Butter Imports and Exports

In the prior post, exports and imports of cheese were analyzed.  In this post, exports and imports of butter are analyzed.  The title for this post is "Imports and Exports" not "Exports and Imports", because the most impactful changes for butter are related to imports.   Butter domestic consumption has experienced strong growth in recent years, but domestic production of butter has lingered (Chart I).  How can this be?

Chart I - U.S. Butter Production

Butter consumption in the U.S. is typically considered a growth area for dairy.  Butter domestic consumption grew by 21 KMT in 2018, which represents a growth rate of 2.4% over the prior year.  Unfortunately, this growth in consumption is not significantly impacting U.S. butter production (Chart I).  The reason for very limited growth in production is simply that a significant amount of the growth is coming from imported "Irish butter."

In 2018, 28 KMT of butter were imported from Ireland, which was an increase of 9 KMT over the prior year.  Depending on how one views this, the 9 KMT growth of "Irish butter" accounts for about half of the increase in U.S. butter disappearance of 21 KMT.  Viewed differently, the 28 KMT of imported "Irish butter" was larger than the entire growth of domestic disappearance in 2018.  Viewed either way, "Irish butter" is responsible for much of the growth in domestic butter consumption.

The unanswerable question is how much of the imports of "Irish butter" cannibalize domestic butter consumption and how much cannibalize plant-based spreads.

To put these numbers in perspective, total domestic disappearance (domestic consumption) of butter in 2018 was 862 KMT.  The imports of "Irish butter" were 3.3% of the domestic consumption.  That is a reasonable estimate of "Irish butter's" market share.  Based on the first quarter 2019 import statistics, that market share is trending to 4.2% in 2019.

Charts II and III below review the growth of butter imports from Ireland.   Chart II displays annual "Irish butter" imports for 2015 to 2018.  During this time "Irish butter" imports increased by 300 percent.  Chart III compares the first quarter imports of "Irish butter" from 2015 to 2019.  During this time, "Irish butter" imports increased by over 500%.  Consumer acceptance of "Irish butter" has been phenomenal, and the growth rate, judging from the first quarter 2019 statistics, is continuing to increase.

Chart II - Annual Butter Imports from Ireland 2015 to 2018

Chart III - Q1 Butter Imports from Ireland 2015 to 2019

"Irish butter" is not a revolutionary product, but the marketing has been extremely well done and the product has made major inroads in U.S. consumption of butter.  Charts IV and V below show the imports of butter by country for 2015 and 2018.  In 2015, 27 per cent of imported butter came from Ireland.  By 2018, imported butter from Ireland has risen to 57 percent of imports.

Chart IV - Butter Imports - 2015

Chart V - Butter Imports 2018

This simply means that the growth of butter consumption in the U.S. is only slightly helping U.S. dairy producers, because it is sharing the domestic consumption growth with dairy producers in Ireland.

Exports of butter have been minimal, and the first quarter of 2019 showed no growth (Chart VI).  The majority, 67%, of the butter exports went to Mexico and Canada.  The U.S. is not a player in the international markets for butter exports.  Chart VII shows the inventory levels of butter in the U.S.  It clearly shows that there are very little supplies available for export.

Chart VI - Butter Exports by Year

Chart VII - Domestic Butter Supplies

SUMMARY

U.S. dairy producers are plagued by a lack of market for their milk. Fluid milk is declining quickly, and the only real growth market is cheese.  The above analytics in this post show that the U.S growth market for butter, is not as healthy as portrayed by the increasing U.S. domestic market consumption.  Much of the increased U.S. butter consumption is being supplied by imported butter from Ireland.

Without innovation, the U.S. butter consumption increases may be claimed by imports from other countries.  Future posts to this blog will continue to follow these trends. 

Exports and Imports

Because the export/import data is complex to analyze, this post will deal only with cheese exports and imports.  Cheese prices are dependent on the size of cheese inventories.  More inventory results in lower cheese prices.  Lower cheese prices result in lower milk prices.  Increased dairy exports are often sighted as the cure for the U.S. milk surplus.  To dent the current bloated inventory of cheese, exports would have to reach "off-the-chart" levels of exports.  Read on, to see the detail supporting this statement.  The next post will cover butter exports and imports exclusively.

In the prior post, cheese pricing, production, and inventories were covered.  With cheese pricing up and cheese production constrained to prior year levels, there was a glimmer of hope for higher cheese prices and higher Class III milk prices. The bad news was that cheese inventories continued to increase. In fact, the inventories grew by 4% in the first quarter, well above consumption increases and that growth was on top of already bloated cheese inventories.

Chart I - Inventories of Cheese by Year

Cheese exports did increase by 10% in the first quarter of 2019, which was another good sign.  More export should increase demand and help lower cheese inventories.  However, as mentioned above, the inventories grew even with this higher level of cheese exports.  In this post, cheese exports will be analyzed in detail to see if the higher level of cheese exports has staying power.  And if these higher levels can be maintained are they sufficient to prevent additional increases in cheese inventories.

Chart II shows monthly exports of cheese by year for 2015 through 2019 YTD.  In the first quarter of the year, exports followed the annual pattern of increasing month by month.  The exports were also higher than any of the prior four years and 10% higher than 2018.

Chart II - Cheese Exports by Year

The top export markets for U.S. cheese are Mexico, South Korea, Japan, and Australia.   In 2018, they accounted for 64% of the U.S. cheese exports.  As shown in Chart III, these four countries are long term stable importers of U.S. cheese.  Their annual purchases are fairly constant with no major increases or decreases or trends.

Chart III - Cheese Exports for the top Four Export Markets

Chart IV compares the first quarter of 2019 cheese exports to the first quarter of 2015 through 2018 for these same four top export customers. The 2019 increases came from South Korea and Japan.  The increase for South Korea was up 46% over the prior year and Japan was up 30% over the prior year.  Based on history, this is very uncharacteristic and therefore probably not sustainable.  Mexico's volume was slightly down, perhaps due to the tariffs imposed during the negotiations for USMCA.  Those tariffs have now been eliminated and there may a temporary surge as the depleted inventories in Mexico are replenished.

Chart IV - Cheese Exports for Q1 for the top Four Export Markets

Imports of cheese for the first quarter of 2019 (Chart V) are very close to the last three years of imports and do not signal any trends that could diminish net exports.

Chart V - Cheese Imports by Year

Charts VI and VII compare imports of cheese by country of origin for 2015 and 2018.  The largest countries of origin for cheese imports are Italy and France.  Together, imports from these two countries make up close to 30% of the total imports.  These imports can be characterized as branded specialty niche cheese products.  Other imports are based on some additional niche products and commodity imports based on varying exchange rates.

Branded niche products have a stable market which does not typically change rapidly.  The commodity products that are imported can vary in volume based on global supply and demand and exchange rates.

The conclusion from this analysis is that overall, import volumes can be expected to remain stable at least for the short term.

Chart VI - 2015 Imports by Country of Origin

Chart VII - 2018 Imports of Country of Origin

With stable cheese imports, net cheese exports (exports less imports) closely match the pattern of exports.  Exports are a larger volume than imports and in the first quarter of 2019 were much more volatile.

Chart VIII - Cheese Net Exports

Cheese exports for the first quarter of 2019 were equal to 6.7% of domestic cheese production vs. 6.1% in the same period of 2018.   This increase represents about a 9 KMT per quarter increase over the prior year.  At the end of the first quarter of 2019, there were 627 KMT of cheese in storage and cheese inventories had just increased by 55 KMT in the first quarter of 2019 over the prior year.  Clearly, even with the most positive scenarios, exports alone will not be enough to reduce the bloated U.S. cheese inventories.

SUMMARY

Exports of cheese have hit a good pace in the first quarter of 2019.  Hopefully, this pace can be maintained.  Even with the current elimination of the Mexican tariffs, any increase in exports to Mexico will likely be offset with a "return to normalcy" in exports to South Korea and Japan.  Imports will also likely maintain a stable pace for the rest of 2019.

The "dream" of exports significantly reducing current cheese inventories is not an analytical reality.

The only way to reduce cheese inventories is to reduce milk production and the resulting excess which is being "parked in cheese inventories.  Only lower inventories will make a lasting increase in cheese prices.  Cheese prices are mathematically linked to the Class III milk price and will therefore only move with changes in the cheese price.

The Class III Price Reaches a 2019 High, but......

The April Class III price reached a 2019 high of $15.96/cwt.  This was driven by a significant increase in cheese prices.  Butter and butterfat prices were unchanged.  Dry whey prices decreased from the prior month, causing other solids pricing to fall.

Chart I - Dairy Pricing Dashboard

The increase in the Class III price (Chart II) is directly tied to the price of cheese.  The Class III price of $15.96/cwt. is not an outstanding price.  However, the increase in the Class III price is welcome news for producers who have been dealing with $14 milk.  This post will review some of the underlaying analytics that provide some clue as to the sustainability of the current Class III price.  The CME futures market has recently been showing small increases in the Class III price in coming months.

Chart II - Class III Milk Price

The improvement in Class III pricing is no doubt based on the "no growth" cheese production shown in Chart III.  During the first quarter of the year, cheese production matched the prior year levels almost exactly.  Cheese production has typically increased every year to meet the increased demand. However, in Chart III, the lines for 2018 and 2019 overlap.

Cheese consumption has been growing at a rate of about two percent per year and production has typically grown to meet that demand.  However, especially in 2018, cheese production grew much faster than consumption.  That resulted in increased inventories and drove down cheese prices.

Chart III - Cheese Production

Chart IV below shows the cheese inventory levels for the current and prior four years.  Cheese inventories have grown significantly in each year.

What is amazing in 2019 is that the high inventory of cheese continued to grow, even with no increase in production.  In January, cheese inventories grew six percent over the prior year.  In February and March, cheese inventories grew by four per cent over the prior year.  These growth rates are well above any increases in domestic consumption. 

Exports of cheese were up in the first quarter of 2019 by 10% over 2018, adding a small amount of additional cheese "disappearance," but it was not enough to slow the inventories growth.

The analytics support only one conclusion.  Cheese production in 2018 was so far above demand, that even though there are no further increases in production in 2019, further reductions in cheese production will be needed to balance supply and demand.

Higher inventories typically mean lower prices, but the NASS cheese price actually rose in the first quarter of 2019.  Based on the continuing growth of inventories, the sustainability of the higher cheese price is questionable.

Chart IV - Cheese Inventories

Chart V below shows the long-term NASS price of cheese.  It always looks identical in shape to the price of Class III milk price shown in Chart II as the two are closely linked by the Federal Order pricing formulas.  The only rational behind the current increase in the NASS cheese price is that the current lack of growth in cheese production will help reduce the bloated cheese inventories in the long-run. 

The current price of cheese is the highest since September of 2018, seven months ago.  While a cheese price at $1.65/lb. is still low, it is encouraging to see at least this increase.  However, as mentioned above, the sustainability of this higher cheese price, with the inventories still growing, is questionable.

Chart V - Wholesale Cheese Prices

Butter supply and demand and pricing analytics are very different from the cheese analytics.  Butter prices (Chart VI) have been extremely stable through 2018 and 2019 YTD.  During the last 12 months, butter prices have maintained a very stable price level around $2.26/lb., with only a two percent variation.

Chart VI - Wholesale Butter Prices

The growth in domestic butter consumption and limited supplies (Chart VII) have kept prices relatively high.  Supplies of butter have remained lower than the prior year for the first quarter of 2019.

Chart VII - Butter Inventory

One of the factors that is keeping butter prices from rising, is that the increased domestic consumption is partially fueled by imports of "Irish Butter", not domestic butter.  That allows a stagnant inventory level to meet demand.  Futures pricing suggests little change in the price of butter.

SUMMARY

The Class III milk price is primarily determined by the price of cheese.  In the last few years, there has been overproduction of milk and that overproduction has gone primarily into cheese, bloating inventories and lowering prices.  While it is refreshing to see that there are no 2019 increases in cheese production, the increasing cheese inventories indicate that there is still a need for further reduction in the milk supply and cheese production.

There is risk to any further increases in cheese pricing and in turn the Class III pricing. If further decreases in the milk supply and cheese production do not occur, the oversupply will continue to bloat inventories and keep prices low.

As mentioned above butter prices will likely remain stable for the near future.