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.

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