TPP would have increased price volatility and potentially had a negative influence on milk prices.

Exchange rates have been reviewed in many past posts to this blog.  A strong USD always means that U.S. exports will be more expensive on the international markets.  That means that prices for U.S. products must be lower in order to compete.  Below are the three most important charts for USD exchange rates that have a strong influence on dairy prices.  They are shown for the period from November 7, the day before the elections, to November 23.  The first two charts show the USD vs. the Euro and the NZD; as Europe and New Zealand are the largest dairy exporters on the international markets competing with the U.S.  In both cases, the USD has become increasingly strong.  The change is somewhere around 4%.

Mexico is the largest U.S. trading partner for dairy exports.  Mexico is also a major partner for imports of butter.  The change in exchange rates between the USD and the Mexican Peso is around 10%.  The drop in the Peso started as the election ballets were counted.  With the surprising elections returns, there is also the possibility of revisions to NAFTA.  The impact on dairy exports and imports with Mexico is unclear at this time, but a stronger USD and weaker Mexican Peso is not good news for dairy exports.

During this same time span, cheese prices on the CME have fallen about 8%.   While there can be many factors influencing cheese prices, the impact of exchange rates and trade agreements are certainly a factor.  One of two things will happen.

1.  The stronger USD would make export volumes decline, increasing domestic inventories and thereby reducing domestic cheese prices.
2. With the stronger USD, export prices would drop to maintain the volume of exports,  having a similar impact on domestic prices.

Cheese prices are by far the most important factor in calculation of the Class III milk price (see earlier post).

Butter prices have increased slightly during this time span and NDM prices have remained stable.  Butter exports are already almost zero, so the export price or the loss of export volume is not a factor for butter prices.   Butter imports come primarily from Ireland, Mexico, and New Zealand and average around 6% of U.S. butter production.  Except for NAFTA, butter imports are limited by the two tier quota and tariff specifications.  Overall, the impact on butter prices is cloudy.

NDM/SMP is largely exported.  The largest export market by far is Mexico.  The stability of the NDM price is surprising.  NDM prices will continue to be followed in upcoming posts to this blog.

Class and Component prices for November will be published on December 2.  Current data would indicate that the Class III milk price will be well above the prior month.  The next post will review the November Class and Component price announcement.

Sunday, November 13, 2016

Update on U.S. Dairy Exports & Imports

Dairy import and export data is now available for the month of September 2016.  Exports of NDM/SMP remain robust, but at low prices.  Exports of butter remain near zero and exports of cheese remain stable.

Net exports (exports minus imports) of cheese and butter remain low, as international prices remain lower than U.S. prices.   Shown below are the net exports of cheese and butter through September 2016.  In each case, there is no obvious trend and net exports remain very low.  If imports were not limited by the two tier quota and tariff program, net exports volumes would probably be lower prompting lower domestic prices.  The phased elimination of the two tier quota and tariff process is one of the items included in the TPP agreement now before congress.  See the October 16 post to this blog for more details on the TPP.

The most significant export market for cheese and butter is Mexico.  In the case of butter, more is imported from Mexico than exported.   Exports of butter to Mexico have remained relatively stable while exports to most other countries have fallen.  Imports recognize the lower international prices and international availability of butter.

The real activity in exports is in exports of NDM/SMP.   Exports remain robust compared to prior years.  NDM/SMP exports hit a record high for the month of September.   Unlike cheese and butter exports, NDM/SMP exports have not fallen since 2014.   

The largest customer for NDM/SMP is again Mexico.  Nearly 50% of the NDM/SMP exports are destined for Mexico.

How has the export of NDM/SMP remained robust while exports of cheese and butter have languished?  The answer is really pricing.  As shown below, while NDM prices have shown some improvement in 2016, they are still at a very low price compared to historical prices.  U.S. pricing has remained very competitive with the other major exporters, the EU and New Zealand.  The domestic price must reflect the export pricing because 54% of NDM/SMP is exported, unlike cheese and butter.  Further price improvement is forecast in the futures market with NDM/SMP reaching prices close to $1.40/lb. compared to the current price of $.92/lb.

This could impact overall U.S. dairy pricing as discussed in the prior post and covered in detail in an earlier post.  

From 2007 to 2013, production of SMP (which is an export only item) has nearly tripled.  NDM production was up by about 14% during this same time span.  Ten years ago SMP amounted to less than 13% of the total production of NDM/SMP.  In 2013 it was 30% of the total combined production of NDM/SMP.   However, beginning in 2014 to the present, total exports of SMP have declined due to competitive international prices and now are at about 20% of the total NDM/SMP production. Although the mix has shifted, the combined total is clearly growing.

Imports of NDM remain robust, as there is available product on the international market at low prices. A lot is imported from New Zealand where there is oversupply.  Competition from the EU has taken NDM volume from New Zealand  Very little U.S. dairy product product goes to Canada, but a significant amount of NDM comes in.  

What is the difference between NDM and SMP?  It begins with how the standards are set for each product.  The standard for SMP is set in Geneva Switzerland while the USDA/FDA sets the standards for NDM.  The subject is "complicated" and will be covered soon in a separate post to this blog.

The most important item for milk pricing is cheese.  In the next year there does not seem to be any major change in exports in the wind.  This will leave an abundance of cheese available in the U.S., which will keep prices near current levels.   This stable level of cheese pricing is reflected in the CME futures market.  The most dynamic change to dairy exports/imports centers on trade agreements.  The current election returns could influence this.  Passage of the TPP could hurt U.S. exports of cheese and a revision of NAFTA could go either way.  

Sunday, November 6, 2016

Other Solids and Class IV Make Gains - Cheese and Butter Prices Decline

On November 2, Class and Component Prices were announced for the five week month of October 2016. The Class III milk price was a disappointing $14.82/cwt.  While this price is down from the prior four months, it is above the first six month's of 2016.  Overall, there were more down prices than up prices.  As shown below, the major items of cheese and butter, and their formula linked milk components, milk protein and butterfat, were down.  However, NDM and dry whey, the basis for Class IV pricing and "other solids" pricing, were favorable.  The positive numbers will be reviewed first.

The long-term trends shown below illustrate the value uptick of other solids.  The increased price of other solids is up 23% from the prior month to $.14/lb.  Because the price of other solids is determined by the formula below, further increases in the price of dry whey will have a dramatic influence on the value of other solids.

Other Solids Price = (Dry Whey Price-.1991)x1.03

Dry whey is expected to increase in price to $.40/lb. by the end of 2017.  If that occurs, other solids would be valued at $.20/lb. and that would contribute an additional $.37/cwt. to the Class III price. Approximately 41% of dry whey is exported, so the price can be significantly influenced by international events.

The price of nonfat dry milk is used to calculate the price of Class IV milk.  The Class IV price is, in turn,  used to calculate the Class II price, and when the Class IV price is above the Class III price, the Class IV price is used to calculate the Class I price.  Therefore, the price of NDM can significantly impact the overall "uniform" milk price.  However, for now the Class IV price is well below the Class III price.  This could change as explained below.

Like Dry Whey, NDM/SMP is a major export item.  To date in 2016, 54% of NDM/SMP has been exported.  The U.S. domestic price is very dependent on the international markets and prices. Currently, the global price for SMP is up approximately 30% from the May 2016 lows.  However, the current price is still 50% below the 2014 highs.   Significant increases are expected in 2017,  which could increase NDM prices by approximately 35%.  More will be covered on this in the next post to this blog, which will cover imports, exports, and global conditions.

Cheese prices really control the Class III price and in turn control the uniform milk price (see earlier post).  Cheese prices in October were $1.58/lb., down 9.6% from the prior month.  This is the primary reason for the drop in the Class III price to $14.82/cwt.  The price of cheese is expected to recover to the September price levels and remain in that area of $1.75/lb. for all of 2017.

Cheese inventories remain high, up more than 20% from 2014 levels.  This increase is far above increases in domestic per capita consumption.  High inventories are holding prices down.

While domestic consumption of cheese has continued to increase demand, exports have lagged reducing demand.  In August, cheese production did drop, but with the continued low exports (and increased imports) high inventory levels are likely to remain.  The next post to this blog will cover exports and imports when more current information is available.

Little change in the cheese markets is expected in the near term.   Exports remain week, imports continue to grow, and production continues to outstrip demand.  If the TPP is approved (see prior post), imports could surge resulting in additional pressure on cheese prices.

Butter is also seeing price pressure as inventories are well above year ago levels.

Butter prices have fallen below $2/lb.  The October NASS price was $1.86/lb.  However, this price is still well above the international price of butter.  Therefore, exports are near zero and imports are limited only by the two tier tariff and quotes program.  The TPP, if implemented, could really upset this market balance (see prior post).

Churning in August fell to a five year low which helped keep butter inventories from ballooning further.

While the price of butter has a direct effect on the butterfat price, it also has an opposite effect on the price of milk protein (see earlier post).  As a result, the Class III price is only slightly impacted, but an increase in butter prices does shift revenue from milk protein to butterfat.  The pie chart of the components of the Class III price for October shows a close split between milk protein and butterfat.

The cheese and butter markets are not expected to significantly change in the next year.  However, the dry whey and NDM markets are expected to strengthen.  The "wild card" in the futures crystal ball is the TPP.  Passage of the TPP as it exists today would eliminate level one tariffs immediately and then phase out quotas for level two tariffs as level one volumes expand.  This could be a major game changer.