Components Make Money

Two prior posts - October 22, 2017 and October 29, 2917 - and one article in Progressive Dairyman have recently emphasized the financial benefits of feeding to maximize components.  When prices are low, some producers and their nutritionists try to reduce feeding costs wherever possible regardless of the impact on milk components.  Other producers and nutritionists try to "chase the market" by trying to feed to emphasize one component.  In both cases, this means that their herds are fed a very inconsistent diet with inconsistent results on component productivity.  Guessing where the prices of cheese, butter, dry whey, and nonfat dry milk are going and trying to feed to benefit from these changes is impossible.  Two many factors overlap in their impact.  What are global events doing that impact exports?  What is domestic demand for various dairy products doing?  What are processors emphasizing in production?  What positive and negative component changes occur when feeds are changed.  Controlling costs is difficult, but running a dairy to maximize profit is more difficult.

While this is all somewhat complicated, what has been emphasized in the above linked articles is that the best strategy is to feed to maximize components all the time.  This post contains quotes from some of the leading dairy nutritionists who are leading the efforts to properly and economically feed for components.  Approximately one quarter of U.S. dairy cows are fed these diets.  That means that three quarters are not.  This is a great opportunity.  Income can be increased by $1 per cwt. or more,  and more cwt. can be produced.  Financially positive results can be attained regardless of where the commodities prices go.

Tables I and II show the the positive benefit of a nutritionally balanced diet at both high and low commodity prices.  While the benefit is larger when commodity  prices are high (Table II), the benefits are still well positive at low commodity prices (Table I).

Table I - Benefit of a Balanced Diet at low Component Prices

Table II - Benefit of a Balanced Diet at High Component Prices

Below are quotes from six experienced leaders:

Brian Sloan, PhD – Global Ruminant Business Director for Adisseo - “If care is taken to not over supply some key nutrients and if the power of non linear optimizers in modern software programs are used, it will ensure that revenue will increase sufficiently to provide a positive and continuing increase in cash flow.”

Franck Gaudin - Dairy Business Director at Big Gain Feed – “It has become difficult to argue with new heights in milk production and tremendous components combined with incredible gains in cow health.”  

Chuck Schwab, PhD – Principal, Schwab Consulting, and Professor Emeritus of Animal Sciences, UNH – “Dairy nutritionists that became aggressive years ago in formulating for key nutrients to maximize milk components have never looked back, regardless of milk prices.  Their producers don’t want them to change; they see too many side-benefits of animal performance that affect dairy herd profitability.” 

Gary Foster – “Over the last few decades of genetic selection, dairy cow potential has advanced far faster than dairy cow nutrition. Consequently, in many instances today’s genetics are still being fed yesterday’s diets. Amino acids, as key nutrients, have enormous potential to turn the genetic key and show what today’s dairy cows can really do.”

Jessica Tekippe - Ruminant Product Manager for Ajinomoto Heartland - “We have entered a new era in the dairy industry. We are now going to be looking at a time when pounds of solids will be more important than ever before due to production limitations set by processors and the ever-increasing need for more butter and cheese in the American diet. This makes it vital for producers to re-evaluate their feeding strategies to ensure that they are capitalizing on all the proven technologies they have available to help them reach higher component levels.“

Robert Patton, PhD - Owner, Nittany Dairy Nutrition, Inc. - “Research continues to show that the best nutritional strategy to increase milk protein yield is to provide sufficient energy from carbohydrate sources, and to provide adequate amounts of amino acids, particularly greater amounts of methionine. Likewise, the best strategy for producing milk with higher milk fat is to provide adequate forage NDF and to reduce levels of linoleic acid in the diet to under 400 g per day.”

Technology changes can bring amazing results.  Computers and software advances used in conjunction with new scientific advances are revolutionizing all industries.  The dairy industry is not different.  Evolving application of new technology is a must for survival. 

Exports Setting Records

November export data was recently released.  The data set records for every commodity that is used to price producer milk.  As explained in the prior post, inventories of these commodities are high, very high.  That post finished with a statement that exports need to increase and production needs to decrease.  Exports for November show strength that will help get rid of excess milk.  Now, a decrease in production is needed.

Below are charts of exports for the four dairy commodities that are used to set producer prices.  Note that all four are records or near records for the month of November.  Butter did not reach the extreme high set in 2015, but it is a record for the last four years.  Nonfat Dry Milk (NDM) was really a tie with the prior year, but extremely close to a record.

Chart I - Cheese Exports

Chart II - Butter Exports

Chart III - Exports Dry Whey

Chart IV - Exports of NDM

In November, exports accounted for 16.1% of milk production.  This is a level not seen for 4 years, and it was done in a very competitive international market.

It was also done at a time when exchange rates were better than recent years, but not as good as the prior months.

Below are charts of the exchange rates between the USD and the currencies of the major international diary exporters, the EU and New Zealand, and the most important U.S. customers, Mexico and Canada.  In all cases, the charts are similar.  After almost a year of a weakening USD, the exchange rates have recently been static or down.  A weak USD makes U.S. exports more competitive in the international markets.

Chart V - USD vs. Euro

Chart VI - USD vs. NZD

Chart VII - USD vs. Mexican Peso

Chart VIII - USD vs. the Canadian Dollar

International prices for these commodities are low and the U.S. has been selling at very competitive prices.  NDM prices are extremely low for all exporting countries and the U.S. has been consistently competitive.  International cheese prices in November were OK and again the U.S. priced cheese was very competitively priced.   International butter prices have fallen like a rock.  Butter from the EU has fallen 30% in price in November from its 2017 high and it is still falling.  The U.S. has not been as competitive in butter export prices as very little butter is available for export.  What butter is exported goes mostly to Canada,  Prices of Dry Whey have also fallen, but the U.S. has not been extremely competitive in pricing.

Overall, U.S. exports of dairy products are doing very well and gaining momentum.  It is very possible that 2018 will be a record year for dairy exports which will help balance supply and demand.  In turn, inventories could drop, commodity dairy product prices could improve, and that would improve producer prices.

Stay informed with upcoming posts to this blog.

December was a Tough Month for Milk Prices

With the January 4, 2018 announcement of December Class and Component Prices, 2017 milk prices were completed.  The prices for December were at or near the bottom of all 2017 prices.  The Class III price was $15.44/cwt.  There was only one month during the year that posted a lower price. As seen on the dashboard in Chart I, the losses were very widespread.

Chart I - Dashboard of Price Changes

Chart II below says the same thing in another way.  The pie chart often used in this blog shows the makeup of the Class III price by component.  The relative structure of the pie chart showed little change in December, because the pieces of the pie all shrunk.  The overall Class III price dropped $1.44/cwt.  The last row of the chart below shows which components contributed to the Class III price decline.  The drop in the price of milk protein caused a $.90/cwt. decrease.  The price of butterfat caused a $.21/cwt. drop, and "Other Solids" caused a $.33/cwt. decrease.  Added together, they account for the $1.44/cwt. drop in the Class III price.

Chart II - November 2017 Compared to December 2017

In some ways this could be characterized as the "perfect storm" of dairy prices.

Percentage-wise, dry whey took the biggest price hit in December, falling 15.5%.  This calculated to a 34.9% drop in the value of "Other Solids."  Chart III below shows the extreme nature of dry whey inventory.  Typically, if there is not a sufficient market for dry whey, the whey is not dried and is disposed of at lower wet whey prices.  This will probably be the fastest commodity to correct as less whey is dried.  Therefore, look for "Other Solids" inventory and price to correct soon.

Chart III - Dry Whey Inventory

As the world's population continues to eat more and more cheese, an equal growth in whey will occur.  Where will all this whey go?

Of course, pricing is typically impacted by high inventories.  The most recent inventory levels shown in the charts IV through VII below are for the end of November.  Cheese, Nonfat Dry Milk (NDM), and dry whey inventories were well above prior year levels.  Exports, which will be covered in an upcoming blog, show export improvements in many of the commodities that are used to set producer prices.  However as of now, cheese inventories are still high, butter inventories are "OK", and dry whey and NDM are extremely high. 

The butter price is the basis of the butterfat price, the dry whey price is the basis of the "Other solids" price, and The NDM price is the basis of the Class IV milk price.  The formulas for pricing milk protein are based on the cheese price and the butter price.  When the commodity inventories are high, prices drop and, by formula, the component prices drop.

Chart IV - Cheese Inventory

Chart V - Butter Inventory

Chart VI - Dry Whey Inventory

Chart VII - NDM/SMP Inventory

Butter inventories are the only inventories that are not high. The reason is simple.  U.S. butter production has not kept up with increased demand.  For the years from 2013 thru 2016, butter production declined.  In 2017, there is a small increase.  Through 2018 these trends will be followed and reported in this blog.

Going into 2018, there is obviously a significant inventory issue.  The inventories can only be reduced by significantly increased exports and/or reduced milk production.

There is a new article in Progressive Dairyman by this author following the lines of the October 22nd and October 29th posts to this blog.  The article is titled "Focus on Components to Increase Revenue and Profit."  In that article, the economics of maintaining a consistent focus of components is quantified.  In an upcoming post to this blog, quotes from some of the leading nutritionists will added to this dialog.  Chasing the market doesn't work for financial management and it doesn't work for dairy production.  More on this in a late January post to this blog.