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."

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