Exports Show Limited Growth

Export and import data is now available for the third quarter of 2019.  This post will cover cheese and butter, the most important commodities in the Class III price calculation.  By comparison, the first half export/import analysis can be seen here.

CHEESE

Cheese net exports (exports less imports) are shown cumulatively in Chart I for 2018 and 2019.  The two parallel each other very closely.  Through the third quarter of 2019, net export volumes of cheese were up by just one percent compared to the prior year.

Cheese exports reduce cheese inventories and cheese imports add to inventories.  The two combined as net exports measure the total impact of exports and imports on cheese inventories.  A growth of only one percent in net exports is a slower growth rate than domestic cheese production and consumption which are running between a two and three percent annual growth.   Therefore, cheese net exports are a shrinking portion of cheese "disappearance."

Chart I - Net Exports of Cheese

Cheese exports (not net exports) are shown in Chart II.  For the first three quarters of 2019, exports were up three percent over the prior year.

Chart II - Cheese Exports

The biggest export market for U.S. produced cheese is Mexico (Chart III).  Cheese exports to Mexico are down seven percent YTD in 2019 vs. the prior year.  However, there have been nice increases in cheese exports to South Korea and Japan, which largely offset the decline in exports to Mexico.  The tariffs on exports of cheese to Mexico are no longer in place, but the volume of exports to Mexico have not increased.

Chart III - largest Cheese Export Markets

Imports of cheese, Chart IV, have increased strongly in 2019, impacting the weak net export data.  Imports of cheese are up six percent YTD through the third quarter of 2019.  Most all of the increase has occurred in the third quarter of 2019.  If this trend continues, it will have a significant impact on cheese inventories.  There are typically significant increases in cheese imports in the fourth quarter holiday season.

Chart IV - Imports of Cheese

Chart V shows where the imported cheese is coming from.  The largest increase in cheese imports has come from the largest cheese import supplier, Italy.  Imports of cheese from Italy are up 30 percent over the prior year.

Chart V - largest Cheese Import Markets

BUTTER

Butter net exports have declined significantly in 2019 compared to 2018 (Chart VI).  Net exports had fallen to negative numbers in late 2018 and that decline in net esports is now increasing.  That means that the U.S. is a net importer of butter.  The negative net exports increased from four million pounds of butter to 26 million pounds of butter in 2019 YTD.  The change is the result of both lower exports and a surge in imports.

Chart VI - Butter Net Exports

Exports have been small for some time due to the strong U.S. consumer demand for butter.  In 2019, those exports have dropped by another 45 percent (Chart VII).

Chart VII - Butter Exports

Butter exports to the two largest butter export markets, Canada and Mexico, fell sharply in 2019 (Chart VII).  Exports to Mexico dropped by 72 percent, and exports to Canada dropped by 41 percent.  Butter exports to other countries were small.

Chart VIII - Butter Exports by Country

But, the real story impacting the huge drop in butter net exports is the continuing increase in butter imports (Chart IX).  Butter imports YTD are up by 25 percent over the prior year.

Chart IX - Butter Imports

Imports of "Irish" butter are up 27 percent from the prior year and YTD make up 44 percent of all butter imports.  The consumer demand for this cultured butter is strong and growing very fast.  It is impossible to brand a competitive U.S. product, because the product is typically branded as "Irish" butter with names like "Kerrygold".  While consumer consumption of butter is growing nicely, nearly half of the growth is in imported "Irish" butter.  That reduces the demand for production of domestic butter.

CONCLUSION

The hope of all dairy producers is that exports will expand to keep pace with milk production expansion.  That would solve the problem of milk over-production which causes increased inventories primarily of cheese.   Large inventories of cheese decrease cheese prices and in turn decrease the Class III milk price.

However, the increase in cheese exports remains anemic and an expanded cheese export market is not happening!  Cheese net export increases of just one percent will not soak up excess milk that results from over-production and falling dairy consumer demand.

Increased production of butter for export would also increase the production of nonfat dry milk (NDM).  NDM is primarily an export item and the international market for NDM is crowded.  As a result, there are limited increases in butter churning.

Perhaps with approval of the new trade agreements like USMCA, there will be increased growth of U.S. dairy exports.  As of this date, those approvals seem to be held up by political squabbles. 

Milk Prices Continue to Increase - Now $18.72

Class and Component milk prices continued their climb in October.  The Class and Component price announcement can be reached at this link.

Charts I and II below show the movement of prices of Class III milk, components, and the commodities that are used to calculate dairy prices.  Chart I compares October prices to the prior month and Chart II compares the October prices to the prior year.  Both show very similar patterns.  Butterfat is down, milk protein is up, "Other Solids" are significantly down. and Class III milk is up.  In the commodities that are used to price producer milk, cheese is up, Butter is down, dry whey is down, and nonfat dry milk is up.

The biggest influence on the Class III and milk protein prices is the price of cheese.  See the recent post for detail on the link between the price of Class III milk and the NASS cheese price.  The NASS cheese price drives the Class III milk.

Cheese is up 25.6 percent vs. the prior year.  That is a huge change considering that inventories have changed minimally. 

Chart I - Dashboard of Dairy Prices vs. Prior Month

Chart II - Dashboard of Dairy Prices vs. Prior Year

Chart III below shows the 20-year movement of component prices.   Milk protein prices have traditionally been higher than butterfat prices.   Between January 2017 and September 2019. butterfat was more valuable than milk protein.  In the last two months, milk protein has again attained a higher price than butterfat.

Chart III - Long-term Trends in Component Prices

CLASS III MILK and CHEESE

The Class III milk prices (Chart II) reached $18.72/ cwt. in October.  That is an increase of 36 percent since the start of 2019.  That change is based entirely on the increase in the price of cheese (Chart V) which has increased 43 percent since the start of 2019.  Just by comparing Charts IV and V, one can see the tight linkage between the cheese price and the Class III milk price.

Chart IV - The Class III Milk Price over the Last Ten Years

Chart V - The NASS Cheese Price over the Last Ten Years

Typically, cheese prices are determined by inventory levels.  Inventory levels are down one percent from the same month in the prior year, and are even with the prior month (Chart VI).  Based on the most recent data, cheese inventories are still at a high 36-day supply and are only one percent lower than the prior year.  Comparatively. in December 2014, cheese inventories were at a 30-day supply.

Chart VI - Cheese Cold Storage Inventory levels by Year

The inventory levels can be expected to grow with increases in consumption, but as shown in Chart VII, those inventory levels are still above the trend line of normal growth.

Chart VII - Long-term Growth Trends for Cheese Inventories

See the October 13, 2019 post to this blog for a more detailed analysis of cheese inventory levels.

BUTTERFAT

Butter prices are down 5 percent since the start of 2019.  The drop-in butter prices were a surprise as cold storage inventory levels have not increased.

Chart VIII - Butter Prices Over Ten Yeats

OTHER SOLIDS

The price of "Other Solids" is way down from the 2012 to 2014 period.  From highs of $.50/lb. in the mid 2014, the October 2019 price is $.14/lb.  The "Other Solids" price is driven solely by the price of dry whey.

Chart IX - Other Solids Prices for Ten Years

Dry Whey is primarily an export item.  The current price of $.34/lb. is half of the high price in 2014.

Chart X - Price of Dry Whey

SUMMARY

Milk prices are up for only one reason, cheese prices are up.  For a review of why cheese prices are up, read the recent post to this blog.  There is significant risk to the current and future expectations in cheese prices.