Imports of Cheese and Butter are Down

In the February 5 post to this blog, year-end inventories of dairy products were reviewed.  They were mostly very high, which has kept the prices of these commodities low and therefore kept producer milk prices low.

In the prior post, cheese exports were reviewed.  They were up considerably over the prior year and were the second highest ever.  The missing pieces in the milk pricing logic link were imports, domestic consumption, and production.  This post will review the impact of 2017 imports.  The emphasis is on cheese as the price of cheese is the most important parameter in the calculation of producer prices. See this prior post for analytical proof of the importance of cheese prices.

Chart I below shows the inventory of cheese and the trend line of these inventories.  The inventory level has not been this much above the trend line since the year of 2000.  With cheese inventories this high, there is bound to be low cheese prices.

Chart I - Domestic Cheese Inventories 

Chart II shows the level of cheese exports by year since 2000.   The year of 2017 was the second highest export level ever and showed a significant increase from the prior year.  Exports of cheese were reported to not only be improving significantly but also showed strong momentum going into 2018.  Higher exports help lower the bloated cheese inventories.

Chart II - Cheese Exports by Year

Lower cheese imports also help lower inventory levels.  Chart III below shows the cheese imports by year through 2017.  The imports of cheese for 2017 were significantly below the prior year which was very positive.  However, there are seven prior years that were lower.  So while 2017 showed significant improvement with lower imports, by recent historical levels, imports were still high.  Why are imports still a problem?  The two big competitors to the U.S., are the EU and New Zealand.  Both have excess cheese to market and U.S. purchasers have found these buying opportunities and taken advantage of them.  There are limits to the amount that can be imported without significant tariffs, but those limits still allow significant cheese imports.  See this prior post for a review of the two tiered tariff system.

Chart III - Cheese Imports by Year

As a result, the net exports shown in Chart IV are only the third best ever (as compared to cheese exports which were the second best.)  From this, one can conclude that imports remain a problem in recovery of producer milk prices.  This is a problem that can only be solved with lower production of cheese in the EU and New Zealand.   There is very little that can be done in the U.S. to limit these imports.  Global over-production of cheese is a difficult problem for the U.S. to solve without tighter tariff limits.

Chart IV - Cheese Net Imports by Year

The price of butter has a much lower impact on the Class III price than cheese, so less space will be dedicated to butter.  Domestic inventories of butter (See Chart V) are not excessive, unlike cheese.  With inventories in line with the trend line, prices of butter are good.

Chart V - Domestic Butter Inventory

As covered in the prior post, exports of butter are minimal with most of those exports going to Canada.  As shown in Chart VI, exports of butter for the last three years have been far below the prior decade.  With inventories in line, there is no reason to push for additional butter exports.

Chart VI - Butter Exports by Year

Imports of butter for the last three years are robust compared to the prior seven years.  More imports and/or greater churning in 2018 would not significantly hurt the balance of inventories, and therefore butter prices will probably remain high.  However, and unfortunately, butter and butterfat prices have little impact on the Class III price.

Chart VI - Butter Imports by Year 

The export/import comparison between cheese and butter is illustrated in Charts VII and VIII.  The U.S. is a net exporter of cheese, with increasing exports and declining imports.

Chart VII - Exports vs. Imports of Cheese

The U.S. is a net importer of butter with increasing exports and declining imports.

Chart VIII - Exports vs. Imports of Butter

There is an important difference between cheese and butter exports and imports.  In order to balance inventories of cheese and thereby increase Class III prices, more cheese exports and fewer cheese imports are desperately needed.  Butter is very different.  Increasing exports of butter will make meeting U.S. domestic demand difficult and will put pressure on more, not fewer imports.  Also, if U.S. butter production is increased, there will be more skimmed milk available which will increase nonfat dry milk and skimmed milk powder production.  The inventories of nonfat dry milk and  skimmed milk powder are already way too high!  Producing more of what you already have too much of aggravates the problem.

Therefore, to raise Class III producer milk prices, the emphasis needs to be directed to cheese, not butter.

Upcoming posts will review 2017 imports of nonfat dry milk and dry whey.  With most 2017 data now available, consumer consumption trends will be reviewed again.  Also, trends in production will be analyzed.  If there are other areas of interest or concern, please leave a comment.