Exports, which fell drastically in January, improved significantly in February. However, with a strong USD and increased international availability primarily from Europe, prices for dairy exports were down as compared to 2014.
Inventories continue to be at reasonable levels and are not putting pressure on domestic prices.
As shown on the graph of component price trends, the only down component was Other Solids. Other Solids pricing is driven by the price of dry whey, which is primarily an export item and pricing and volume are dependent on international factors.
February export data will be available soon and will be covered in more detail in the next post to this blog. With 15% of dairy solids being exported, dairy exports are significant in size, and very volatile due to exchange rates and other international events.
CHEESE
Cheese pricing is the most important commodity in the Class III milk price. (See the April 2009 post for a review of this important relationship.) There is fear that cheese exports will drop significantly and create a bubble in cheese inventories that in turn will cause lower prices. The current pricing of cheese reflects that fear. The chart below shows the drop in cheese pricing which started in December 2014. Throughout 2014, cheese prices were above $2/lb. until December. For the first three months of 2015, that price has dropped more than 25% to the $1.50/lb. range.
The futures price for cheese, as reflected in the CME data, is expected to increase for the remainder of 2015, approaching but not reaching the $2/lb. level of 2014. This will increase the Class III price due to the mathematical relationship between these commodities.
In February, nearly 30 thousand metric tons of cheese were exported. This was down 5% from the prior year, but still was very strong.
Inventories of cheese remain at reasonable levels compared to prior years. While there is a slight uptick in the inventories, they are not significant at this time.
As a further view of cheese inventory levels, the chart below shows the trends over the last eight years. Current inventory levels remain below the long term trends.
The domestic consumption cheese has a long history of growth and more recently, exports have contributed to cheese demand. With the growth in production and demand, an increase in inventories would be expected. To date, inventories levels remain within reasonable boundaries.
MILK PROTEIN PRICES
Component prices that make up the Class III milk price continue to show the dominance of the financial contribution of milk protein. Milk protein contributed 48% of the value of Class III milk in March.
Butterfat prices influence the price of milk protein. Butter has returned from the brief lofty highs reached in 2014, but remains over $1.50/lb. Butter inventories remain tight, as churning has not increased at all to help meet consumption and potential exports.
A higher butter price and therefore higher milk butterfat prices detracts from the value of protein. (See the August 10, 2010 post to this blog for a review of this relationship.) This is based on a valuation system that compares the value of butterfat in butter vs. the value of butterfat in cheese. As the value of butter goes up, the butterfat is relatively more valuable in butter than in cheese. Therefore, by formula, milk protein which is essential for cheese making is less valuable when butter prices are high.
CONCLUSIONS
As discussed in prior posts to this blog, the 2015 drop in the Class III milk price appears to be mostly driven by concerns about lower cheese exports and ballooning cheese inventories. While cheese exports are down slightly, the concerns about bloated inventories are not founded. Cheese exports are down slightly, but still very healthy and based on February's export levels, cheese exports appear to be recovering their growth profile. Cheese and milk prices can be expected to increase from current levels as these concerns diminish.
There will be a new post in the near future covering the new data available on milk exports and imports.
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