Sunday, April 3, 2016

Cheese Prices Remain Very Stable in 2016

On March 30, March Class III Milk and Component prices were announced.  For the first three months of 2016, cheese prices have remained stable at $1.52/lb.  Because cheese prices have remained stable, the Class III milk price has also remained stable at $13.74/cwt.   Butter prices have dropped to a six month low of $1.99/lb. The drop in butter prices has caused a lower butterfat price, but a higher milk protein price.

The blow-up on the right hand side of the chart below shows the five-month trend of decreasing butterfat prices and increasing protein prices.  Butterfat at $2.20/lb. is still worth more than milk protein at $1.92/lb., but as these prices normalize, milk protein will likely return to be more valuable than butterfat.

When butter prices were extremely high, it made butterfat more valuable in butter than in cheese.  Therefore, the milk protein prices went down and butterfat prices went up.  Overall, the change in butter prices has very little impact on the Class III price, which is the basis for initial payment, to the majority of U.S. dairy producers.

The chart below shows the cheese and butter impact on the milk protein price graphically.  The two components adding to the total value of milk protein (shown in green) are the cheese price impact (shown in orange) and the butter price impact (shown in yellow.)  The bottom yellow line on the graph illustrates what happens, when butter prices are extremely high.  Withe high butter prices, the contribution of butter price to the value of milk protein becomes negative, as it has been for the last four months.  This negative value is very unusual.  It would appear that the relationship of these factors is trending back to a more normal situation.  For more detail on this relationship, see the September 6, 2015 post to this blog.

The decrease in the butter price will change the pie chart shown below.  At this time butterfat is still contributing the majority of value to the Class III price.  However, the relative size of the slices is continuing to trend back to more normal proportions where milk protein contributes the majority of value to the Class III price.

As this trend continues, it does increase the financial incentives to produce milk protein with techniques like balancing the amino acids of feed.  To evaluate the economic returns of amino acid balancing with up-to-date values for components, see the website or download the apps with the same name.

The concerns about the overproduction of cheese remain.  The inventories of cheese remain very high compared to historical levels.  Because cheese prices dominate the formula based pricing of Class III milk, higher cheese inventories typically mean lower cheese prices and in turn, lower milk prices.

Cheese production remains high while exports remain low.  Cheese from the EU and New Zealand have flooded the international markets causing oversupply and significantly reducing international prices.   This has decreased exports of cheese from the U.S. and significantly increased imports.  U.S. cheese prices as measured by NASS and the CME indicate a continuing stable price for cheese for the full year of 2016.  This translates into a relatively stable, but low price for Class III milk for the remainder of the year.  See the April 23, 2009 post to this blog for a detailed explanation of the close relationship between cheese prices and the Class III milk price.

Most other inventory levels of commodities used to price milk remain at reasonable levels.  Dry whey inventories are slightly high, but butter and nonfat dry milk inventories remain at a very reasonable level.  Butter futures are showing a slight increase, but with the international markets pricing butter well below the U.S. domestic price, lower prices are definitely possible.

All factors considered, Class III milk prices will probably remain stable for the remainder of 2016.  Once current export/import data is available, it will be analyzed in the next post to this blog.

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