Sunday, September 7, 2014

Déjà vu

Class III milk and component prices for August 2014 were announced on September 4.  The Class III price was near record levels and the Class IV price was a record.  The big news is again the price of butter, which has shot to record levels never seen before.  An in-depth review of the reasons behind the very high butter prices was covered in the last post and will not be repeated here.

Protein prices dropped slightly in spite of an increase in the NASS price of cheese.  The NASS price of butter was up 7.8%, which increased the price of butter, but decreased the price of protein.  For an explanation of this mathematical relationship, see the August 8, 2010 post to this blog.

The long term trends shown below reflect the current component pricing situation.  Butterfat is at a significant record price.  Inventories of butter remain low which was caused by very strong exports. Butter churning has yet to catch up.  The August drop in the price of milk protein is totally the result of the record high butter price.

The pie chart below shows a very unusual component make-up of the August value for Class III milk.  Butterfat is now contributing more to the Class III price than milk protein is contributing.

As expected, the price of nonfat dry milk, which is the basis for the Class IV skim price, fell slightly.  The global market price of nonfat dry milk/skim milk powder is falling, and the NASS price is really governed by the global price as the majority of U.S. nonfat dry milk is exported.  In spite of this drop, the still high Class IV skim milk price and the resulting differential between Class IV and Class III skim milk prices, continues to benefit most all U.S. dairy producers.  See the February 14, 2014 post to this blog for an explanation of this relationship.


Inventories of both butter and cheese are low.  The most significant of these is the butter inventory. As of the end of July, the butter inventory is lower than anytime in the last six years.  (August data is not yet available.)  Exports in late 2013 and early 2014 depleted butter inventories and churning has not increased sufficiently to rebuild these inventories.

As shown in the chart below, butter churning is running at the level of the last four years, and this level does not allow recovery of the low inventories.  With the extremely high butter prices, there should be a strong incentive to produce more butter.  However, the Federal Milk Marketing Order pricing model pegs the price paid for butter churning and this "make allowance" has not changed in years.  Therefore, butter churners are paid the same price per pound for all butter churned and the benefit of the current high butter prices falls to the dairy producers.  Other than the standard make allowance for churning, there is no additional incentive to churn additional butter because of the low inventories.

The current level of exports may be playing a role here, but current export data will not be available for August until mid October.

Cheese inventories are also very low.  Cheese consumption and cheese exports are both growth categories and inventories should be increasing to keep the days of inventory constant.  This is not happening and when inventories are low, prices will rise.  Natural and American cheese inventories are shown below.

The NASS price of cheese did increase in August, but it is not near record levels.  The NASS cheese price in August was $2.11/lb., above the prior month of $2.05/lb., but well below the early 2014 record prices, which peaked at $2.35/lb.

Dry Whey prices are the basis for pricing "other solids."  Dry whey is principally an export item.  In August, the price of dry whey was $.69/lb., a current record and up slightly from the prior month.  "Other solids" continue to contribute nicely to the Class III milk price.

Whole milk powder has a huge international market.  While the U.S. has not significantly participated in this market, there has been some production and export activity recently.  This export market appears to have fallen apart again and inventories have skyrocketed.  As a result, production has quickly fallen off. This is a very volatile market with a history of difficulty.  Whole milk powder is only a small niche market in the U.S., and is discussed here only because of the dramatic change. 

The dairy business is always changing and the dynamics of becoming a global exporter have increased the volatility.  Overall, producer prices for milk are currently very positive, mostly the result of strong exports.  The new and developing trends will always be reviewed in this blog.