Sunday, September 13, 2015

Exports Down - Imports Up

As mentioned in prior posts, imports and exports are significantly influencing U.S. producer milk prices.  The most recent data suggests a deepening problem as the U.S. milk prices are influenced by international factors.

Cheese will be examined first as it is always the most import commodity influencing the Class III milk price.  As shown in the chart below, cheese net exports have fallen to the levels of five years ago.  These net exports are less than half of the 2014 net exports.  This is having an influence on inventory levels.

The data behind the chart above shows that the issue is related to both exports and imports of cheese.  Exports will be examined first, but the data on imports is equally important.

Exports have fallen from highs in excess of 35,000 metric tons to 25,000 metric tons in July 2015.  Sales were down for all three major importing countries (Mexico, South Korea, and Japan) in July.

YTD cheese exports to Mexico are up, but cannot make up for the volume losses to Japan.  Increased exports of cheese to Mexico have kept cheese exports reasonably healthy, but the losses in exports to other countries is overwhelming YTD gains in Mexico. 

There is also a very significant change in cheese imports.  Cheese imports are at record highs with a good possibility of new record highs in future months.  In the past, imports of cheese were limited primarily to specialty cheeses typically imported at the end of the year holiday season.

This is changing.  As mentioned in the prior post, the most major change came from imports of  cheddar and other cheeses from New Zealand.  Little cheese has been purchased from New Zealand in the past, so this could signal a lasting change in a transition from a domestic cheese market to an international cheese market. 

Butter has maintained prices high and inventories at reasonable levels.  Based on the data below, it is doubtful that this will continue.  The U.S. has become a net butter importer as exports have dropped and imports are rising.

As mentioned in prior posts, butter exports have fallen drastically from the 2013/14 levels to the very low level of exports in 2015 as shown in the chart below.

The high levels of butter exports in 2014 to the Middle East, have largely disappeared.  No improvement in butter exports is expected for the balance of 2015.

Butter imports are the real news.  Like cheese, butter imports are at record levels.  The U.S. domestic market has continued to maintain high butter pricing as covered in the prior post to this blog.  With significantly lower international prices, it is probable that U.S. butter prices will soon fall.

In the August 27, 2015 post to this blog, the increased level of imports from New Zealand and France were reviewed.  The increased level of imports from Mexico is even more significant.  With the reduction in restrictions on imports and exports under the NAFTA agreement, imports of butter from Mexico are available.  Pricing determines the amount purchased.

The currently high U.S. butter prices are destined to fall as international factors come to play.  As mentioned in prior posts, a falling butter price will have little influence on the Class III milk price, but will increase milk protein value and decrease butterfat value.

Nonfat Dry Milk (NDM) is the basis of Class IV skim milk pricing.  Imports and exports of NDM also are under pressure.  The U.S.'s largest dairy export item is NDM.  In July, exports of NDM were down 13% from the prior year and imports were up.

Most of the NDM is going to Mexico and much of that is supplied from California.  Sales to countries in the Asia/Pacific region are now saturated with low cost product from Europe and New Zealand.

Imports of NDM are at record levels as shown below.  However, these record levels are nowhere near the record levels for cheese and butter.

Most of the increased NDM imports for 2015 have come from New Zealand.  NDM is used by cheese makers to reach protein levels needed for efficient cheese making and by prepared product manufacturers that need a dry source of dairy.

The one consistency in all of the above charts is that exports are down and imports are at historical highs.  Dairy is now an international business where commodities are openly traded.   Dairy trade between Mexico and the U.S. under NAFTA is flourishing.  This is probably a sign of the future as new trade agreements with other countries are being implemented.

The U.S. dairy business must structure itself to cope with this change.  Local markets and small dairies have evolved into national markets and large dairies.  Now these markets are becoming international.  Low production costs and financial sophistication are required to effectively compete in the international markets.

Sunday, September 6, 2015

Class III Milk Prices Hold

Class and Component prices for August were announced on September 2, 2015.  The Class III price was down only slightly, moving from $16.33/cwt. in July to $16.27/cwt. in August.  Both cheese and butter prices improved in August with butter reaching $2.04/lb.  More details on butter are discussed below.

With the increase in butter prices, milk butterfat gained 7.3%.  However, also due to the increase in butter prices, milk protein dropped slightly.  More details on this are also discussed below.

The biggest loss was in dry whey prices which fell to $.31/lb. in August from a high of $.69/lb. one year ago.  Dry whey pricing is the basis for valuing "Other Solids" in the component payment system.  Therefore, "Other Solids" fell from $.50/lb. one year ago to $.12/lb. for August 2015.  The impact on the Class III price is shown below.  "Other Solids" contributed $2.87/cwt. to the Class III price one year ago.  In August 2015, "Other Solids" contributed only $.66/cwt.  in 2014 "Other Solids" made up 11% of the milk check, and in 2015, it made up only 6% of the milk check.  Dry whey is primarily an export product and is strongly influenced by international events as discussed in a recent post to this blog.

As shown below in the long-term component price trends, the most significant mover is "Other Solids."   Butterfat continues to express its new higher value which is somewhere in excess of $2/lb.  Milk protein is being held below its long term trend because of the higher butter price.

The formula for milk protein is as follows:

Milk protein price = ((Cheese price - .2003) x 1.282) + ((((Cheese price - .2003) x 1.572) - Butterfat price x .9) x 1.17)

The price of milk protein is influenced by the price of cheese and butter.  Butter comes into play to give value to milk protein because butterfat is more valuable when used in cheese than in butter.  Cheese cannot be made without milk protein, so milk protein gets "extra" value when it can sell butterfat at a higher price in cheese than in butter.  Expressed graphically, the two components of the formula contribute to the price of milk protein are shown below.

Because butter is currently selling for an excellent price, and cheese is selling for a moderate price, the contribution from the butterfat factor is low and going lower.

Butter pricing is showing a positive trend over the last seven years as shown graphically below.  However, with lower priced butter being imported, it’s doubtful that this trend will continue. 

Butter production is being managed to remain at almost identical levels to prior years.  Because very little butter is being exported, the prices above really do reflect the domestic value of butter.  Record setting levels of lower priced butter have made the U.S. a net importer of butter.  See the August 15, 2016 post for more details on this.

Butter futures are showing a significant decline beginning is December 2015.  Butter prices are expected to fall from the area of $2/lb. to around $1.80/lb.

The change in the price of butter has little impact on the ClassIII price.  It only shifts the milk protein and butterfat prices back and forth.  As one goes up, the other goes down.  The most important element to watch is the price of cheese.  In the last post, rising cheese inventories were analyzed and there was reason to be concerned that they would decrease cheese prices.  However, none of this concern is currently being reflected in the futures market.  Cheese is expected to maintain it's current value.  As long as that happens, the Class III milk price will remain in the same $16/cwt. range.

Imports and exports are significantly influenced by the international markets.  Other countries can make the same dairy products and if they are less expensive, they will influence U.S. imports and exports.  As imports and exports fluctuate, they influence domestic inventories of dairy products, which in turn influence domestic dairy prices.  The most important dairy product to watch is cheese, as its price has a very significant influence on the Class III milk price.

Dairy is now an international business and the entire dairy industry will have to learn how to manage with this international influence.  The U.S. dairy industry cannot go back to being only a domestic market.