Monday, February 22, 2016

2015 Review - Part Two - Domestic U.S. Factors

In Part One, international factors impacting U.S. producer prices were reviewed.  In Part Two, U.S. domestic factors will be reviewed.  The review will include production, inventory levels, and domestic consumption of the key dairy products.  The key products that influence producer milk prices are cheese, butter, dry sweet whey, and nonfat dry milk.  The most important is always cheese and will be reviewed first in this post.  Each of the above dairy products share some common issues, but each is also uniquely different.

Cheese influences producer prices the most.  Cheese in 2015 can be characterized as low exports compared to 2014, normal to high increases in domestic consumption, low prices, and over production.

Domestic per capita consumption has continued its normal growth rate of about 2% per year.  The chart below shows the growth in per capita consumption over the last 45 years.  The growth has been steady and shows no sign of plateauing.  The current consumption rate is well below the levels of long-term cheese consuming countries like France, so there is little concern of leveling off in the future.

Cheese consumption does have elasticity of demand, meaning that if the price is lower, more is consumed and if it is higher less is consumed.   The lower prices experienced in 2015 (the red line below) have resulted in a higher growth rate of per capita consumption (the blue line).   (For more on this relationship, see the November 15, 2009 post to this blog.)  This is indeed good news in terms of increased demand from the largest sector, domestic consumption.

The bad news was explained in Part One.  Export demand has fallen significantly and imports have increased, offsetting the gains in domestic consumption.

However, production of cheese has continued with an expectation of rising demand from both exports and domestic consumption. Throughout ever month in 2015, cheese production exceeded the prior year.

In a review of the long-term trends (chart below), a similar picture is seen.  The concerning factor is that the increase from prior year is not lessening, but appears to be growing.

This can only result is one thing, rising inventories.  With rising domestic inventories,  cheese prices have declined.

The futures markets are not predicting a further fall in cheese prices, which implies that inventories will not increase further.  However, this can only happen if less cheese is produced in early 2016.  Stay updated on this very important parameter as analytics are reviewed in future editions of this blog.

Butter consumption has turned around after years of decline and is increasing in terms of domestic per capita consumption.  This increase may be expressing a consumer trend toward "natural" products.

Regardless, this is a very significant trend that is putting pressure on supplies.   The chart below shows the trends in butter churning in the U.S.  The trend is clearly not consistent with the increased per capita consumption of butter..

As a result, the shortfall in butter supply has brought significant increases in imports.  No announcements of increased churning capacity have been announced, and to date, butter futures have maintained a level consistent with current prices.  The current domestic butter prices remain well above international prices, so the shortfall in supplies will have to be maintained with imports.

Domestic use of nonfat dry milk has remained steady in 2015.  No major change is expected in 2016.  Nonfat dry milk is used in many manufactured products to improve taste and increase protein content.  It can be shipped affordably and it's use is fairly insensitive to price.   That simply means that at a lower price that prevails today, there is little change in domestic usage.  Due to adequate refrigeration in the U.S. there is little consumer demand for nonfat dry milk.

Dry sweet whey usage domestically is similar to nonfat dry milk.  As export demand has softened for dry sweet whey, less whey is dried.  When prices are as low as they were in 2015, drying costs can eat up any profit potential.

Dry whey inventory is up slightly in 2015, but is still at a manageable level.  Changes in total demand are influenced primarily by international demand.  Expect little change in 2016.


All of the data reviewed in the two posts covering 2015 suggest little change in 2016.  The year 2015 was really a year of blending U.S. dairy analytics into the international dairy dynamics.  The year end prices for Class III milk will likely prevail through most of 2016.  Butter prices are likely to drop although this is not currently shown in the futures market.  Cheese prices are at risk of higher inventories (and lower cheese and Class III milk prices) unless production is curtailed.

Future 2016 developments will be followed in this blog.

No comments:

Post a Comment