Wednesday, January 6, 2016

All Dairy Commodity Prices Drop

On December 30, Class and Component prices were announced for December 2015.  This report covers the four week period ending December 26, 2015.  The remaining days of December will be included in January 2016 data.

The commodities behind the producer prices all fell.  This includes cheese, butter, nonfat dry milk, and dry whey.  In the Chart below, there is one item that shows as positive, milk protein.  The price of milk protein was up only because butter prices fell more than cheese prices.  For a more in depth analysis of this complex relationship, see the November 8, 2015 post to this blog.

Cheese prices are the most important factor in Class III milk prices.  (Read the August 23, 2009 post to see why.)  Cheese is primarily a domestically consumed product, however, the reduced export volumes are influencing domestic inventories and prices are falling accordingly.  Below are charts of  natural and American cheese inventories as of the end of November.   The inventory levels are obviously bloated.  Domestic consumption is normal, but because exports of cheese are down, inventories are up.

In spite of a reduced export demand, cheese production has continued at levels supporting higher export demand.  A reduction in cheese production is the only way to bring supply and demand back in balance and deplete these high inventories.  If exports increased to 2014 levels, it would prevent a further increase in inventories, but only a reduction in cheese production will allow these excess inventories to return to normal.  Because it is unlikely that cheese exports will quickly resume to higher export levels, additional pressure on reduced production is needed.

Butter and butterfat prices are finally beginning to fall.  Butter is down 8.2% to $2.57/lb. and butterfat is down 8.7% to $2.91/lb.  These are still very high prices compared to historical prices.

The current price of butter is still well above the international price for butter and will probably continue to decline in the coming months.

Butter production continues at levels below prior years and this is keeping inventories stable and U.S. butter prices at high levels.

Dry whey prices drive the price for other solids.  The December price for dry whey is $23/lb., the lowest price in five years.  By the time the whey is dried, the cost near equals the selling price.  Other Solids are now worth $.035/lb., down from $.50/lb. in 2014.  Because other solids make up nearly 50% of the solids in milk, this is a big factor weighing on the Class III price.  Dry whey is primarily an export product and as a result, is priced based on international values.  No change is expected in 2016.

Nonfat dry milk is the basis of Class IV pricing.  When the Class IV price is higher than the Class III price, it is the basis for Class I pricing.  Currently, Class IV is more valuable than Class III.  (See the July 16, 2014 post to this blog for more details on this relationship.)

What does this mean?  For those paid on the advanced system (mostly Class I milk), it is a direct advantage.   For those paid on the component system, the higher Class I and Class IV pricing will come into play with a higher "uniform" price (an average of the four classes) and it's benefit will come from a larger producer price differential.

There is one other revenue stream for the four Federal Orders in the middle of the U.S. (Upper Midwest, Mideast, Central, and Southwest).  There is a premium paid for a somatic cell count under 350,000 cells per milliliter.  The somatic cell count adjustment is based on the price of cheese. The price of cheese in December was $1.57/lb., down slightly from the prior month and was the second lowest price in the last two years.

When data is complete for 2015, a special "Review of 2015" post will be made to this blog.

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