Tuesday, June 5, 2018

May Milk Prices Improve, But...

May Class and Component Prices were announced on May 31.  The Class III price was up, the Class IV price was up,  the butter price was up, the cheese prices was up, the dry whey price was up, the milk protein price was up, the butterfat price was up, and the "other solids" price was up.  Unfortunately, at the end of April cheese and butter inventories were also up, which usually drives prices down.  The increasingly high inventories may dampen future producer dairy prices.  Many of the charts below are based on 18 year market changes.  This is intended to give a long-term perspective on the current production, inventory, and price levels.

Chart I below shows the price increases of commodities used to price milk and the resulting component prices.  It is extremely unusual to see all of the prices in blue, indicating an increase from the prior month.  While this is very positive, many of the charts following will put this in long-term perspective.

Chart I - Dashboard of Dairy Prices Compared to the Prior Month
Cheese production continues to be robust and inventories remain high. Charts II and III below show the growth in production, which is growing at rates far above the amounts needed for domestic consumption.  In Chart III of the March 31 post to this blog, the growth of domestic cheese consumption was shown to be leveling out at about 2% annually.  Cheese production is growing at rates much above 2%.  While growth rate in domestic consumption is declining from historical levels, production is increasing.  This scenario will drive inventories up and prices down.  The only other solution is increased exports, and while exports of cheese are growing, they are not growing fast enough to match the growth in production  And, the export of cheese could easily be interrupted by the recent Mexican threat of increasing tariffs on cheese imported from the U.S. or other international events.

Chart II, Growth in Cheese Production Long-term
Chart III - Cheese Production
The result is as expected.   Cheese inventories for the last 2 plus years are at levels well above the norms (Chart IV).  The "over norm" cheese inventory levels have continued for a record time span.

Chart IV - Cheese Inventory since 2000
Chart V below shows the impact of high inventories on cheese prices.  During this time of extremely high inventories, the price of cheese is staying in a low, narrow range of $1.40/ lb. to $1.80/lb.

Chart V - Cheese prices Since 2000
Why is so much cheese being produced?  The answer is simple.  Too much milk is available, much on contract, and the cheese can be stored.  Until the excess milk supply and over-production of cheese can be corrected, cheese prices will continue to be low.

The price spread between butter and cheese (Chart VI) has continued with the current spread at $.69/lb.  The spread was first covered in the April 8 post to this blog.  Since the beginning of 2015, the price differential between butter and cheese averaged $.62/lb.  The current differential of $.69/lb. shows a widening of that spread.  

Chart VI - Price Spread Between Butter and Cheese
Inventories of butter (Chart VII) have stayed in line with butter growth except for a few periods like 2011/12 and 2014/15.  Supply and demand have keep inventories low and prices high.

Chart VII - Butter Inventory Since 2000
Production of butter grew at a steady rate for ten years starting in January 2000.  It then took a breather and did not grow for the next seven years.  Domestic consumption continued to grow during this time span resulting in tight inventory levels.  in 2018 there has been some increase in butter churning, but not enough to increase inventories.

Chart VIII - Butter Production
The slowdown in the growth of butter churning began having an impact on butter prices in 2014 and that impact has kept butter prices above $2.00/lb. since then.

Chart IX - Butter Price
Nonfat Dry Milk/Skimmed Milk Powder (NDM/SMP) has seen some similar long-term activity resulting in high inventories.  Production, Chart X, shows a pretty steady growth.

Chart X - Production of NDM
Inventories (Chart XI), show a gradually growth from 2005 to 2015.  However, beginning in 2016, inventories grew at a new extreme level.  NDM/SMP is primarily an export item.  Not only does the U.S. have an oversupply problem, but the whole world has an oversupply problem.

Chart XI - NDM Inventory
As one might expect, NDM prices have plummeted.

Class XII - NDM Price

May showed price gains in every commodity used to price milk and every milk component (Chart I).  However, from a long-term point-of-view, the U.S. dairy industry is still stuck in a low milk price position (Chart XIII) with over-production at a time when fluid milk consumption is shrinking.

Chart XIII - Class III Price
Low producer milk prices typically force higher cost producers to abandon milk production.  This is happening, but slowly and in small amounts.  There are at least five events that are adversely influencing producer prices; over-production of milk, the rapidly shrinking market for fluid milk, the growing demand for butter which leaves skim milk looking for a market, the over-production of cheese, and the uncertainty of exports.  These events will continue to be followed in future posts to this blog.

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