Monday, July 8, 2019

Positive Signs for Nonfat Dry Milk Pricing

Class IV milk, used for butter and Nonfat Dry Milk (NDM), is priced based on exactly the two products it is used for, butter and NDM.  Butter Prices remain high and have gone higher in June as butter inventories remain very low.  NDM is on a steady price increase. NDM and the international version, Skimmed Milk Powder (SMP), are priced based on the international markets.  NDM/SMP are by far the largest U.S. export dairy products.  (The difference between NDM and SMP are covered in a prior post.)

As of the start of 2019 Class IV skim milk prices are combined 50/50 with the Class III skim price to determine the Class I skim milk price.  The new formula is shown below.

Base Skim Milk Price for Class I = ((Advanced Class III Skim Milk Pricing Factor
 + Advanced Class IV Skim Milk Pricing Factor) / 2) + $0.74

The Class IV skimmed milk price is also used to set the Class II skimmed milk price.

Class II Skim Milk Price = Advanced Class IV Skim Milk Pricing Factor + 0.70

In total, the Class IV skimmed milk price sets roughly one third of the total producer milk prices.

The Class IV skimmed milk price is set by the price of NDM.  And, the  price of NDM/SMP price is increasing very nicely.

Class IV Skim Milk Price = Nonfat Solids Price x 9

Chart I below shows 1) the price of NDM as determined by the National Agricultural Statistics Service (NASS), 2) the international price of the European exports of SMP, and 3) the international price of U.S. exports of NDM/SMP.  All three prices move together.   As one goes up, they all go up.  The price of Class IV skimmed milk is set by the price of NDM (the dashed line in the chart) which follows the international prices of SMP.

Chart I - Price of NDM/SMP
Chart I shows the NDM prices for 2018 and 2019 YTD.  The price is showing a very nice steady increase.  Chart II below shows the NASS NDM price long-term.  Compared to long term prices for NDM, 2018 and 2019 YTD prices are still well below historical levels. The current NDM price is only half of the historical highs.

Chart II - Price of NDM long-term
Domestic inventories of NDM (Chart III) are still slightly high.  They are well above the trend line for NDM inventory.  Because excess milk can be stored as NDM, the current excess milk is probably the reason for the high NDM inventories.  However, the global market condition is really the determinant of the NDM price and in-turn, the price of U.S. Class IV skim milk.  Domestic cheese inventories, covered in a prior post, have a major influence on the Class III milk price.  However, the domestic inventories of NDM/SMP are a minor influence on global and domestic NDM/SMP prices 

Chart III - Inventory of NDM
Chart IV below shows the Class III and Class IV milk prices.  Currently, the Class IV price is higher than the Class III price.  In June 2019, cheese and Class III prices fell.  There are still bloated cheese inventories that are keeping Class III prices low.  (See the June 12 post for a review of cheese inventories vs. cheese pricing.) 

The Class IV volume is much smaller than the Class III volume, but in pricing Class I skim milk, Classes III and IV are considered equals.  Class II milk is priced strictly on the Class IV milk price.  All these relationships mean that the Class IV skim price has a significant impact on the overall producer milk price.  The change in the Class I pricing formula cited above has made the Class IV price a constant mover of overall milk prices.  Because of the formulas for Class IV milk pricing, the price of NDM is the real mover.

Chart IV - Class III and Class IV Milk Prices
Global conditions control the international price of NDM/SMP.  Europe is the biggest player in the global SMP market.  The upward movement of the NDM/SMP international price is very positive for U.S. producer milk pricing.  In the June 12 post to this blog, the 2018 low milk prices were directly tied to the over production of milk which is being held primarily in cold storage cheese.  Domestic high inventories of cheese reduce the price of cheese and the Class III price.  Class III price is the largest category of milk utilization and has a very strong influence on overall producer milk prices.

That stated, because NDM/SMP is not tied to domestic analytics, U.S. over production does not significantly influence the NDM/SMP price.  Global conditions are favorable for NDM/SMP prices.  While the influence of NDM/SMP price is not as impactful as domestic cheese inventories and pricing, they do help overall milk pricing, and with the long period of low producer milk prices they are a very welcome influence.

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