Sunday, December 18, 2016


In a lot of publications, you see combined data for Skimmed Milk Powder (SMP) and Nonfat Dry Milk (NDM).  They are very similar.  Both remove the moisture from skimmed milk by drying and end up with a powder, which can be reconstituted by adding water.  So why do we have the same name for two identical products?  Well, they are not identical.

The real difference begins with who defines the standards for the product.  Most of us would have correctly guessed that NDM is defined by the USDA/FDA and the specifications are listed in the Federal Code of Regulations (FCR).  There are standards for flavor, physical appearance, bacterial plate count, milkfat content, scorched particle content, solubility, and acidity, with different parameters for "standard grade" and "extra grade."  The specifications also define three different levels of heat used in the drying process.  The specifications are detailed, specific, and available at this address.  NDM can be shipped without refrigeration and used to reconstitute milk, or as an addition to whole milk to meet the protein requirements for efficient cheese manufacturing, or as an ingredient in many other edible products.

So how is SMP different?  It begins with who sets the specifications.  In some of the earlier posts to this blog, there has been discussion of the World Trade Organization (WTO), and other groups primarily located in Geneva, Switzerland.  They negotiate, set, and arbitrate the standards for products traded globally.  For food products, the standards are defined in the "Codex Alimentarius", Latin for "Food Code."  The U.S. is a member of this group, as well as 186 other countries.  The complete file can be viewed at this website.    The standard for SMP can be viewed at this website - Pg 54-57.

The standard for SMP does require a minimum protein level of 34% which is not required by NDM.  The standard foe SMP does allow for the use of stabilizers, firming agents, acidity regulators, emulsifiers, anti-caking agents, and antioxidants, and appropriate protein concentrates.  These items are not allowed in NDM.  Because of the additives allowed in SMP, its use as a protein enhancer for cheese manufacturing is limited.

SMP is almost totally an export item for the U.S.  A great deal of NDM is also exported, primarily to Mexico; however, SMP is really the international product which competes head on with the EU, and New Zealand in the international markets.

It is possible to produce a product, which meets both standards.  The protein content of SMP is based on nitrogen content whereas the Federal Order standard for milk production is based on "true protein."  For the same product, protein based on nitrogen content runs approximately 5% higher than true protein.  When protein levels are defined by the same standard, typically NDM meets the protein level requirements of SMP.  If the additives allowed for SMP were not added, SMP would meet the requirements defined for NDM.  However, the various additives in SMP can provide some benefits which buyers may be requiring.

Sales of SMP are very dependent on the international market.  As can be seen below, production of SMP peaked in 2013 when demand and prices peaked in the international markets.  In 2014 and 2015 and continuing in 2016, sales of SMP have decreased.

The chart above shows that international business can be more volatile than domestic business.  This has been covered in prior posts (Free Trade Agreements and TPP) and is reinforced here.

Whole Milk Powder (WMP) which is also in the classification of powdered milk has not been a major product in the U.S.  However, other countries like New Zealand make and export a lot of WMP.  It is a major item in the international market.  The U.S. has been growing this business, but it is still quite small compared to NDM.  The Standard used for WMP production is based on the Codex, as it is primarily an export item.

For more details on the differences between NDM/SMP, see my recent article in Progressive Dairyman.

Sunday, December 11, 2016

Exports Show Gains

Export and import data for October 2016 showed continued improvement.  Exports volumes of all commodities used to price producer milk were up.  The largest percentage increase was butter, but that increase is based on a very small export level.  More detail on butter is covered later in this blog. The most important item is cheese as it has the largest impact on milk pricing.  The 9.3% increase in cheese exports is significant for this time of the year.  NDM exports which have remained strong in 2016 are showing increasing strength with a 10.2% increase in export volume.

Imports of cheese typically rise in the fourth quarter of the year with the holiday demand for specialty cheeses.  The increase in October is in line with the two prior years.


The most important chart for improved producer prices is the chart below on cheese exports.  The October volume of cheese exported is above the 2015 level and near to the levels of 2013 and 2014.  While exports YTD are still off for the three largest export buying countries, October levels are hopefully the start of a positive trend.

Cheese imports coming from Italy and France are close to 2015 levels, but imports from New Zealand are significantly higher YTD.  The higher import levels from New Zealand represent the availability and low prices that have persisted in the international markets for commodity cheese.

Overall, cheese net exports (exports - imports) remain low as compared to 2013 and 2014, but the October levels remain near the 2016 levels.  October net exports typically fall more due to high imports.  However, the increased level of exports in October 2016 kept net exports at prior month levels.  This is an indication of a strengthening export market for U.S. cheeses.


Butter remains a complicated story.  U.S. per capita consumption continues to rise, but production of butter remains near prior year levels.  This has kept inventories relatively tight and domestic prices high.

Butter net exports did show an improvement with exports up and imports down.

The real activity in the butter export/import market is trade with Mexico.  Mexico is the largest export partner AND is nearly the largest import partner for butter.  There are no volume restrictions on exports and imports due to the NAFTA agreement.  YTD more butter has been imported from Mexico than exported.  Changes from 2015 show a huge shift in the market.  U.S. domestic butter prices were well above international prices, at the beginning of 2016, but international prices have increased roughly 60% since the beginning of 2016 and are now comparable to U.S. prices.  This should provide an opportunity for increased exports of butter although available supply remains tight.

As shown in the first chart below, exports of butter to Canada have been significantly above prior years.  This change is relatively recent and its continuance is uncertain.


Exports of NDM have been the strength of the dairy export program in 2016.  While prices have been low, volume has remained steady and growing.  The last three months exports have all been record for that month.  October maintained and improved on that record.  While prices remain well below the early 2014 levels, they are currently up roughly 50% from the beginning of 2016.  The futures market is forecasting additional increases in NDM prices.

Mexico remains by far the largest export market for U.S. NDM, however, the growth over the prior year is coming from other markets.

NDM prices are the basis for Class IV milk prices and in turn Class II milk prices.   See the potential impact of Class IV pricing in the July 16, 2014 post to this blog.


Dry whey exports have seen increasing strength during 2016.  Exported volumes are above every one of the five prior years except 2013, and they are near the 2013 level.  As mentioned in the prior post, prices of dry whey have improved during 2016 and are expected to increase further in the coming months.  Dry whey  is the basis of pricing for Other Solids.

October has been a very positive month for dairy exports.  The global dairy market seems to be getting supply and demand more in line and international prices are improving.  The one remaining issue for export prices is the strong USD.  Since the U.S. election, the USD has strengthened more.  More detail on the USD strength is available in the November 27 post to this blog.  While the future always remains uncertain, recent development are suggesting improved prices in 2017.

Sunday, December 4, 2016

Milk Protein Price Up, Butterfat Price Up, Other Soldis Price Up,.....

November Class and Component Prices are now available.  November was a very positive month for dairy prices.   As shown in the dashboard chart below, many prices were up substantially.  This resulted in a Class III price of $16.76/cwt., which is higher than any Class III price in 2015 and the second highest price in 2016.  Based on the futures market, December prices should continue this increase.  Is this another "Trump rally?"  Are the President Elect's statements on killing TPP and renegotiating NAFTA having an impact or has there been a change in the fundamentals?  The analytics examined below suggest that fundamentals underlying dairy pricing are only slightly improved, but this could be interpreted as the start of a trend.

The long-term trends for components are showing a return to more normal component prices.  Milk protein increased 22% while butterfat remained close to the prior month.  The price for Other Solids is returning to a more positive value after a year of very low near zero prices.

Behind all this good news is a good balance of inventories.  Not all data is yet available for October and November, but the data that is available shows lower inventory levels of the commodities behind the component prices.  Lower inventories typically bring prices up.

Cheese inventories are still high compared to 2012 through 2014 levels but they are declining slightly.  As reviewed in the November 13 post to this blog,  exports of cheese remain anemic and imports remain near record high levels.  While current production data is not yet available, a decrease in production must be behind this.

Inventories of butter are following the normal cyclical pattern with a significant decrease in October.  The current price of butter at $1.90/lb. is nearer to traditional levels and well below the "bubble" levels of the last 12 months.

Some of the price increase for milk protein is caused by the current lower butter price.  The chart below shows an analysis of the milk protein price broken into the contribution made by the cheese price and the butter price.  The decrease in the butter price and the increase in the cheese price have contributed equally to the higher milk protein prices.  See the August 8, 2010 post to this blog for more detail on this relationship.

The futures market is showing a return to butter prices above $2/lb. and cheese prices are expected to hold steady.  If the market follows this pattern, butterfat will increase in value and milk protein will decrease.  Changes in the price of butter have a minor influence on the Class III milk price, but do cause a shift between the price of milk protein and butterfat.

Dry whey pricing is the basis for the producer price of Other Solids.  Dry whey is largely an export item and has for the last year, been at very low prices.  During 2016, dry whey prices have increased steadily.  They started the year at just $.24/lb. and reached $.37/lb. in November.  Inventories of dry whey are at a reasonable point and the futures market is showing further price increases.  A return of Other Solids pricing above $.40/lb. can be expected.  While Other Solids are currently contributing $1/cwt. to the Class III price, this could increase to $1.25/cwt. with the expected continuing increase in the value of dry whey.

In November, milk protein contributed 50% of the value in milk.  This makes a very clear case for prioritizing efforts to maximize milk protein.  The butter price is expected to increase, shifting the pricing toward butterfat and away from milk protein.  If this occurs, the pie chart would again favor butterfat as the major contributor to the Class III price.  However, U.S. butter pricing remains well above the international price of butter, which may hold butter to a lower price than is currently expected in the futures market.  These dynamics will continue to be followed in this blog as they play out.

Additional data will soon be available on production, exports and imports.  The next post will cover an analysis of these analytics.   For now, futures pricing is showing some additional increase in the Class III price to the $17/cwt. level in December and throughout 2017.