Inventories-Inventories-Inventories

Chart I below says it all.  January was a really ugly month for the commodities used to price producer milk and as a result it was also an ugly month for producer milk prices.  The January 2018 stats can be reviewed at this link.  While butter and butterfat continued their declines, those declines were small compared to other declines.  What's behind these declines?  Too much inventory!  Most of this post will concentrate on inventories.  With the exception of butter, all commodity inventories are really high.

Chart I -Ugly Chart!

Inventory data is shown below.  All of these charts represent the commodities that are used to calculate producer milk prices.  The most important one is always cheese as it has by far the greatest impact on the Class III price.  The growth in cheese inventories has been developing over the last nine months as shown in Chart II.   Because the over production has been small but consistent, Chart II does not easily show the growing problem.

Chart II - Cheese Inventory

But when viewed over the long-term, the bloat is more obvious.  Chart III illustrates the normal in growth in cheese inventories via the black trend line.  Cheese consumption has shown regular increases in per capita consumptions and inventories for nearly a century.  When the actual inventory line is consistently above the trend line, there is a problem.  Because of the excess milk available, cheese with its longer shelf life is viewed as a decent parking place of excess milk.  Especially when milk prices are extremely low, it can be advantageous for cheese processors to produce more cheese than needed and park it in inventory for sale at a later time when prices are higher.

As covered in the January 14 post to this blog, exports of cheese are improving.  The unknown factors are how quickly these exports can improve and for how long will there be excess milk available.  There are a few charts shown later in the post that can help shed light on the excess milk dilemma.

Chart III - Cheese Inventory Growth over 18 Years

Dry whey inventories have grown tremendously over the last five months (See Chart IV).  The same dilemma described above for cheese is apparently impacting dry whey inventories.  Typically whey is not dried unless there is a market for it.  However, drying whey can provide a longer shelf life and when the price of whey is very low, it is tempting to create inventories that can be sold later at a higher price.  However, the excesses must eventually be reduced.

Chart IV - Dry Whey Inventory

More Nonfat Dry Milk/Skimmed Milk Powder (NDM/SMP) is available internationally than can be used and international prices are low.  The increased domestic and international consumption of butter has put pressure what to do with the skimmed milk.  One-way of "kicking the can down the street" is to dry it.  As shown in Chart V, inventories have sky rocketed. As with dry whey, these excessed must eventually be dealt with.  The price of NDM/SMP is used to calculate the skimmed price of Class IV milk.

Chart V - NDM/SMP Inventory

The price of whole milk powder is not used in FMMO formulas for pricing producer milk.  However it does have a huge international market opportunity.  Because there is no domestic market for whole milk powder, the U.S. has not materially participated in this market.  However, it is an opportunity for the future.  As shown in Chart VI, production of whole milk powder has doubled in the last five years.

Chart VI - Production of Whole Milk Powder

Currently, inventories of WMP have reached record levels.  Apparently it has also become a place to send cheap excess milk.

Chart VII - Whole Milk Powder Inventory

Butter is the only commodity used to price milk that does not have an inventory problem.  Inventories did hit a record for the month of December, but it was a very slight record.

Chart VII - Butter Inventory

There is some good news.  Milk production is dropping to more reasonable levels.  The low January producer milk prices may further decrease production as less efficient or thinly financed producers may be forced to leave the market.  The data has been adjusted to eliminate the impact of the 2016 leap year.

The year 2017 started with an increase of 2.5% over the prior year.  For the last four months of 2017, the increase has dropped to a more manageable 1% level.  This should help eliminate further increases in inventories, but the existing high inventories must still be managed down.

Chart VIII - Increase in U.S. Milk Production

The next post will review dairy imports and exports.