Monday, November 19, 2018

Cheese Exports Fall

Export/import data is now available through September.  This post will deal exclusively with cheese analytics.  Cheese prices are linked very closely to the Class III milk price.  This is illustrated in Chart I and the math behind this tight correlation can be viewed in the April 15 post to this blog.  The data behind Chart I show a 96% correlation between the price of cheese and the price of Class III milk.  That means that 96% of the fluctuations in the Class III price can be predicted by the cheese price.

Chart I - Correlation Between the Cheese Price and the Class III milk Price

Because the price of cheese has been stagnant for the last three plus years, the price of producer milk has also been stagnant as covered in the prior post.  The low price of milk is directly caused by the low price of cheese, and the low price of cheese is caused by the high inventories, which will be covered later in this post.

There are three elements that control the size of cheese inventories, domestic consumption, which is very predictable, cheese production that is covered later in this post, and cheese exports.  Chart II shows cheese exports by month over the last 18 plus years.  After a steady climb for 14 years, cheese exports have been stagnant.  While there could be some impact from the newly implemented Mexican tariffs, the stagnant pricing covers a much longer period.

Chart II - Cheese Exports for the Last 18 Years
Chart III below shows the cheese exports for the last five years on a year-by-year basis.  For the last two months, the cheese exports have been below the prior year and for September; the cheese exports are near a five-year low.

Chart III - Cheese Export by year for the Last Five Years
Chart IV reviews the cheese exports YTD by country.   Mexico remains the largest importer by far.  Imports of cheese to Mexico are virtually flat vs. the prior year.  A few other countries like South Korea have purchased more this year, but those increases are small and largely offset by losses in other countries.

Chart IV - Cheese Exports by Country

Cheese production (Charts V and VI) has raced well ahead of prior years.  The data in Chart V shows an increase well ahead of the prior year.  Chart VI shows that for the last three years production has been well above the long-term trend line.

Chart V - Cheese Production for the Last Five Years
Chart VI - Cheese Inventory for the last 18 Years
As a result, Inventory levels have risen well above those needed to support the domestic increase in cheese consumption.

Chart VII - Cheese Inventory by Year for the Last Five Years
With these analytical charts, it is clear that the problem of low producer milk prices centers around over production of cheese and lagging cheese exports.  The over production of cheese is somewhat caused by too much milk.  The lack of cheese exports is a little more difficult to explain.  Certainly, there is some impact from the Mexican cheese tariffs recently imposed.  However, the stagnant cheese exports are a problem of a much longer duration.

Sunday, November 11, 2018

The New Normal?

October Class and Component Prices were announced October 31.  Prices were mixed resulting in a 3.5% drop in the Class III price to $15.53/cwt.  That is a pretty normal price based on current history.  This post will review the "new normal" for milk and component pricing.  Prices have been fairly consistent for over three years.

Chart I - Dashboard of Dairy Prices
A quick review of Class III milk prices (Chart II) shows that for over three years the price has been in a fairly tight range from about $13/cwt. to $17/cwt.  Currently, at $15.53/cwt. the price is near the midpoint of the range.  Compared to Class III price movements in the past, this is a very long time for prices to be in such a tight range.  Considering inflationary adjustments, the price of Class III milk is at a low and is staying there for a longer time than ever before.

Chart II - Class III Milk Prices 2000 to 2018
The Class III milk price is primarily based on the price of cheese.  Therefore, Chart III which shows the cheese price over the same time period looks almost identical to Chart II.  For a review of the linkage between cheese pricing and the Class III price, see the April 16 post to this blog.   As long as the price of cheese is low, the price of Class III milk will remain low.

Class III - NASS Cheese Prices 2000 to 2018
Butter prices (Chart IV) has a similar tight range.  The range represents a new higher price level for butter.  The range is between $1.80/lb. and $2.70/lb., well above the long-term butter price.

Chart IV - NASS Butter Prices 2000 to 2018
And, Nonfat Dry Milk (NDM) prices (Chart V) have a clearly lower price also within a tight range for the last three years.  The price range is between $.70/lb. and $1.10/lb.  Cheese and Class III milk prices are low considering inflationary adjustments.  In the case of NDM, the price range is low even without an inflationary adjustment.  The demand for more butter and lower reduced fat fluid milk have lead to an abundance of NDM.  Too much supply equals lower prices,

Chart V - NDM Price 2000 to 2018
If we look at the comparative cheese and butter prices we also see a multiple year period of butter worth about $.70/lb. more than cheese.  That difference seems to be spreading.  In the past, butter has been worth more than cheese for only short periods of time.  This time, butter is worth more than cheese for over three years.

Chart VI - Cheese and Butter Price difference 2000 to 2018
Clearly we are in a period different from any other periods since this current pricing was started in 2000.   

Is this the new norm?  Will milk prices stay low?  Will butter remain expensive?  Will NDM remain low priced?

The reason behind the current circumstances is simply, too much milk, too much cheese in inventory, declining consumption of fluid milk, exports that don't seem able to export cheese, and increased consumption of butter, which leaves a lot of NDM to be disposed of at lower prices.  It is the perfect storm of financial issues for the U.S. dairy industry.  

What will probably not change?  Decreased consumption of fluid milk is a continuation of a very long trend that is accelerating.  It is very unlikely that the trend will change.  Because fluid milk (Class I milk) is the highest paid, that will cause some long-term reduction in the uniform or average producer milk price.

Will the volume of producer milk quit growing and perhaps shrink?  Low milk prices are forcing some producers out.  However, the long-term trend of more milk per cows continues and will continue.  The only thing that can reduce more milk is lower prices to limit herd expansions and force more producers out.  That's a pretty grim statement, but it is incontestable.

Will cheese consumption continue to grow?  U.S. cheese consumption has grown for over 100 years.  Per capita consumption is still less than other mature markets like France.  However, as the market matures, the rate of growth is slowing down.  That is what a mature market does.  The cheese market, Class III milk, is the largest segment and even moderate growth will help.  
Can exports begin selling high value dairy products like cheese?  This is certainly a wild card.  If the U.S. can develop strong international brands, there could be a stable growing market.  This would require more vertical integration of the dairy industry with a plan to develop brands that carry the language and graphics for the international market segment.  

Will butter consumption continue to grow?  Domestic consumption increases are beginning to slow.  Will consumer look to a more vegetable based diet?  This is certainly another wild card.

The recent market analysis done by the USDA sees steady growth is both the domestic market and the export market.  Frankly, it is not hard to find fault with the analysis.  International events are always adding volatility to exports.  The growth in the domestic market is hard to rationalize with declining fluid milk consumption and a slowing of cheese consumption.

The above analysis does not project a rosy environment for growth of the U.S. dairy market.  That said, there is opportunity to make money as a milk producer if a strong emphasis is made on component production and tight financial controls.

Sunday, November 4, 2018

Where is Class I Milk Crashing?

In the prior post, the decline in Class I milk was examined for the U.S. in total.  That post has raised questions as to where the impact is greatest.   This post will examine the decline in each of the ten Federal Milk Marking Orders (FMMOs).  In summary, all FMMOs are seeing a decline in the amount of Class I milk.  Some are seeing steady declines while other are seeing accelerating declines.  The charts below will examine the FMMOs with the fastest accelerating declines compared to those with a slower decline.   The amount of Class I milk in each FMMO is always based on the amount processed.  It may not be representative of consumption in that area.  Because Class I milk cannot be de-pooled, the numbers represent an accurate portrayal of the declines.  In all graphs the same mathematical trend-line has been applied.

The table below shows the January to September YTD decline for each of the FMMOs.  As can be seen, all FMMOs are showing declines in 2018.

Table I - Class I Decline by FMMO vs. Prior Year
The three with the largest declines are the Upper Midwest, the Northwest, and the Mideast FMMOs.  The declines in these three are significantly accelerating.   In terms of size, they represent 28% of the total Class I milk.
Chart I - Upper Midwest FMMO Class I Percent Decline vs. Prior Year
Chart II - Upper Midwest FMMO Class I Percent Decline vs. Prior Year
Chart III - Northwest FMMO Class I Percent Decline vs. Prior Year
At the other end of the scale is the Southeast FMMO.  While the Southeast has a steadily declining Class I volume, the decline is not significantly accelerating. That is a good as it gets.  Every other FMMO does have an accelerating decline in volume, but not as rapid decline as the Upper Midwest, the Mideast and the Northeast.

Chart IV - Southeast FMMO Class I Percent Decline vs. Prior Year
What does this mean financially to the producers in these FMMO?  The faster the decline, the faster the average (Uniform) price of milk in the FMMO will drop. What this means in the Upper Midwest is that the Class I impact of keeping the Producer Price Differential (PPD) positive will diminish.  The frequency of a negative PPD will increase.  Typically many of the producers will de-pool when the PPD goes negative.  Much of the milk in the Upper Midwest is already being de-pooled.  With the declining amount of higher priced Class I milk, de-pooling of Class II, III, and IV milk will expand.  Class I cannot be de-pooled.

The acceleration of the decline in drinking milk has been reviewed at least three times in this blog; May 28, 2018,  June 27, 2018, and October 26, 2018.  There is not doubt that the decline is accelerating.

Chart V below expresses the change in a slightly different way.  It shows that actual decline in millions of pounds for the Upper Midwest.  In January of 2014, 326 million pounds of milk were processed as Class I.  In the most recent month, September 2018, just 224 pounds were processed as Class I, a 1/3 reduction.

Chart V - Million Pounds of Class I Milk Processed in the Upper Midwest

There was a recent article published to show that the growth in Class III milk for cheese has more than offset the loss of fluid milk.  The author used data from 1975 through 2017 based on per capita consumption.  While his charts are correct, during this time population growth has slowed, the growth rate of cheese has declined from 6% in 1975 to 2% in 2017, and the decline in milk consumption has accelerated.   The current decline in Class I milk is a game changer for the U.S. dairy industry and will impact the entire industry.  The facts must be accepted so proper planning can be done.