March Component Prices Improve.

The March Class and Component Price Announcement, showed some nice improvement.  Chart I below is positive for every dairy commodity except for Nonfat Dry Milk and Nonfat Solids.  The Class III price gained $.82/cwt. over the prior month.  This brought the Class III price to $14.22/cwt.  While this is not a great price, it is a significant gain from the prior month.  Milk Protein jumped 11.1%, on an increase in the cheese price of 5.5%.  Milk protein is now worth $1.81/lb.  Butterfat had a smaller increase of 3.3% and is now worth $2.43/lb.

Chart I - Pricing compared to the prior month.

This still leaves a significant gap between the prices of cheese and butter.  Traditionally, the prices of cheese and butter have been close with only short periods where one was significantly higher than the other (Chart II).  The current price difference is a major change in the history of component milk prices.

Chart II - NASS Cheese and Butter Prices

The differential between the cheese and butter prices over time is shown in Chart III.  Between January 2001and May 2015 the average differential was - $.05/lb. (butter-cheese price).  Cheese was slightly more expensive than butter.  Between October 2015 and March 2018, the differential was a positive $.62/lb., a change of $.67/lb.  During the current three year time span butter has been significantly more expensive than cheese.  This pricing difference between cheese and butter is now three years old, and can no longer be identified as a short-term aberration.

The changing butter consumption was reviewed in the prior blog.  Increased butter demand is putting pressure on supplies and stimulating imports of butter.  Increased butter consumption is not just a U.S. trend.  It is a global trend as well.  The greater demand for butter creates a lot of milk with no butterfat.  The financial impact on Nonfat Dry Milk/Skimmed Milk Powder (NDM/SMP) was mentioned in the prior post and analitics on this will be covered again below.  There is a very significant inventory glut of NDM/SMP, causing significant price declines.

Chart III - Price Differential Between Butter and Cheese

Cheese prices, which are the main determinant of producer milk prices, were up 5.5% from the prior month.  Inventories of cheese continue to grow as U.S. consumption and exports are outweighed by cheese production. The bloated inventories (Chart IV) are keeping cheese prices low.

Chart IV - Cheese Inventory Through the end of February

The current NASS cheese price is $1.55/lb., well below 2014 price of $2.35/lb.  For the last four years, cheese prices have stayed between $1.50 and $1.81/lb. and they are currently near the bottom of that range.  As mentioned in previous blog posts, less cheese needs to be produced and more cheese must be exported.

Chart V - NASS Cheese Price

NDM/SMP inventories are very high (Chart VI).  The majority of NDM/SMP is exported, linking the U.S. price to the global price.  International prices are very low.  The demand for butterfat is and will continue to make more NDM/SMP available than there is demand for.  This creates an over supply and puts pressure on the price of NDM/SMP.  NDM is presently worth $.70/lb.

Chart VI - NDM/SMP Inventory

Chart VII shows the impact of the NDM/SMP inventories on NDM/SMP pricing.  The Price is very low and still in a decline.  The NDM/SMP price is the basis for Class IV milk pricing, which is currently very low and will probably remain to be very low.

Chart VII -  NDM/SMP Inventory

The next post to this blog will cover the very important area of exports and imports.  The USDEC has developed a good relationship with China, but there are currently concerns of interference caused by the potential developing trade war between the U.S. and China