Tuesday, June 12, 2018

Exports Reach Records, but.......

The headlines from the USDEC announced, "Exports were equivalent to 18.8 percent of U.S. milk production, an all time high.  Volume was up 31 percent from April 2017."  That is a tremendous accomplishment.

As stated many times in this blog, the Class III price is the the basis for payment for most dairy producers, and the price of cheese is the driver for the Class III price.  Unfortunately, cheese exports were down from the prior month and cheese imports were up.

It is not unusual for cheese exports to drop in April, so that can be expected.  In fact, the 2018 April drop was less than the prior four years as shown in Chart I.
Chart I - Cheese Exports
Year-to-date there were gains in cheese exports in most all the countries where the U.S. sells cheese. Mexico is by far the largest buyer. South Korea and Japan also have healthy volumes and nice gains.
Chart II - Cheese Exports by country
Typically, in April cheese imports also drop.  Unfortunately, imports were up significantly in April 2018 as shown in Chart III below.  Chart IV shows the imports by country.  All the significant imports came from European countries and YTD their purchases are mostly even with the prior year.  Most of those imports are typically specialty cheeses, not commodity cheeses like cheddar blocks and barrels.  Specialty branded products are typically a consumer choice and are therefore more difficult to replace with domestic cheese.  
Chart III - Cheese Imports
Chart IV - Cheese Imports by Country
The combination of lower cheese exports and higher cheese imports, caused net cheese exports (Chart V) to take a significant tumble.  
Chart V - Cheese Net Exports
And, as a result, cheese inventories continued to grow.  As the inventories grow, cheese prices drop and in-turn, the Class III milk price drops.  
Chart VI - Cheese Inventory
This will bring the Class I price down as well.   The Class I skim price is the higher of the Class III or Class IV prices.  As shown in Chart VII below, the Class III price, although low, has been higher than the Class IV consistently in the last year.  The combination of a lower Class I and Class III milk price will have a definite negative impact on producer prices.

Chart VII - Class III and Class IV Milk Prices
While the month of April was overall an excellent month for dairy exports, the most important item for producer pricing, cheese, was not positive.  Much of the funding for USDEC comes from producers and the emphasis needs to be on cheese exports if milk prices are to improve.


What really did set records in April was Nonfat Dry Milk/Skim Milk Powder (NDM/SMP) exports (Chart VIII).
Chart VIII - NDM Exports
And, as a result, inventories took a plunge in April (Chart IX).  NDM/SMP is primarily a export product and prices are heavily influenced by International supply and demand.  In order to move the record setting volume of NDM April prices were down 30% from January 2017.  A 30% reduction in the price of NDM results in a 20% drop in the Class IV skimmed price.
Chart IX

Very little butter is exported.  Chart X below shows that the U.S. is now a net butter exporter.  However, the numbers are very small.  What butter is available is needed for domestic consumption.  Butter exports were up in April, however, so were imports, leaving March and April net exports at the same volume.
Chart X - Butter Net Exports
Exchange Rates with international dairy competitors and customers show a strengthening of the USD against other currencies (Charts XI to IXV).  A strengthening of the USD makes U.S. dairy products more expensive on the international market.  To be competitive, U.S. dairy products must be sold at a lower price.
Chart XI - Exchange Rates USD/Euro
Chart XII - Exchange Rates USD/NZD
Chart XIII - Exchange Rates USD/Mexican Peso
Chart IXV - Exchange Rates USD/CAD

By all the headlines, dairy exports are doing very well and setting records.   More solids being exported do reduce the level of milk oversupply.  However, exports of some products have much more of an impact on the milk price than other exports have.  Cheese prices are linked closely with the milk price and therefore cheese exports are the most important.  Cheese exports have not set an all time export record.  A record level of cheese exports are needed to reduce the bloated cheese inventories.

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