Sunday, November 6, 2016

Other Solids and Class IV Make Gains - Cheese and Butter Prices Decline

On November 2, Class and Component Prices were announced for the five week month of October 2016. The Class III milk price was a disappointing $14.82/cwt.  While this price is down from the prior four months, it is above the first six month's of 2016.  Overall, there were more down prices than up prices.  As shown below, the major items of cheese and butter, and their formula linked milk components, milk protein and butterfat, were down.  However, NDM and dry whey, the basis for Class IV pricing and "other solids" pricing, were favorable.  The positive numbers will be reviewed first.

The long-term trends shown below illustrate the value uptick of other solids.  The increased price of other solids is up 23% from the prior month to $.14/lb.  Because the price of other solids is determined by the formula below, further increases in the price of dry whey will have a dramatic influence on the value of other solids.

Other Solids Price = (Dry Whey Price-.1991)x1.03

Dry whey is expected to increase in price to $.40/lb. by the end of 2017.  If that occurs, other solids would be valued at $.20/lb. and that would contribute an additional $.37/cwt. to the Class III price. Approximately 41% of dry whey is exported, so the price can be significantly influenced by international events.

The price of nonfat dry milk is used to calculate the price of Class IV milk.  The Class IV price is, in turn,  used to calculate the Class II price, and when the Class IV price is above the Class III price, the Class IV price is used to calculate the Class I price.  Therefore, the price of NDM can significantly impact the overall "uniform" milk price.  However, for now the Class IV price is well below the Class III price.  This could change as explained below.

Like Dry Whey, NDM/SMP is a major export item.  To date in 2016, 54% of NDM/SMP has been exported.  The U.S. domestic price is very dependent on the international markets and prices. Currently, the global price for SMP is up approximately 30% from the May 2016 lows.  However, the current price is still 50% below the 2014 highs.   Significant increases are expected in 2017,  which could increase NDM prices by approximately 35%.  More will be covered on this in the next post to this blog, which will cover imports, exports, and global conditions.

Cheese prices really control the Class III price and in turn control the uniform milk price (see earlier post).  Cheese prices in October were $1.58/lb., down 9.6% from the prior month.  This is the primary reason for the drop in the Class III price to $14.82/cwt.  The price of cheese is expected to recover to the September price levels and remain in that area of $1.75/lb. for all of 2017.

Cheese inventories remain high, up more than 20% from 2014 levels.  This increase is far above increases in domestic per capita consumption.  High inventories are holding prices down.

While domestic consumption of cheese has continued to increase demand, exports have lagged reducing demand.  In August, cheese production did drop, but with the continued low exports (and increased imports) high inventory levels are likely to remain.  The next post to this blog will cover exports and imports when more current information is available.

Little change in the cheese markets is expected in the near term.   Exports remain week, imports continue to grow, and production continues to outstrip demand.  If the TPP is approved (see prior post), imports could surge resulting in additional pressure on cheese prices.

Butter is also seeing price pressure as inventories are well above year ago levels.

Butter prices have fallen below $2/lb.  The October NASS price was $1.86/lb.  However, this price is still well above the international price of butter.  Therefore, exports are near zero and imports are limited only by the two tier tariff and quotes program.  The TPP, if implemented, could really upset this market balance (see prior post).

Churning in August fell to a five year low which helped keep butter inventories from ballooning further.

While the price of butter has a direct effect on the butterfat price, it also has an opposite effect on the price of milk protein (see earlier post).  As a result, the Class III price is only slightly impacted, but an increase in butter prices does shift revenue from milk protein to butterfat.  The pie chart of the components of the Class III price for October shows a close split between milk protein and butterfat.

The cheese and butter markets are not expected to significantly change in the next year.  However, the dry whey and NDM markets are expected to strengthen.  The "wild card" in the futures crystal ball is the TPP.  Passage of the TPP as it exists today would eliminate level one tariffs immediately and then phase out quotas for level two tariffs as level one volumes expand.  This could be a major game changer.    

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