Sunday, December 16, 2018

October Dairy Export/Import Data is Now Available.

October Dairy Export/Import data was recently released.   The most positive category sector is exports of Nonfat Dry Milk/Skimmed Milk Powder (NDM/SMP.)  NDM/SMP export volumes for 2018 remain very high, with most of the product going to Mexico.  Exchange rates were also generally positive with a weaker USD.  Other export data was not so positive.  The four export products analyzed below are those that impact dairy producer milk prices; cheese, butter, NDM/SMP, and dry whey.  The emphasis in this post will be net exports (exports-imports).

Cheese net exports (Chart I), are a very important as they impact inventories and cheese inventories control the price of producer milk (see prior post).  Cheese net exports for October are almost exactly at the level of 2014 and 2017 and somewhat above 2015 and 2016.

Chart I - Cheese Net Exports
 Cheese imports are typically strong in the final quarter of the year as specialty cheeses are imported for the year-end holidays (Chart II)

Chart II - Cheese Imports
Chart III shows where these imported cheeses come from, which are primarily from Italy and France. This shows the impact of specialty cheeses during the holiday season.  By comparison, most all U.S. cheese production is commodity cheeses.
Chart III - Imports of Cheese by country
Butter exports and imports show a similar situation.  Butter Imports are growing (Chart IV) and will likely continue to increase.

                               Chart IV - Butter Imports

Irish butter, which is cultured, has gained a significant position in the U.S. market (Chart V) as well as other international markets.  The concept of a "different" butter with unique characteristics was refined, branded, and marketed, and has had a major impact on Irish dairy exports.   The Irish dairy cooperatives have led the effort.

Chart V - Butter Imports by Country
As a result, butter net exports (Chart VI) remain near zero.

Chart VI - Butter Net Exports
NDM/SMP is the bright spot in dairy exports.  Net exports of NDM/SMP have been setting records most every month in 2018.  And, the records being set are significant gains (Chart VII).

Chart VII - NDM/SMP Net Exports
Exports of NDM/SMP have set new records in all but one month of 2018 (Chart VIII).
Chart VIII - NDM/SMP Exports
More than half of the exports of NDM/SMP are going to Mexico (Chart IX).  It is a perfect product for areas that lack refrigeration and need low cost good nutrition products.
Chart IX - NDM/SMP Exports by Country
Imports of NDM/SMP are at a low.  In September they were at a five-year low and were near a five-year low in October.
Chart X - Imports of NDM/SMP
The imports are coming primarily from Canada at low prices.  Due to increased butter consumption in Canada, there is a glut of skimmed milk which can be converted into NDM/SMP.  New Zealand has also been selling low priced NDM/SMP in the international markets.
Chart XI- Imports of NDM/SMP by Country
The final product to be reviewed is dry whey, which is the basis for pricing Other Solids.  While exports are low, inventories are also low (see prior post).  Not all whey is dried, and a significant amount is feed to animals in a wet form.  This helps keep inventories in balance and therefore even with low exports, the price of dry whey is reasonable. 
Chart XII - Exports of Dry Whey
Exchange rates are currently moving in a favorable direction for exports. Only the exchange rate with New Zealand showed a stronger USD. A weaker USD makes U.S. products more competitive in the international markets.  The four charts below represent the two largest dairy competitors in the international markets, the EU and New Zealand, and the two largest U.S. dairy export markets, Mexico and Canada.  
Chart XIII - Exchange Rates USD/Euro
Chart XIV - Exchange Rates USD/NZD

Chart XV - Exchange Rates USD/Mexican Peso
Chart XVI - Exchange Rates USD/CAD
The USDEC should be congratulated on a positive 2018 for dairy exports.  The challenge in 2019 is to increase exports of cheese to help reduce inventories and improve producer prices.

Sunday, December 9, 2018

Inventories Control Producer Prices

November Class III milk and Component prices were released on December 5.  Milk protein and the Class III milk price were down considerably, and butter and butterfat were down slightly.  The Class III price fell to $14.44/cwt., about 7% lower than the prior month and 14% lower than November 2017.
Chart I - Monthly Gains of Loses Compared to the Prior Month
The Class III price remains within the tight pattern it has been in for the last four years.  (See the November  11 post for more details on the "new normal."   The data for the last four years shows no significant trends for improvement.  The November price of $14.44/cwt. is in the lower quartile of prices over the period from January 2015 to the present.
Chart II - Class III Milk Price Since January 2015
What is driving the low milk price is the high inventory of cheese being carried.  For the linkage between the cheese price and the Class III milk price see the prior post.  A case could be made that cheese prices could be worse based on current inventory levels.
Chart III - Cheese Inventories by Year
The long-term cheese inventory levels are shown in Chart IV.  The trend line can be used to compare the current inventory levels to the "appropriate levels" represented by the trend line.  The growth of cheese inventories above the trend line is obvious.  A case can be made that the cheese inventory levels are in the neighborhood of 50 million pounds too high.  If changes are not made, it will continue to grow.
Chart IV- Cheese Inventory Compared to Growth Trend Line
As reviewed in prior posts, exports of cheese are not growing.  While there may be some impact from the current tariffs on cheese exported to Mexico, that impact could not begin to match the 50-million-pound bulge in inventories.  Production is simply too high, and that production is being pushed by too much milk.

Butter prices remain in the higher level established starting in 2015.  For 2018, butter has traded in a very tight pattern, ranging from $2.11/lb. to $2.38/lb.  The current price of $2.27/lb. is near the midpoint of the four-year and one-year range in butter prices.  There was a very slight downturn in the butter price from the prior month which had very little impact on overall pricing.
Chart V - Butter Pricing since January 2000
Butter inventories remains very close to the prior year in spite of the growing consumption of butter.  The tight inventories remain very close to prior years.  The tight inventories are keeping butter and butterfat prices high.
Chart VI - Butter Inventory Year by Year
The Class IV skimmed milk price is derived from the price of Nonfat Dry Milk/Skimmed Milk Powder (NDM/SMP).  NDM/SMP increased slightly in price (Chart VII).  This resulted from the continuing drop in inventories of NDM/SMP (Chart VIII).  
Chart VII - NDM/SMP Prices
Chart VIII - Inventory of NDM/SMP
While the current price of NDM/SMP is still in the low-price range for NDM/SMP, it did increase the Class IV price enough to make it higher than the current Class III price (Chart IX). When the advanced Class IV skimmed milk price is above the Class III skimmed milk price, the Class IV price is used as the basis for Class I milk pricing.  This in turn increases the uniform milk price and Producer Price Differentials and provides slight benefit for producer prices.
Chart IX - Class III and Class IV Milk Prices
The price of Other Solids is calculated based on the price of Dry Whey.  Dry Whey inventories dropped in March of this year and have remained low throughout the year (Chart X.)  
Chart X - Dry Whey Inventory
The price of Other Solids has increased from a low $0.06/lb. in early 2018 to $0.27/lb. in November.  This has changed significantly the makeup of the Class III price (Chart XI).  In November, Other Solids made up 11% of the Class III price.  In January 2018, Other Solids made up only 3% of the Class III price.
Chart XI - Component Contributions to the Class III price. 
Behind all of the price changes analyzed above, the level of inventories has been the primary cause.  The biggest problem facing producer prices is the huge high inventory of cheese.  Producer prices cannot be improved until actions are taken to reduce the cheese inventory.