Exports Take a Dive

June export/import data reflected the softness in the international dairy markets.  Exports volumes and prices were down significantly.  There are three major reasons behind this: Russia has extended their embargo of dairy products for another year, China has significantly reduced dairy purchases, and the strength of the USD has made U.S. dairy products less competitive in the international market..

The most important dairy commodity for U.S. milk pricing is cheese.  (See the April 23, 2009 post to this blog.)  Cheese exports have been near prior year levels for the first five months, but in June, volume fell significantly.  The chart below shows the healthy growth of cheese exports from 2009 to 2014.  In the first half of 2015 they have taken a major dip.  This chart below is for cheese, but most other dairy export charts are similar.

Exchange rates between the USD and other major dairy exporters are shown in a later section.  The strength of the USD has given other cheese exporters like the EU a 20% price advantage compared to early 2014.  Additionally, major cheese  importers like Mexico, South Korea, and Japan have experienced exchange rate differences also in the area of 20%, which means that they could pay less buying elsewhere, or if they need a certain U.S. cheese, they will have to pay a significantly higher price that could reduce local consumption.

CHEESE EXPORTS AND IMPORTS

The chart on cheese exports is alarming.  In February, March, April, and May cheese exports were only slightly behind 2014 levels.  In June, cheese exports fell significantly below the prior year.

The opposite side of the export picture is cheese imports, which are at record levels and well above prior years.  Typically cheese imports show strength only at year-end as specialty cheeses are imported for the holidays.  The growing level of cheese imports currently suggest that commodity cheeses are gaining an international focus as demand from U.S. processors and distributors can be satisfied with less expensive imports.

Net cheese exports (cheese exports less imports) show a decline to 2011 levels in June.  Any continuation of this trend could really upset domestic inventory levels and thereby upset Class III milk pricing.

BUTTER EXPORTS AND IMPORTS

Very little butter is available for export as domestic churning has slowed considerably.  Butter exports each month have been lower than any of the prior four years.

Butter imports have grown to record levels.  This trend started in late 2014 and continues in 2015.  For more information on butter export activity over the last two years, see the June 7, 2015 post to this blog.

This has made the U.S. a net importer of butter for the last five months.  Low cost butter, which is very much a commodity, is available on the international markets at prices lower than the domestic markets.

The only logical conclusion is that U.S. butter prices are likely to decline quickly in the coming months.  This will result in lower producer prices for butterfat and higher prices for milk protein with very little impact on the Class III price.  For more detail on the mathematical relationship of the pricing for butterfat and milk protein, see the August 8, 2010 post to this blog.

DRY WHEY EXPORTS

Dry whey prices are the basis for the pricing of "Other Solids" in the component pricing system.  Dry whey is primarily an export item.  However, these exports are now at a five-year low.  

This will likely cause an increase in inventories and a drop in price for dry whey and therefore a drop in the value of "Other Solids."

NONFAT DRY MILK EXPORTS AND IMPORTS.

Exports of nonfat dry milk/skim milk powder (NDM/SMP) have traditionally been dominated by EU exports.  However, in 2013 the U.S. passed up the EU to become the largest exporter of NDM/SMP.   In 2014, the EU came back to take the lead again and in 2015 the EU is expected to export record amounts of NDM/SMP.  NDM/SMP is an export item affecting primarily the western states.  In June, exports took a plunge.

NDM is used in the U.S. primarily to increase protein levels for cheese and yogurt production.  Throughout 2015, imports have been a record levels.  The combined drop in exports and the increase in imports of lower priced NDM suggest a continuing decline in the price of NDM.

NDM is the basis of Class IV Skim pricing and thereby impacts the the uniform milk price used for determining the producer price differential.  See the July 14, 2014 post this blog for more detail on this relationship.

EXCHANGE RATES

A stronger USD results when the international financial community sees the U.S. as financially healthy and a safe place to park funds.  This sounds good, but it can have a devastating impact on exports.  The two charts below show the USD vs. the two biggest competitors (the EU and New Zealand) in the global dairy markets.

The big drop in the NZD in 2008 caused producer milk prices to fall from $20/cwt. to $10/cwt.

As mentioned in the prior post, exports to Japan, one of the biggest importers of U.S. cheese,  saw exports fall 51%  in June.  a quick review of exchange rate shows what's behind this drop.

Exchange rates can significantly impact dairy pricing.

CONCLUSIONS

The U.S. dairy industry has so far largely avoided the international turmoil in dairy markets.  Unfortunately, that seems to be changing.  The next post will focus on the most recent inventories of the commodities behind milk pricing.  The developing impact of exports will also be closely watched.