Sunday, December 17, 2017

Contrary to Many Reports, Exports are Doing Very Well

Contrary to many reports on exports, the review below shows that exports are doing very well.  While Nonfat Dry Milk (NDM) is the largest export item, when it comes to setting producer milk prices, the commodity to watch is cheese.  See the March 12 post to this blog if you have any doubt about this.

Cheese exports were near a record level for the month of October.  They were above 2014,2015, 2016, and near the same volume as 2013.  That is excellent growth in a competitive global market.
Chart I - Cheese Exports
Imports of cheese (Chart II) were unfortunately up significantly in October, however, they were still at or below the prior two years.
Chart II - Cheese Imports
The heavy imports kept net exports from reaching record levels, but net exports were still above the prior two years and close to 2014.
Chart III - Cheese Net Exports
Cheese exports by country show amazingly strong growth in 2017.  Exports to the top ten buying countries were all up with one very small exception, Canada.
Chart IV - Cheese Exports by Country
Cheese imports by country also show YTD improvement.  For each of the seven countries supplying cheese to the U.S., that volume was down.  This helps take pressure off high inventories.
Chart V - Cheese Imports by Country
Of course there is always room to further improve, but the statistics on exports and imports of cheese look very strong.  With a continuance of this effort, 2018 could see lower cheese inventories, higher cheese prices, and higher Class III milk prices.  With about 95% of U.S. cheese consumed in the U.S., the price is primarily controlled by domestic events.

Cheese futures prices on the CME are down from current levels.  The continuing recovery is very dependent on more positive results for cheese exports.  China is a growing market and there are new agreements with China on imports of dairy products,   While the future is always cloudy, there is a reasonable expectation of continuing improvements in cheese exports.

Exports of butter continue at the levels of the prior three years.   October exports were up, but still on a very small base.  In the last five years, there has only been one period of significantly higher butter exports and that was in late 2013 and early 2014. 

Chart VI - Butter Exports
Butter exports are small, and they are concentrated in exports to one country, Canada.  The current NAFTA discussions between the U.S. and Canada do not seem to be going anywhere. If NAFTA does not stay in place, Chart VI below could change drastically.
Chart VII - Butter Export by Country
Much of the current news on NDM has centered on slowing exports, growing domestic inventories and lower NDM exports.  While all this is true, the analytics do not show extreme weakness.  Certainly global prices of NDM are low and inventory is plentiful.

However, as seen below in Chart VIII, October exports were at or above prior years except for 2016 when NDM exports peaked.  The October 2016 peak was driven by specific events and was only temporary.  Yes, inventories are high, but the highs are driven by over production as shown in Chart IX below.  Production data is currently available only through September.  In the months of August and September, when export levels did not grow, production did grow.  The result is obvious, bloated inventories.
Chart VIII - NDM Exports
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Overall, dairy exports are not in bad shape. 

There are no planned posts to this blog for the remainder of 2017.  Happy Holidays to all and new posts will start in early 2018.

Sunday, December 10, 2017

It was a Very Good Month

Class and Component prices for November, 2017 were announced on November 29.   While the dashboard below shows a lot of red, November was actually a positive month.   Cheese prices were up and cheese is the primary determinant of the Class III milk price, which was also up.  The Class III milk price was $16.88/cwt.  Cheese inventories were down for the third straight month and lower cheese inventories will continue to bring milk price improvements.

Chart I - Dashboard of Price Changes from Prior Month
Chart II below shows the drop in cheese inventories.  They are still high, but they have come down nearly 100 million pounds in the last three months.  The decrease in inventories is a combination of both increased exports and reduced cheese production (Chart III).  Exports will be covered in detail in the next post to this blog.

Chart II - Cheese Inventories
Chart III Cheese Production
As a result, cheese prices were up for the fourth straight month (Chart IV).  The current price is $1.76/lb.  That is above all of 2015 prices,  above 11 out of 12 months of the 2016 prices, and is also the best monthly price for all of 2017 YTD.  These are clearly very positive signs.

Chart IV - NASS Monthly Cheese Prices
The November Class III milk price is the highest monthly price for 2017 YTD, and is higher than 10 out of 12 months of 2016.  Chart V shows this graphically.  This is also a very positive sign.

Chart V - Class III Milk Price
Butter inventory is down (Chart VI), but this is part of an annual cycle.  For this time of the year, butter inventories are actually rising.  As a result, the butter price is falling.  This is the third consecutive month of falling butter prices (Chart VII).

Chart VI - Butter Inventory
Chart VII - Butter Prices
As cheese prices rise and butter prices fall, the pie chart below shifts to a higher financial contribution from milk protein and a lower contribution from butterfat.  Milk protein is now up to $2.34/lb., up from $1.22/lb. in July and butterfat is down to $2.55/lb. down from $3.01/lb. in August.

Chart VIII - Breakdown of Class III Milk Price
Where is the market going?  Will cheese exports continue to grow and shrink inventories?  Will cheese production escalate and increase inventories?  Will butter consumption decrease with high butter prices or will butter demand escalate and put pressure on butter prices?  While there are lots of very smart people attempting to make educated guesses on these movements, the fact is that no one can accurately predict which way the markets are going.  There are just to many variables influenced by multiple global factors.  In the October 29 post to this blog, the practice of adjusting cow nutrition needs to out-guess where the market was going was addressed.  Quoting from that post,  "Chasing the market prices with constantly changing nutritional diets is not a best practice."  Staying with and fine tuning nutritional needs for component production is a much better practice.

There was some bad news in the November statistics.  Nonfat Dry Milk (NDM)/Skimmed Milk Powder (SMP) inventories are out-of-control.  (See the December 18, 2016 post to this blog for a review of the difference between NDM and SMP.)  Over production and strong international competition have bloated inventories to extreme levels.

Chart IX - NDM/SMP Inventory
With high NDM/SMP inventories, price will plunge.  The price of NDM/SMP is at a low for this year. NDM/SMP was prices for November were $.75/lb., down 25% from the beginning of 2017.  That has pushed the value of skim Class IV milk to $5.23/cwt., down 31%.

With the exception of NDM/SMP, November was a "Very Good Month."

Sunday, December 3, 2017

The Proposed Change in the Class I Price Formula-Is it Good for Producers?

The proposed change in the Class I formula for computing the price was reviewed in this blog on October 1.  Now that advanced pricing data for the full year of 2017 is available, a more complete analytical analysis is possible.   Because the Class I category is the second largest of the four Classes of Milk, any change will be impactful.  This post will review the impact of the change from the point of view of a producer.

Chart I - Pie of Milk Volume by Milk Class - 2916
The current formula for determining the base Class I advanced price is the "Higher of Advanced Class III or IV Skim Milk Pricing Factors."  The proposed formula is the "Average of the Class III and Class IV Skim Milk Pricing Factors plus $.74."  The purpose is to allow improved hedging to exactly match the formula pricing.  Because the Class III and Class IV factors can be hedged on the CME, the two can be hedged exactly.  When the formula says that the price is the "higher of", hedging can be may not be accurate because the hedging had to bet on one or the other of the Class III or Class IV price.  For those who hedge (primarily processors) this formula change will improve their predictability via hedging.

The current and proposed formulas were analyzed for four different time periods.   They are as follows:
  1. The18 years from 2000 to 2017
  2. The last ten years 
  3. The last five years
  4. The current year of 2017 
Average Class I base skim prices were calculated for both formulas, the current and the proposed.  Additional, the volatility of the Class I base skim price was calculated for current and proposed formulas based on traditional methods of measuring volatility.  Volatility is typically measured by comparing the standard deviation of the data for each case.   The change is then expressed as an index.

Other parameters were measured as well, such as frequency of use of Class III or Class IV in the current formulas, and trends in the frequency, impact of the proposed formula change on monthly pricing.

Table I compares the Class I base price averages for the time periods listed above.  In each comparison, the average price is higher by the proposed formula than by the current formula.  The changes for just 2017 were up by $.11/cwt., but for any longer period, the change was insignificant.  From a producer's point of view, based on Table I, there is no reason to resist the change to the proposed formula.
Table I - Change in Average Class I Base Skim Price

Table II compares the impact of volatility in Class I prices when calculated by the current and proposed formulas.  In each case, the volatility is less with the proposed formulas than with the current formulas.   From a producer's point of view, based on Table II, there is no reason to resist the change to the proposed formula.

Table II - Volatility of Class I Base Skim Price

Table III compares the number of months that the proposed formula was higher or lower than the current formula.  Over the last 18 years (216 months), in 137 months, the price was higher, and in 79 months, the price was lower over the last 18 years.  Similarly, over the last ten years, the last five years, and 2017, the number of positive months outweighs the number of lower priced months.  From a producer's point of view, based on Table III, there is no reason to resist the change to the proposed formula.
Table III - Number of Months Price is Higher or Lower

Table IV shows the months and percents of using Class III and Class IV prices over the trial years.  The mix seems consistent except when viewed for a single year. If the demand for butter creates too much skimmed milk, the skimmed milk may only find a home as nonfat dry milk in the international markets.  The excess could keep Class IV prices low.  In that case, the inclusion of a low Class IV price in the Class I formula could make Class I price lower.  More on this below.
Table IV - Months that Class III and IV were used in Current Class I Formula

Table V shows the largest variations, both positive and negative that would occur via the change in formula.  If calculated by the new proposed formula, the largest monthly increase compared to the current formula was $.72/cwt.  However, the largest monthly decrease compared to the current formula was $2.53/cwt.  Because the change in the average price does not significantly change and because there are more positive months than negative months, it does make sense that the negative months have to change by more than the positive months change.

Table V - Largest Monthly Changes in the Class I
Base Price
To further explore the impact of the new pricing formula, Chart II shows the monthly change in Class I base skim price if the proposed formula was used over the last 18 years.  As shown in Table V and Chart II, the increases in price topped out at $.72/cwt. and the decreases in price have lows dipping to $2.53/cwt.  The pattern of larger price changes for negative months is consistent for all date ranges in Table V.  Importantly, note that the trend line of the change remains extremely flat, indicating that the $.74/cwt. addition to the formula in the proposed formula is reasonable and should remain reasonable  in the future.

Chart II - Change is Price with Proposed Formula vs. Current Formula
From a producer's point of view, based on Table V and Chart II, there could be a reason to resist the change to the proposed formula.  If cash flow was so tight, that a significantly lower Class I price would in a single month become a disaster, than the change in the Class I formula would create the possibility of that disaster.  In most cases, producers would be able to weather a month or more of a lower price if it all evens out over the long term.

In summary, there appears to be very little reason for a producer to resist the proposed change in the Class I formula.   However, to does nothing to benefit producers who do not hedge and very few producers to hedge.  A few items, such as long-term depressed prices for Class IV milk could make the proposed formula less attractive.  However, history does not currently show any long-term trend of low Class IV prices.