Dairy Exports Drop

In the prior post, the fall in dairy commodity prices was analyzed.  While new export data was not available at that time, they were suspected as the culprit.  Export data became available shortly after that post and will be analyzed in this post.  As suspected in the prior post, dairy exports did fall significantly.  This post will analyze the export data.

To put things in perspective, the pie chart below shows the values of export categories for the first nine months of 2014.  They total 5.7 billion dollars and account for 15.5% of the U.S. dairy production.

Nonfat Dry Milk is the largest category in USD, and has a much larger share in tons exported.  In 2013, the U.S., for the first time, became the world's largest exporter of Skim Milk Powder/Nonfat Dry Milk, exporting 555 thousand metric tons.  The chart below shows the other SMP/NDM exporting countries.  The EU and New Zealand are major exporters of SMP/NDM, and competitors for this business in the international markets.

For the first ten months of 2014, the U.S. has exported 469 thousand metric tons of SMP/NDM.  To match 2013's volume level, the U.S. would have to export 43 thousand metric tons in November and December.  Exporting that level is still possible, but for the last two months, the U.S. has been below that level.  In October, there was a slight gain in exports, so recovery may be in process to meet the 2013 record export levels.

Prices for SMP/NDM have fallen internationally.   International prices are important because to date, 54% of the U.S. SMP/NDM have been exported.  The Export price closely matches the domestic price.  As shown in the chart below, the U.S. has held prices above the EU and Oceania, but that higher pricing is hurting export volumes.  With higher prices export volumes will not recover, domestic inventories will increase, and domestic prices will fall.  On the other hand, if prices are lowered on exports, domestic prices will also fall.  Either way, a domestic price decline is likely.

Cheese is probably the most important product to review. This is because the price of cheese, as determined by NASS, is the major variable in pricing milk.  Cheese exports have more than doubled in the last five years and now account for 7.4% of production.  However, that export volume is declining.  If volumes continue to decline, it can quickly bloat domestic inventories and hurt domestic prices.  Traditionally, Mexico is the largest export customer for the United States.  In October, Mexico's imports fell 16% from their 2014 running rate and South Korea became the largest export customer.  This may be a short-term situation, but bears watching.

The biggest export drop was in butter.  The all time high volume of butter exports occurred in March 2014 with over 12,000 metric tons exported.  This depleted domestic inventories and caused historically high butter prices.  In October, just over 2000 metric tons were exported.  This should certainly allow domestic stocks of butter to recover.  For a view of butter stocks over the last six years, click here.

Currently butter prices are declining and are expected to fall further.  This fall will bring butter prices more in line with long-term trends.  As long as churning capacity is not increased, the U.S. cannot be a major butter exporter. For a view of butter prices, click here.

Dry Whey is the fourth and final commodity, which directly influences producer prices.  To date, 60% of the dry whey produced has been exported.  Exports remain strong, and dry whey prices are maintaining the level of 2014 prices.  As a result, the price paid producers for "Other Solids", which is based on the dry whey price, also remains healthy.

There is one other market of interest, because it is a developing market for the U.S.  Whole Milk Powder (WMP) does not have a market in the U.S.  This is due to adequate refrigeration of fluid milk, excellent logistics for fluid milk delivery, and consumer buying habits.  WMP is strictly an export market, dominated by one major buying customer, China.  Production and inventories have varied tremendously.  However, WMP exports, while small, are the strongest growing U.S. export item.  WMP exports are up 46% YTD.  Recently the market has cooled off and exports are tracking at last year's level.  U.S. exports of whole milk powder are only about 10% of those for SMP/NDM.  This is a market of high risk, but it is the largest export category globally and penetrating it could have big returns.

EXCHANGE RATES

Exchange rates are adversely impacting dairy exports.  The strongest impact is vs. the Euro.  This comes at a time when Europe's dairy industry is concerned about over production as a result of the recently implemented Russian embargo.  The European dairy industry needs to export more dairy products and a weak Euro helps them accomplish this.

The NZD has also weakened against the USD, helping New Zealand export their dairy production.

The EU and New Zealand are the two largest dairy exporters, and represent strong competition to the U.S.  The strong USD gives these competitors a pricing advantage.

CONCLUSIONS

Producer milk prices, as predicted in the CME futures market, show prices falling by 1/3 from the 2014 highs in the next few months.  Cheese prices, which are the primary basis for milk prices, are similarly priced.  This assumes a continuing drop in cheese exports that will bloat domestic inventories and cause prices to drop.  An examination of cheese exports in detail doesn't support this.  The long-term best customer for cheese is Mexico.  In October, their imports were off, causing them to be the "second best" customer after South Korea.  We do continue to see increasing U.S. cheese exports in many other parts of the world, notably in the Far East counties.

Exports to Mexico, that have dropped in the last few months, are not reason enough to expect a long or even a short-term trend of decreased exports to Mexico.  While the future is always uncertain, exchange rates between the Mexican Peso and the USD have shown only a slight strengthening of the USD.  It would therefore be reasonable to expect exports to Mexico to increase to the prior higher levels.  With the strengthening of cheese exports to other parts of the world and a recovering market in exports to Mexico, a stable to increasing level of cheese exports is not unreasonable.  With that would come strengthening prices for cheese and milk.

As for SMP/NDM, lower prices continuing well into 2015 are reasonable.  The contribution of the high SMP/NDM prices in 2013 and early 2014 were the basis for a nice addition to milk prices, but not of the magnitude of cheese prices, so their impact should be less.

Dairy Commodity Prices Fall

On December 3, 2014, November Class and Component prices were announced.  All underlying commodity prices that impact milk component prices fell.  Cheese prices fell 7%, butter prices fell 21.2%%, dry whey fell 2.5%, and Nonfat Dry Milk (NDM) fell 6.7%.  Class III milk prices fell 7% to $21.94, a lower but still excellent price.

As shown in the "INVENTORIES AND PRICING" section below, inventories of these commodities do not show anything out-of-line.  However, the CME futures market is portraying a coming broad price drop in these commodities.  

Exchange rates are showing a significant strength in the USD which adversely impacts exports.  New export data is not available as of this date, and will be published in this blog as soon as it is available.  Dairy solids exports are hovering near 16% of total dairy production. With this large and volatile export market, exports can drastically effect domestic pricing of dairy products.

The most major drop was in the price of butter, falling by $.54/lb. which equates to a 21.2% drop. This drop has been widely anticipated as the record high prices for butter were unsustainable.  

The one positive number on the dashboard above is the price of milk protein.  Milk protein is up only because of the significant drop in the price of butter.  The price of milk protein is based on the price of cheese plus an adjustment for the higher value of butterfat when used in cheese rather than butter.  Those elements of the milk protein price are shown in the chart below.

Long term component price trends are returning to more normal levels, with the value of milk protein once again well above the price of butterfat.  Protein at $3.90/lb. is 77% greater than the current price of butterfat which is $2.20/lb. 

The pie chart of producer revenue below is based on the November component prices and the USDA standards of 3.5% butterfat, 3.0% protein, and 5.7% other solids.  Once again, payment for protein is making up the majority of the milk check.

INVENTORIES and PRICES

Typically, low component prices are the result of high inventories of the commodities that are used to calculate the milk component prices.  However, these inventories are not significantly out-of-line as shown below.  Therefore, the lower component prices can only be attributed to events that could cause the future inventories to balloon. 

Cheese inventories are slightly low, and below the year ago levels of October 2013.  Considering the increased domestic consumption of cheese, increased cheese production, and strong 2014 cheese exports, the current inventories are at reasonable levels and do not suggest a lower price for cheese caused by high inventories.  (By clicking on the charts a larger version can be displayed.)

However, the current NASS price of cheese is falling and the CME futures price of cheese is also falling.  The average November price of cheese fell $.16/lb. or 7%.  In 2014 there have been record high prices for cheese and the current price is still a relatively high price.

Butter inventories remain low, and below the four prior years of inventories for the end of October.   These inventories also do not provide a reason for the lower prices.  Strong exports in late 2013 and early 2014 caused inventories to shrink.  Production of butter has not increased from historical levels to allow recovery of these inventories.  However, exports have dropped recently, and this may be creating an expectation of increasing future inventories.

The price of butter has seen a significant drop from the recent record high levels.  The current  NASS wholesale price of butter at $1.99/lb. is still a lofty price compared to historical prices.  The September extreme record price ($2.85/lb.) was an abnormality, that in hindsight appears to have been irrational.

Inventories of Dry Whey and Nonfat Dry Milk are also both in reasonably good shape as of the end of October.

Dry Whey and NDM are both primarily export commodities.  Through September 2014, 60% of Dry Whey production has been exported and 56% of NDM production has been exported.  Pricing for these commodities is tied to international prices, and both are falling.

CURRENT NASS AND CME FUTURES

Although the above inventories do not indicate that price declines should be expected, the CME futures prices are showing a significant price drop.

The green line representing the price of cheese in the above graph shows a significant drop in cheese prices in December.  Cheese and Class III milk prices are highly correlated.  The chart below shows that the CME futures are maintaining this close correlation.

There is only one justification for the decline in the futures market pricing for dairy products.  The strong USD is expected to decrease export sales and thereby increase inventories and decrease prices.  When new data on exports is available, a new post to this blog will show the more current data on exports.