Class III Milk Prices Break $16/cwt.

September Class and Component prices were announced on October 3.  As shown in Chart I below, most price changes were positive.  Why did prices improve?  It may be the news that a revised NAFTA agreement, now known as USMCA, has been finalized and is ready for ratification by congress.  Some of the fundamentals, which are reviewed below, are showing significant improvement.

Chart I - Dashboard of Price Changes

While Chart I shows a positive view for August, there are still lingering issues that have been discussed in prior posts to this blog.

• There is still too much milk in the system.
• Class I milk is showing serious and significant declines in consumption.  Because this is the highest paid milk, the Class I decline both reduces the amount of milk needed and lowers the average (Uniform) milk price.
• The increasing consumption of butter leaves a lot of nonfat dry milk to market.  By the formula linkages and the laws of supply and demand, Class IV milk will continue to plagued by low prices. 
• Exports gains are mostly in low value products that do not significantly impact producer prices.  For instance, in the most recent month for export data, exports were up 12%.  However cheese exports were down 7%.

Cheese is reviewed first, because cheese prices are the most important factor is the Class III price calculation.  Exports will be briefly reviewed in this post, but more details will be provided in the next post.

Cheese inventories remain high.  They are reviewed in Charts II and III below.  August inventories were down from July, but were still a record for the month of August (Chart II).  Chart III shows the long-term view.  The trend line in Chart III illustrates the "normal" growth rate.  It shows that cheese inventories are still well above the "normal" growth rate and are at levels above normal seen only occasionally in the past.   

Chart II - Cheese Inventories by Year

Chart III - Cheese Inventories Long-term

August exports of dairy products were up significantly.  However, cheese exports were down, not up.  With inventories high, production high, and exports low, one would not have expected to see a 6.4% increase in the price of cheese.

Chart IV - Cheese Price

The enthusiasm of a new North American trade agreement may have provided a boost to future expectations and cheese prices.

The price of butter and butterfat were down slightly.  Butter was down 2% and butterfat was down 2.2%.  That price point is still within the narrow band of the last 12 months.  The current price of butter is $2.27/lb. and over the last 12 months the price has ranged from a low of $2.11/lb. to a high of $2.37/lb. (Chart V).  The September price for butter appears to be just a normal fluctuation, not a trend.

Chart V - Butter Price

Inventories of butter are very tight.  As seen in Chart V, they are below 2016 levels and very close to 2017 levels.  Butter consumption is increasing (see the March 31 post) but inventories are not keeping pace.  The slight reduction in the price of butter is surprising with these tight inventories.

Chart VI - Butter Inventory

Nonfat Dry Milk/Skimmed Milk Powder (NDM/SMP) remains low priced.  The price has remained near or below $1/lb. for three years.  While there is a slight uptick in September, the price of NDM/SMP remains low with no major up or down trends.

Chart VII - Price of NDM

This has kept the Class IV milk price lower than the Class III price. Class I milk is priced based on the higher of the Class III or Class IV milk price.  For the last three years, Class IV milk price has been below the Class III milk price most of the time.  Cheese prices will therefore dictate both the Class I and Class III milk price.  With pricing for the two largest classes dependent on the price of cheese, getting cheese inventories down, which will drive Class III prices higher, should be the highest priority.  Instead, excess milk is being stored in cheese.

Chart VIII - Class III and Class IV Milk Prices

The next post will review August exports and imports in detail.  There have been headlines about how exports grew by 12% in August.  In the fine print, there is a slight mention of the reduction of 7% in cheese exports.  What is needed for producer prices to grow is higher exports or reduced production of cheese.  Either one will reduce inventories and improve cheese prices and thereby raise Class III milk prices.  But month after month, that does not happen.