Sunday, January 15, 2017

Exports Down in November - USD gets Stronger

November exports of dairy products that influence producer milk prices were down compared to the prior month and imports were generally up.  While prices are improving internationally, increased volumes are proving difficult.  NDM was again a bright spot in the statistics.

The biggest change was in NDM, the largest U.S. export item in volume.  As mentioned above, NDM was down from the prior month, and it was well below the all time volume highs that occurred in 2014 and 2015.  However, it was still the second best volume level of 2016.  While export volumes are encouraging, prices are still 50% below early 2014 levels.  

Unfortunately, imports of NDM were also up to record levels.  This was an all time high record for imports.  The two largest sources of imports were Canada and New Zealand.  Much smaller amounts were imported from many other countries and those imports were up substantially from the prior year.

As a result, the net export volumes were down significantly from the prior month and were well below the peaks of 2013, 2014, and 2015.

The chart below shows the comparative prices of NDM/SMP on the international markets.  For all of 2016, prices for U.S. NDM were below SMP prices from Europe and New Zealand.  However, in January, the U.S. price rose above the price of SMP from Europe.  This was likely the impact of exchange rates which are reviewed below.  The stronger USD may impact December and 2017 exports of NDM.

For a review of the difference between NDM and SMP, see the December 18 post.

Cheese and butter net exports remained near the YTD 2016 levels.  Cheese prices have risen globally, but U.S. cheese is still higher priced than the competition.  Cheese exports to Mexico and Canada remain stable, but are off for all other countries.  Butter exports remain low due to pricing.  What is exported is mostly going to Mexico and Canada.  The U.S. continues to import more butter than is exported.


Below are five charts that reinforce the prior post on "Election Impact."  As the USD gets stronger, exports become more difficult and imports are more financially attractive.  Since the November election, the USD has become increasingly strong.  In the charts below, a lower value means a stronger USD.   The first two charts show the USD relationships to the currencies of the two strongest global dairy exporters, New Zealand and the EU.  Since November, the USD has made U.S. dairy products less competitive by about 5%.  Fortunately, global prices are increasing, but a 5% discount to compensate for exchange rates has taken some of the joy away.

The last two charts on exchange rates show the impact with our two large and long-time trading partners, Mexico and Canada.  The Mexican Peso has been especially hard hit, and the Canadian Dollar has also taken a plunge.

The impact of these exchange rates has not been fully felt in the November data, but will make 2017 net exports more difficult.  Overall, there are three strong events that will influence dairy prices in 2017.  One is the increasingly strong USD.  The second one is the reduction in milk production by Europe, New Zealand, and Australia, who are all major players in the international markets.  The third event that could impact the U.S. dairy industry is the possible change in California pricing practices as they may transition from their six decade old system of unique pricing, and become a Federal Milk Marketing Order.  These developing events will be followed closely in this blog.

Sunday, January 8, 2017

Class III Milk Price Hits Two Year High

On January 5, December Class and Component Prices were announced.  The Class III price set a two-year record high at $17.40/cwt.  Prices of all commodities used to calculate component prices were up.  Other Solids made a jump to $.21/lb.  While this price is still well below early 2015 prices,  it is the best price in the last 18 months.  Demand for butter continues to outstrip production, requiring imports to make up the shortfall.  While the price of milk protein dropped (the only red on the dashboard chart below), it was only because of the major increase in the price of butter.  See this prior post for a review of this relationship.

Even with the significant increase in the price of butter, and therefore butterfat, the price of milk protein still stayed above the price for butterfat.  Milk protein received a price of $2.69/lb. while butterfat received a price of $2.34/lb.  In December, milk protein and butterfat contributed equally to the Class III price.

Inventories of cheese, butter, NDM and dry whey were all at reasonable levels.   The data shown below is for the end of November, the most recent inventory data available.  If those inventories continue to hold when December data is released, the year of 2017 should have a strong start with inventories in line, international milk production down, and rising domestic dairy prices.

Production is also well balanced with no excess production in the major commodities used for pricing milk components.  On each of the four charts below, production is down from the prior month.  After seeing some expansion in butter production in the first half of 2016, production has fallen below prior year levels in the second half of the year.  Production is now running at the same level as 2012 through 2014.

Butter prices remain very high.  International butter prices have risen significantly, but the U.S. prices remain the highest prices in the world with roughly a 10% premium over the international markets.  In the next post, imports and exports will be reviewed, but it seems certain that butter exports will remain near zero.  With tight supplies and high prices, exporting butter is very tough.

Cheese prices are the highest in two years and competitively priced compared to the international markets.  However, compared to historical prices, the price of cheese is nowhere near record levels.  There is definitely room for growth in cheese prices which could lead to increased milk protein prices in 2017.

The price of NDM, while up, is still low compared to historical prices.  The U.S. is priced competitively with the international prices and has been able to move significant volume.  There is also room here for price improvement in 2017.  Because so much NDM/SMP is exported, the domestic U.S. price is very dependent on the international price.

As full year 2016 data becomes available, a full analysis will be made on this blog.  That will probably not take place until February.  However, looking forward, there are important changes that could take place in the U.S. dairy landscape.  One of the big ones is the possible transition of California to a Federal Milk Marketing Order.  This could put California on a more level playing field with other parts of the U.S. and stimulate both domestic dairy growth and international dairy growth.  More on this in an upcoming post.