Wednesday, March 9, 2016

February Dairy Prices Show Little Change

Class and Component prices for February were released on March 2.  There were only minor changes from the prior month.  Butter increased slightly, cheese fell very slightly, and dry whey increased about 5%.  The increase in the dry whey price, up 5%, drove the value of other solids to a big percentage change, but a big percentage change from a prior price near "0" means very little.

As a result, the value of components show very little change from the prior month.  Milk protein is well below the long term trend and butterfat remains at a high value of $2.38/lb.

The most troubling statistics are the increasing inventory levels of cheese.  The January ending cheese inventories are shown below with the January end levels circled in red.  Increasing inventory levels result in decreasing cheese prices and decreasing cheese prices result in decreasing Class III prices.

The linkage in cheese prices and Class III milk prices is shown below.  There is a 96% correlation between the cheese price (as determined by NASS) and the Class III milk price.  A 96% correlation means that if one knows the cheese price, he can determine the Class III milk price with 96% accuracy.  The reason behind this is the mathematical relationship between cheese prices and Class III milk prices that was covered in a prior post.

Cheese production continues to run well above the prior year.  With a normal growth of both domestic and export volumes, this would be fine.  However, as covered in a prior post, cheese export volumes are well below the prior year and there is no immediate change expected.

A near term correction (reduction) in cheese production is needed in order to protect the Class III milk price.  The futures market is forecasting a relatively static Class III price in the $13/cwt. range through the middle of 2016, with minor increases after that.

There is little a producer can do to reduce cheese production except ride out the low prices and prepare for good component production as prices normalize.  The normalization should see a lower butterfat price, a higher protein price, and a higher Class III price.


One other developing dynamic is the increase in Whole Milk Powder (WMP).  It is still small compared to Nonfat Dry Milk, but it is a rapidly growing and could be a significant dairy export product.  Internationally, the market for WMP is much bigger than the market for Nonfat Dry Milk.  However, in the past the U.S. has not participated in the WMP market, because there is only a very small market for WMP domestically.  That means that sales of WMP can be very volatile.

The chart below shows the increase in production which had doubled in the last eight years.   While still erratic, there is obvious growth.

In reviewing the year by year WMP production, 2016 appears to be off to a good start.  The growth is modest which should not bloat inventories, but is well above all prior years except 2015, where excess production did create an inventory bloat.

As of the end of January 2016, inventories are in control with no excesses to work out.

The WMP market represents a huge opportunity for the U.S.  It is a volatile market and entirely based on international opportunities.  WMP progress will be followed in this blog.

1 comment:

  1. John
    It looks to me as if your WMP production might be monthly rather than annual. Some of the inventory changes look infeasible if it is annual. Can you please confirm.
    Keith Woodford