Sunday, October 15, 2017

Exports Show Improvement

Export and import data for August is now available.  There were many positive events in August.  There were again improvements in exchange rates, which will aid in future exports, as a weaker USD makes U.S. exports more financially competitive.  Cheese exports were up (Chart I), and nearly matched the record levels of 2014 for the month of August.  Nonfat Dry Milk (NDM) exports (Chart II) were up compared to the prior month and imports were down.  To meet and exceed the export positions of 2014, there is additional work needed, but August was certainly a positive move toward that goal.

Chart I - Cheese Exports
Chart II - NDM Exports
Mexico remains the strongest market for U.S. cheese, but exports to South Korea and Japan are also showing strength.  Due to trade restraints, there are very small amounts of cheese exported across the border to Canada (see Chart III).  With NAFTA re-negotiations in process, there may be an opportunity for more dairy trade with Canada.

Chart III - Cheese Exports by Country
Dairy exports and imports between the U.S. and Canada are primarily between butter and NDM.  With the global consumer increase in butter consumption, a glut of NDM is developing.  Canada is perhaps an example of where other countries may be going.  For over a decade, Canada has struggled with an excess of milk protein in the form of NDM.  When butterfat is used for churning butter, the remaining skimmed milk is typically dried. Because of the high cost structure of the Canadian dairy industry, it has been difficult to export the excess NDM profitably.  The Canadian managed system has used various formula revisions to encourage butterfat production and minimize milk protein.  Current technology has very limited tools to make this happen.  As a result they have typically struggled with high inventories of NDM.  Charts IV and V below show the increased exports of butter to Canada from the U.S. and the increased imports of NDM from Canada to the U.S. that result.  Although dairy trade with Canada is excluded from NAFTA, where there is a need, Canada has allowed imports of butter and exports of NDM.

Chart IV - U.S. Butter Export by Country
Chart V - NDM Imports to the U.S. by Country
Dry whey exports (Chart VI) also showed improvement over the prior month and established a 2017 record month.

Chart VI - Dry Whey Exports
As mentioned above, exchange rates continue to move in a positive direction adding support to the competitiveness of U.S. Exports.  Europe is the biggest international competitor and the exchange rate has now changed from a low of $1.08 USD/Euro at the beginning of 2017 to nearly $1.20.  Hopefully this trend will continue.

Chart VII - Exchange Rates - USD/Euro
Exports of cheese to Japan improved in August and certainly the exchange rate between the USD and the Japanese Yen helped that.  The stronger Yen is still a short term event, but hopefully this will continue and support future exports to Japan.

Chart VIII - Exchange Rates - USD/Yen
One of the important exchange rates is with the U.S. neighbor, Canada.  Again, the impact of this will probably be known only after further NAFTA negotiations as dairy exports to Canada are currently limited by exclusion from the current NAFTA agreement.

Chart IX - Exchange Rates - USD/CAD
While the Export/Import data was only mildly positive for August, it is good to see things moving in the right direction.

PRIOR POST COMMENTS

There has been a lot of interest generated from the October 7 post to this blog concerning the proposed change to the Class I formula..  An addendum has been added to express comments from the Farm Bureau.  They have not taken a position on this change, but are continuing to evaluate the impact.  The Farm Bureau comment is appreciated as it clarifies their position. 








Sunday, October 8, 2017

Milk Prices are Down - Here's Why

On October 4, 2017, September Class and Component prices were released.    Chart I below shows a lot of red as prices fell from the prior month.  The only positive change was in the price of milk protein, and that increased only because butter prices fell (see why in this post).  All of the commodity prices, which are used to calculate the component prices were down.  This includes cheese, butter, dry whey, and nonfat dry milk (NDM).

Chart I - Monthly Change in Dairy Prices
This changed the long-term trends only slightly.  Note that the price of milk protein was higher than butterfat for the first 14 years of the Chart II.  Only when consumption of butter began to increase globally did the value of butterfat exceed the value of milk protein.  That change has remained in place since 2014 and there is no short-term change expected.

Chart II - Long-Term Trends in Component Prices
Inventories of three of the four commodities used to price milk are high, pushing prices low at least for the near term.   The inventory of cheese, shown in Chart III below, continues to be significantly high.  The growth of cheese inventory since 2013 is three times higher than the growth of consumption.  Compared to 2013, current cheese inventories are 30% plus above the levels of just four years ago.

Chart III - Cheese Inventories
Chart VI shows the inventories levels over the last 17 years.  There is a trend line that shows the normal grow consistent with cheese consumption and exports.  The recent month's cheese inventory is well above the growth trend line and is near all time highs as compared to the trend line.  These high cheese inventory levels are a place to park excess milk production, but they also impact pricing as there is more cheese for sale than there are buyers for cheese.

Chart IV - Long-term Trends in Cheese Inventories
The high level of domestic cheese inventories will continue to keep cheese prices low.  The extreme size of the inventory cannot be corrected through consumption.  It can only be corrected, through reduced production and/or increased exports.  Chart V below shows cheese production for the last five years.  As long as there is excess milk, cheese production will probably remain high.  In the last three months, there has been a reduction in cheese production, but it is not enough to bring inventories in line. 

Cheese exports did increase in August.  More detail on exports and imports will discussed in the next post to this blog.  However, it will take time to reduce the cheese inventories, which in turn will bring higher cheese prices and higher Class III milk prices. 

Chart V - Cheese Production
Nonfat Dry Milk/Skimmed Milk Powder (NDM/SMP) is the largest dairy export product.  Recently exports of NDM/SMP have lagged prior months, and inventories are starting to build.  NDM and especially SMP are primarily export products whose price is determined on the global market.  The high inventories shown in Chart VI mean that international traders must compete hard to move these inventories.  That means, lower prices.

Chart VI - Inventory of NDM/SMP
The same can be said about dry whey inventories.  Higher inventories mean lower prices.  Nearly half of dry whey is exported so prices are very dependent on the international markets.

Chart VII - Inventory of Dry Whey
All of the current low prices result from over production compared to domestic consumption and exports.  When exports began to fall, milk production did not decrease, and that has created excesses that are keeping prices low.  In a future post milk production will be compared to demand.


Sunday, October 1, 2017

Proposed Change to FMMO Milk Price Formulas

There is currently a proposal to change the method of calculation for Class I milk.  Class I milk is the second largest milk category with Class III being the largest.  Therefore any change in the method of calculating the Class I price will have a significant impact on producer milk prices.

Chart I - Milk Production by Utilization Class
Currently, the Class I base price is based on the higher of Class III or Class IV milk.  The proposal under consideration would average the higher one with the lower one.  This would obviously lower the price paid for Class I Milk.

Chart II below shows 17 years of of Class III and Class IV prices.  Obviously, the Class III and Class IV price move in a similar pattern.  In  the first half of 2017,  the Class III price was not high, but the global glut of nonfat dry milk has kept the Class IV price lower than the Class III price.  With the proposed formula revision, Class I milk would have a lower value as the price of Class III and IV would be averaged.

Chart II - Class III and Class IV Milk Prices
The rationale for this is that it would allow processors to more precisely hedge the price paid for Class I milk because the current hedging tools require processors to choose between hedging with  Class III or Class IV prices.  If they choose the wrong one, the hedge may not precisely fit the final price.  If the processor chose to hedge using the Class III price, and international events drove up the price of nonfat dry milk which would increase the Class IV price,  their hedge would be lower than the actual price.

For producers, the same can be said, but there are very few producers who use hedging tools.  Most all processors do use hedging to minimize fluctuations in cash flow and profits.  So, in summary, all producers would be paid less.  Processors would buy Class I milk at a lower price.  Those that use hedging (primarily processors) would benefit from a simplified method of hedging.

The rationale is that more processors would be willing to produce fluid milk products if they could accurately hedge the price of milk and minimize they risk of inaccurate hedging.  In that way, more Class I milk would be produced and producers would gain by having a greater market for Class I milk.

It's not hard to see the folly in the logic of the above paragraph.  Milk consumption is not constrained by processing capacity.  The decrease in per capita consumption of fluid milk has been going on for nearly a century.  It is influenced primarily by competition from the many other choices in available drinks.  Because consumption decreases every year, processing capacity is more an issue of which processing plants should be closed than what new ones should be built.  There are no grocery stores in the U.S. that do not carry milk because of a lack of processing capacity.  See a recent post to this blog covering U.S. consumption of dairy products.

How would this change impact producer prices?  The most impacted Federal Order would be Florida.  Their milk is primarily Class I fluid milk.  A formula change that would reduce the price of Class I milk would simply lower the producer income.  This would be true of the other three orders paid on the "Advanced" pricing system, although the impact would be less.

For the six Federal Orders paid on the component system, the change would be seen in a lower producer price differential.  The impact will be minimal for Orders like the Upper Midwest, where fluid milk makes up a very small part of milk usage.  It would be greater in areas like the Northeast Federal Order, where a significant part of overall milk usage is Class I.

In 2018, California will likely become a Federal Order paid on components. If the new Class I pricing formula is approved, the proposed formula change could influence the upcoming vote of California producers and their cooperatives.

It is frankly surprising that the Farm Bureau is supporting this change.  One would expect them to protect farmers.  I encourage the staff of the Farm Bureau and the Farm Journal's publishers of "Skimmed Milk" to add comments to this blog to defend their positions or debate this analysis.  What has been published is certainly not “fair and balanced.”

ADDENDUM

On October 12, Dr. John Newton, Director, Market Intelligence for the American Farm Bureau Federation asked that an addendum by added to this blog.  He stated that "The Farm Bureau has not taken a position on the proposal to change the FMMO Class I formula."  He also stated that "The proposal is currently under evaluation by the Farm Bureau." 

Sunday, September 17, 2017

Exports Down for July - Exchange Rates Improve

July dairy exports were disappointing.  Exports of every commodity used to price producer milk were down.  On the positive side, exchanges rates improved vis-a-vis most all U.S. dairy-trading partners and competitors.  That should improve future dairy exports.  As shown in Chart I, butter exports were down by 32.5%.  However, any movement in butter exports is usually a large percentage as there are almost no exports and therefore changes are large percentages.  U.S. domestic demand for butter is exceeding dairy production, so there is very little butter to export.  Most importantly, cheese exports were down again in July, disrupting the positive gains shown in prior months.

Chart I - Summary of Dairy Exports
Shown below are the export charts of the four commodities used to calculate producer milk prices.  It is easy to notice that the July data is down from the prior months in every chart.

Cheese inventories are high as discussed in the prior post.  In May, it appeared that cheese exports were starting to reach record levels (see the July 9 post to this blog).  When June data was down, there were hopes that this was only a "blip" on an increasing trend.  With the July data in, there are concerns that the "blip" really occurred in May with a near record level of monthly exports.  With the very high levels of cheese inventories, there is not enough domestic demand to significantly shrink this inventory.  Without an improvement in cheese exports, high inventories and low cheese prices will continue.  The price of producer milk is tightly linked to the price of cheese (see post on the mathematics of this correlation).

Chart II - Exports of Cheese

Butter exports were down slightly as shown in Chart III.  Year-to-date, the only significant butter exported went to Canada, and that was small.  Canada is in a unique position of having a butter shortage and an excess of milk protein.  The high butter price in Canada does provide tempting opportunities for butter exports.

The strong demand for butter globally, in spite of the high prices, is creating a complicated supply and demand scenario ( see the August 28 post for details).  

Chart III - Exports of Butter
The price of dry whey is the basis of "other solids" pricing.  As mentioned in the prior post,  dry whey is currently at an OK price.  As a result, other solids pricing is not at a high, but it is making a nice contribution to the Class III price.  It would be nice of the price of dry whey were higher, but it pales in significance to the influence of the cheese price.

Chart IV - Exports of Dry Whey
Nonfat Dry Milk (NDM) pricing is the basis for pricing Class IV skim milk.  The price of Class IV milk is important when the price is above the price of Class III milk.  It then becomes the basis of Class I, Class II, and Class IV milk prices.  However, the low price for NDM is keeping the Class IV price well below the Class III price for now.

Chart V - Exports of Nonfat Dry Milk
The big positive for the month is exchange rates.  The USD continues to weaken against most all currencies of dairy trading countries.  Chart VI shows the improvement in the exchange rate between the USD and the Euro.  Only a few months ago, the exchange rate was around $1.08 per Euro.  It is now at $1.19 per Euro.  That makes U.S. produced dairy products less expensive vs. the largest global dairy exporter, Europe.

Chart VI - USD/Euro Exchange Rate
There has also been a very positive change in the other largest international dairy competitor, New Zealand.  The USD/NZD exchange rate is currently down slightly, but there is a strong trend to a stronger NZD.

Chart V - USD/NZD Exchange Rate
There is also a favorable change in the strength of the USD vs. the currencies of the largest customers of U.S. dairy products.  Most importantly is the USD/Mexican Peso exchange rate.  Since the beginning of 2017, the Mexican Peso has strengthened vs. the USD, making U.S. dairy products more affordable in Mexico.

Chart VI - USD. Mexican Peso Exchange Rate
Canada is also a very important U.S. customer for dairy products.  The strengthening of the CAD is similar to the strengthening of the Mexican Peso.

Chart VII - USD/CAD Exchange Rate
In summary, while the July export data was a disappointment, the exchange rate data helps set the stage of improved exports.  The most critical of these is exports of cheese.




Monday, September 4, 2017

Prices improve in August

On August 30, Class and Component prices were announced for August.   Milk protein was up from the July's price of $1.22/lb. to $1.55/lb. in August.  This was driven by an 8% increase in the NASS cheese price.  The increase in the cheese price is not in line with fundamentals as will be covered in more detail later in this post.  Butter prices rose again, this time slightly.  Butter production is down and inventories are lower, putting pressure on the price of butter.

Chart I - Price Changes from Prior Month
The cheese price increase did bring the Class III price up by 7.2%.  The correlation between the cheese price and the Class III price is very strong at 94%.  That simply means that the Class III price can be predicted with 94% accuracy based on the price of cheese.  The Class III price did increase from $15.45/cwt. last month to $16.57/cwt. in August.

Cheese production is strong in spite of growing inventories.  When there is too much milk, where else can it go?  Cheese production is outstripping domestic consumption and exports.  As a result, inventories are rising.

Chart II - Cheese Production
The severity of the inventory increase is displayed in the two following charts.  Cheese stocks need to increase over time with the increase in consumption.  The growth in inventory is needed to provide sufficient stocks to manage the demand. The chart below shows the growth in cheese stocks since 2000, which is consistent with the growth of consumption plus exports.   However, the stocks are currently well above the long-term trend line.  The inventory is at a record level above that trend line.

Chart III - Long-term trends in Cheese Stocks

Chart IV below compares year-by-year levels of cheese inventories on a month-to-month basis.  July ending data shows a significant and concerning swelling of inventories.

Chart IV - Cheese Inventories
In spite of this, the NASS cheese price did go up in August to $1.67/lb.  The most recent CME cash prices as of September 1 were $1.54/lb. for blocks and $1.52/lb. for barrels.  These numbers signal a potential strong drop in the NASS cheese price for September and, therefore, a strong drop in the Class III milk price.

Butter inventories remain tight.  Demand for butter remains strong in spite of the high retail prices.  The NASS butter price rose only slightly in August to $2.67/lb. from $2.62/lb. the prior month.

Chart V - Butter Inventories
Production of butter is running lower than prior years in spite of the higher demand for butter.  The shortfall is being made up with butter imports, primarily from Ireland.  There is strong demand for butter from Ireland, which is considered premium butter by many consumers.  It is "cultured" and has a slightly stronger flavor and a higher melting point.  There will be more on this in the next post, which will analyze export/import data.

Chart VI - Butter Production
The price of dry whey, the basis of "Other Solids" pricing lost 3.7% in August, but remains at a mid-range level.  Therefore, the price of "Other Solids" remains at a respectable level of $.24/lb.  

Chart VII - Dry Whey Prices
The dairy commodity markets remain turbulent.  Articles on the high wholesale and retail price of butter are everywhere.  It is not just a domestic issue, but a global issue.  As covered in the prior post, butter prices mostly just move dollars from milk protein to butterfat or vice-versa.  The dominant force for milk prices is the wholesale cheese price.  The change in August was welcomed, but may be short lived.  The low spot market prices quoted above, are not indicative of the futures cheese market, which is quoting continuing prices in the $1.60/lb. range for the remainder of the year. This will only be possible if cheese exports quickly pick up.  New data on exports will be available next week and will be covered in the next post to this blog.


Monday, August 28, 2017

Where is Butter Going?

Butter prices are extremely high and cheese prices are "moderate."  When cheese prices are "moderate", milk prices are "moderate." But the high price of buttert has caused a major distortion in the value of milk protein and butterfat.  This post will review some of the fundamentals driving these results.  In the most recent month, milk protein was worth $1.22/lb. and butterfat was worth $2.95/lb.

The most recent data lags in publications from government sources and often later contains adjustments after the initial publishing.  Some of the most recent data shown in the charts below was developed from the currently available data, and may show some adjustments in later publications.

The prior blog covered some of the elements concerning exports and imports of dairy commodities.  This post will focus on domestic consumption.  The definitions behind these numbers can be obtained in this USDA publication.  Statistics defined as consumption or per capita consumption, are technically defined as availability.  This simply is meant to state that consumers are not surveyed to see how much cheese they left of their plate or how much butter was on toast that was not eaten, etc.  Availability simply means that the item was available for consumption and includes any final waste.  The data for 2017 is based on actual data for the first seven months and the USDA projections for the remainder of 2017.

Another term often used by economists is "price elasticity of demand."  This simply means that if something increases in price, consumption will go down and vice-versa.

Cheese consumption has been increasing for a very long time.  This has occurred not just in the U.S., but also in other part of the world.  Countries like France eat more cheese per capita than the U.S. which simply means that there is still lots of room for increasing cheese consumption in the U.S..  The increase has typically varied between two and three percent per year.   So, the trend for increasing cheese consumption seems to have almost no upper limit.  Cheese is eaten as a stand alone food item or used as an ingredient in other food items.

Chart I - Cheese Consumption
The trends in butter consumption in the U.S. are a little different.  During WW II, butter demand far outstretched supply.  Substitutes were developed primarily based on vegetable oil.  Some of these were horrible, but with no butter available, citizens had to settle for "substitutes."  Over-time, the substitutes were improved and priced competitively and became accepted in everyday use.

Chart II shows the growth in butter consumption.  After a terrific fall in the 40's and 50's consumption was relatively flat until the 2000's. Around ten years ago butter consumption started to increase at a faster rate.  There appears to be two major reasons for this increase.  The melting point of vegetable based spreads was largely controlled by partial hydrogenation, which was deemed to be a health hazard.  This practice has changed, but concerns still linger about these vegetable spreads.  There has also been a movement of increasing concern over "processed" foods and a trend to more "natural" and "organic" foods.  Companies like Whole Foods, recently acquired by Amazon, have developed a business on what was a niche and is now a substantial business.   As covered in an earlier post to this blog, butter consumption is now growing at a higher percentage than cheese consumption.

Chart II - Butter Consumption
The trend for increased consumption of butter is around ten years old.  The increased consumption of cheese has been going on for much longer, perhaps a century or more.  The continued growth of cheese is very likely.  The continued growth of butter may be a trend that may reverse in the coming decades.  Who knows when publicity about butter may be loaded with stories about cholesterol, caloric value, or other concerns?

Butter is primarily butterfat, with water and typically has salted added.  Cheese is a combination of milk casein protein and butterfat in fairly equally amounts (typically a little more butterfat than protein), with water, salt, a perhaps a few other ingredients added.  When making cheese, only whey is left as a by-product, but with butter, a lot of skimmed milk is left.  U.S. consumption of skimmed milk is small and decreasing, leaving only the export market to help the disappearance of skimmed milk.  Some nonfat dry milk will go to "spike" protein for cheese making, but that will not begin to absorb the supply.  If the domestic and global demand for butter continues to grow, it will undoubtedly create a glut of nonfat dry milk and skimmed milk powder which will further reduce the Class IV milk price.

Currently, about 12 billion pounds of cheese are consumed in the U.S.  By comparison, there are 2 billion pounds of butter consumed.  Currently butter consumption is growing faster than cheese consumption by percentage, but the actual pounds of growth are much greater for cheese than butter.  It is important to note, that milk protein is needed to make cheese.  While right now, milk protein is priced fairly low, but the growth of cheese will again put pressure on the need for milk protein.

At the beginning of this post, there was a comment about "elasticity of demand."  Typically in the past, the increases in cheese consumption have dipped only when prices were high, which shows that cheese has "price elasticity of demand."  There is not a long sustained growth in butter consumption vs. price to accurately measure this same scenario.  However, currently the retail price of butter is very high.  The far right end of Chart III would suggest that butter consumption might be falling with the current high prices.  The blue price line in the chart below is based on the NASS wholesale price of butter.  With a sustained high price for butter, domestic disappearance seems to be dropping.

Chart III - Butter Price vs. Disappearance
This blog reports primarily events that influence U.S. producer milk prices.  Based on the above, how do these events impact producer milk profits?
  • First of all, increased butter consumption and increased butter prices do not lead to significant increases in producer milk prices.  A higher butter price only changes the makeup of the Class III price from being dominated by protein to being dominated by butterfat.  By the Federal Milk Marketing Order formulas, a higher butter price increases the value of butterfat and lowers the price of milk protein.  The change to the Class III price is minimal.  See the detail of this in a prior post.
  • Unfortunately, many of the current dairy publishers do not seem to have a good understanding of how the Federal Order formulas work and keep publishing how much the current butter prices are boasting milk prices.  This is fake news.
  • If butter consumption both domestically and globally continues to grow and cheese domestic consumption and exports do not provide a sufficient market for cheese production, it will tend to keep cheese prices "moderate" and the Class III price at the current "moderate" levels as well.  What is needed to increase producer milk prices is increased cheese disappearance through both domestic consumption and exports.  This will increase demand, lower inventories, and improve milk prices.
  • Butter consumption will probably drop with the current high prices.  This will tend to "right" the market with lower butter consumption both domestically and globally and reduce butter prices.  This will directly impact the butterfat price.









Sunday, August 13, 2017

Great H1 for exports, however, June cheese and NDM exports are down

Dairy exports showed some weakness in June, but from a broader perspective the first half of 2107 was up considerably over the prior year.  Butter exports were up 35.9% from May, but it was on a very small base.  With the domestic shortages and tight inventories, it would be difficult to export any significant amount of butter.  Exports of cheese, nonfat dry milk (NDM), and dry whey were all down versus the prior month.
Chart I - Export Changes from Prior Month
As mentioned in the July 9 post to this blog, long-term increases do not typically occur with increases each month.  Long-term increases always have ups and downs.  The upward trend for cheese exports started in October 2016 and has continued to grow reaching a near record level in May 2017.  If there is another downturn in August, that could be concerning, but the one month decrease is normal for an improving market.  There are now nine months of data supporting an upward trend in cheese exports.

Chart II - Monthly Exports of Cheese
Cheese exports for the first half of 2017 were close to the second best ever.  Cheese exports are the most important parameter for insuring that there is a sufficient market for the cheese being produced. Without a sufficient market, inventories will increase and prices will fall.  With lower cheese prices, Class III milk prices will also fall as well as the uniform milk price.

Chart III - Cheese Exports for January through June
NDM exports are the backbone of U.S. dairy exports.  It is by far the largest export category and the U.S. is the world leader in NDM exports (see prior post).  June exports fell significantly.  As with cheese, one month of data, although troubling, does not define a long-term problem.

Chart IV - Monthly Exports of NDM
For the first half of 2017, exports of NDM were about even with the record year of 2014.  Unfortunately, prices were much lower than 2014, but the volume has helped in keeping demand for dairy products closer to supply.

Chart V - NDM Exports for January through June

Exchange rates are continuing to show a weaker USD, which will help increase exports by making U.S. products less expensive in the international market.

 When the chart charts below show an increase, the USD is weaker and U.S. export products are more competitive.  The two largest export competitors in the international markets are Europe and New Zealand.  (More detail is available in the July 28 post.)  In the two charts below, there is a trend toward a weaker USD and a stronger Euro and NZD.

Chart VI - Exchange rates for the USD vs. the Euro
Chart VII - Exchange Rates for the USD vs. the NZD
Mexico is by far the largest export market for U.S. Dairy products.  The Mexican Peso is gaining strength against the USD,  which in turn is making U.S. dairy products more financially attractive in Mexico.  This is another very positive sign for U.S. dairy exports.

Chart VIII - Exchange Rates for the USD vs. the Mexican Peso
Exports to Canada are not typically significant as Canada is not a NAFTA open border for dairy products.  However there has been a great deal of press concerning a possible renegotiation of NAFTA.   It seems unlikely that Canada will open their market for dairy imports.  However, if this did happen it could have a very strong and positive impact on U.S. dairy exports.  The exchange rate of the USD/CAD could be very important and it is currently showing a weaker USD and a stronger CAD.

Chart IX - Exchange rates for the USD vs. the CAD
While June exports has some disappointing analytics, the longer-term view shows very positive trends.  The data for July, which will be ready in a few weeks, should tell a lot.

Sunday, August 6, 2017

Milk Protein hits 16 year low, Butterfat Prices Near Record

July Class and Component milk prices were announced on August 2.  The class III milk was down $1/cwt. to $15.42.  Milk protein hit a 16 year low and butterfat is at near record highs.

Chart I - Price Movements for July vs. the Prior Month
As shown in Chart II below, the price of milk protein has not been this low since the start of 2001.  The value of milk protein for July is $1.22/lb.  This compares to record highs for milk protein at nearly $5.00/lb.  Butterfat in July was worth $2.95/lb., near the all-time records which are just above $3.00/lb.
Chart II - Long-term Trends
With these abnormal prices, July's butterfat contribution to the milk check jumped to 67%.  July is a record setting month, but only because of the extremes in pricing.

Chart III - Pie Chart of Class III price
What caused these extremes?  Cheese prices were down only 5.3% in July, but protein prices went down 30.2%.  Frankly, it's surprising that cheese prices went down at all.  Exports of cheese are improving (see July 9 post) and inventories are declining (Chart V below).  Typically, this scenario causes an increase in cheese prices.  For that reason, the 5.3% dip should be taken as a normal fluctuation, not a trend.  

The real reason for the big dip in protein prices is the increase in butter prices.  When butter prices go up, the value of butterfat goes up, and the value of milk protein goes down.  There are many published articles stating how much money producers are making from the increase in butter prices.  However, butter prices do not drive higher milk checks.  The Class III hardly changes when butter increases in value.

The formulas behind this are shown below.  The price of butter influences both the formulas for butterfat and milk protein.

Butterfat Price = (Butter Price − 0.1715) x 1.211) 

Protein Price = ((Cheese Price − 0.2003) x 1.383) + ((((Cheese Price − 0.2003) x 1.572) − Butterfat Price x 0.9) x 1.17)

If one collapsed the protein price formula, to its simplest terms it would be as follows:

Protein Price = Cheese Price x 3.22 - Butter Price x 1.28 - $.42

In July, the cheese price was $1.54/lb. and the butter price was $2.60/lb.  Because the butter price has a negative influence in the formula, it significantly drove down the value of milk protein.

The chart below shows the cheese and butter prices since the beginning of 2000.  There have been a few times in the past when butter was worth more than cheese, but they were short-term spikes. However, starting in 2015, butter prices shot up.   During that same period, cheese prices have been moderately low.  In July, this reached an extreme point with very high butter prices and very low cheese prices.

Chart IV - Cheese and Butter Prices
A high butter price moves the money from protein to butterfat, but has a small impact on the overall milk check.  (See more detail on this relationship in a prior post.)

July's pricing was an extraordinarily unusual event and extraordinarily unusual events don't typically last. It would not be wise to make long-term decisions based on Pie Chart III above.   Retail prices for butter are very high, and high retail butter prices will reduce domestic consumption as some consumers change to lower priced vegetable spreads.  With reduced consumption, inventories will grow and domestic prices will fall.  The future's market is indicating a 10% increase in cheese prices by the end of 2017, and a 10% decline in butter prices. This would bring the milk protein price back to $2.00/lb. from the current $1.22/lb. price.

The moderately low cheese prices result from excess inventories and the excess inventories are caused by lagging export volumes of cheese.  However, as covered in a prior post, cheese exports are growing quickly and inventories are starting to fall.

Chart V - U.S. Cheese Inventories
Cheese exports for June will be covered in the next blog, but the data available indicates that cheese exports are continuing to grow at a rapid rate.

July component pricing was abnormal.  But all indicators show that more normal pricing will quickly return.