NDM Pricing is Important!

Based on a few questions from the prior post "Where are Milk Prices Headed in 2023," this post will detail the direction that nonfat dry milk (NDM) pricing is going.  Cheese is the most important parameter for producer skim milk pricing as it controls the skim Class III price and half of the Class I price. NDM controls all the skim Class IV, Class II, and half of the Class I price.

The domestic commodities butter, cheese, and dry whey are used to price butterfat, milk protein, and other solids. Their prices are primarily influenced by domestic wholesale inventories of these commodities.  The inventory levels are readily available.  NDM is primarily an export product and global inventory levels are not available.  That makes estimating future NDM prices more difficult.  

The pricing of NDM is also complicated by the fact that there are two very similar produces, NDM and skimmed milk powder (SMP).  Only NDM is used to price milk.  While the two products are similar, there are important differences. 

Some of the available data combines NDM and SMP.  The differences were defined in detail in a prior post.  NDM is defined by the USDA and is only a U.S. produced product.  SMP is defined in the "Codex Alimentarius" or "Food Code."  The Codex is a collection of international standards used to define products to ensure fair practices in food trade. The Codex standards are used by the World Trade Organization to settle disputes and assure uniformity in products.  The U.S. Agricultural Marketing Service (AMS) determines the price of NDM for use in pricing producer milk.  

The U.S. is primarily a producer of NDM with SMP making up less than ¼ of the total volume of NDM and SMP (Chart I).

Chart I - SMP as a percent of NDM/SMP

When the current Class and Component pricing system was developed prior to 2000, there were no significant exports of NDM/SMP.  By 2005, 22 percent of the NDM/SMP was being exported.  Today, over 70 percent of U.S. produced NDM/SMP is exported (Chart II).

Chart II - Percent Exports of NDM/SMP 

Therefore, to determine where the price of NDM is going, one must turn to international data.  Chart III below shows the 2021 through September of 2022 pricing of NDM and SMP from Europe, Oceania, South America, the West coast of the USA, and the prices determined by AMS.

Chart III - International prices of NDM/SMP and the AMS Price

While there are some differences in the lines above, there is consistency with lower prices through the first three quarters of 2021 followed by steep increases from the later part of 2021 though the first quarter of 2022.  Since then, all international and domestic price have dropped.  Will they continue to drop?

As shown in Chart IV, it is unusual to see price spikes for NDM as high a as they were is the first quarter of 2022.  In fact, there have been only two other high price spikes for NDM in the last 23 years and they both dropped back quickly.

Chart IV - AMS Pricing of NDM

NDM has the least volatility in its pricing compared to the three other commodities used to price milk.  That means it is less likely to make large pricing changes routinely.

Table I - Volatility Indexes

U.S. production of NDM/SMP has dropped in 2022 as shown in Chart V.  This has occurred because of the decrease in butter churning which was discussed in the September 11 post to this blog.  Lower production often means tighter inventories.

Chart V - U.S. Production of NDM/SMP

However, despite the decrease in butter churning and the decrease in production of NDM/SMP, NDM/SMP domestic inventories are not low.  The August 2022 inventories are larger than the August inventories of the prior two years (Chart V). 

Chart V - Inventory levels of NDM/SMP

What does this mean for the 2023 pricing of NDM and the pricing of skim Classes 1, II, and IV?  While international events can influence these prices, the above analysis indicates that NDM is already decreasing in price and will continue to decrease in 2023.

It is unusual for Class IV milk to be priced well above Class III milk.  In September 2023, Class IV skim milk was $4.98 per cwt. higher than Class III skim (Chart VI).  Further decreases in Class IV skim are very likely.

Chart VI - Class III and Class IV Skim Milk Prices