July dairy exports were disappointing. Exports of every commodity used to price producer milk were down. On the positive side, exchanges rates improved vis-a-vis most all U.S. dairy-trading partners and competitors. That should improve future dairy exports. As shown in Chart I, butter exports were down by 32.5%. However, any movement in butter exports is usually a large percentage as there are almost no exports and therefore changes are large percentages. U.S. domestic demand for butter is exceeding dairy production, so there is very little butter to export. Most importantly, cheese exports were down again in July, disrupting the positive gains shown in prior months.
Shown below are the export charts of the four commodities used to calculate producer milk prices. It is easy to notice that the July data is down from the prior months in every chart.
Cheese inventories are high as discussed in the prior post. In May, it appeared that cheese exports were starting to reach record levels (see the July 9 post to this blog). When June data was down, there were hopes that this was only a "blip" on an increasing trend. With the July data in, there are concerns that the "blip" really occurred in May with a near record level of monthly exports. With the very high levels of cheese inventories, there is not enough domestic demand to significantly shrink this inventory. Without an improvement in cheese exports, high inventories and low cheese prices will continue. The price of producer milk is tightly linked to the price of cheese (see post on the mathematics of this correlation).
Butter exports were down slightly as shown in Chart III. Year-to-date, the only significant butter exported went to Canada, and that was small. Canada is in a unique position of having a butter shortage and an excess of milk protein. The high butter price in Canada does provide tempting opportunities for butter exports.
The strong demand for butter globally, in spite of the high prices, is creating a complicated supply and demand scenario ( see the August 28 post for details).
The price of dry whey is the basis of "other solids" pricing. As mentioned in the prior post, dry whey is currently at an OK price. As a result, other solids pricing is not at a high, but it is making a nice contribution to the Class III price. It would be nice of the price of dry whey were higher, but it pales in significance to the influence of the cheese price.
Nonfat Dry Milk (NDM) pricing is the basis for pricing Class IV skim milk. The price of Class IV milk is important when the price is above the price of Class III milk. It then becomes the basis of Class I, Class II, and Class IV milk prices. However, the low price for NDM is keeping the Class IV price well below the Class III price for now.
The big positive for the month is exchange rates. The USD continues to weaken against most all currencies of dairy trading countries. Chart VI shows the improvement in the exchange rate between the USD and the Euro. Only a few months ago, the exchange rate was around $1.08 per Euro. It is now at $1.19 per Euro. That makes U.S. produced dairy products less expensive vs. the largest global dairy exporter, Europe.
There has also been a very positive change in the other largest international dairy competitor, New Zealand. The USD/NZD exchange rate is currently down slightly, but there is a strong trend to a stronger NZD.
There is also a favorable change in the strength of the USD vs. the currencies of the largest customers of U.S. dairy products. Most importantly is the USD/Mexican Peso exchange rate. Since the beginning of 2017, the Mexican Peso has strengthened vs. the USD, making U.S. dairy products more affordable in Mexico.
Canada is also a very important U.S. customer for dairy products. The strengthening of the CAD is similar to the strengthening of the Mexican Peso.
In summary, while the July export data was a disappointment, the exchange rate data helps set the stage of improved exports. The most critical of these is exports of cheese.
On August 30, Class and Component prices were announced for August. Milk protein was up from the July's price of $1.22/lb. to $1.55/lb. in August. This was driven by an 8% increase in the NASS cheese price. The increase in the cheese price is not in line with fundamentals as will be covered in more detail later in this post. Butter prices rose again, this time slightly. Butter production is down and inventories are lower, putting pressure on the price of butter.
The cheese price increase did bring the Class III price up by 7.2%. The correlation between the cheese price and the Class III price is very strong at 94%. That simply means that the Class III price can be predicted with 94% accuracy based on the price of cheese. The Class III price did increase from $15.45/cwt. last month to $16.57/cwt. in August.
Cheese production is strong in spite of growing inventories. When there is too much milk, where else can it go? Cheese production is outstripping domestic consumption and exports. As a result, inventories are rising.
The severity of the inventory increase is displayed in the two following charts. Cheese stocks need to increase over time with the increase in consumption. The growth in inventory is needed to provide sufficient stocks to manage the demand. The chart below shows the growth in cheese stocks since 2000, which is consistent with the growth of consumption plus exports. However, the stocks are currently well above the long-term trend line. The inventory is at a record level above that trend line.
Chart IV below compares year-by-year levels of cheese inventories on a month-to-month basis. July ending data shows a significant and concerning swelling of inventories.
In spite of this, the NASS cheese price did go up in August to $1.67/lb. The most recent CME cash prices as of September 1 were $1.54/lb. for blocks and $1.52/lb. for barrels. These numbers signal a potential strong drop in the NASS cheese price for September and, therefore, a strong drop in the Class III milk price.
Butter inventories remain tight. Demand for butter remains strong in spite of the high retail prices. The NASS butter price rose only slightly in August to $2.67/lb. from $2.62/lb. the prior month.
Production of butter is running lower than prior years in spite of the higher demand for butter. The shortfall is being made up with butter imports, primarily from Ireland. There is strong demand for butter from Ireland, which is considered premium butter by many consumers. It is "cultured" and has a slightly stronger flavor and a higher melting point. There will be more on this in the next post, which will analyze export/import data.
The price of dry whey, the basis of "Other Solids" pricing lost 3.7% in August, but remains at a mid-range level. Therefore, the price of "Other Solids" remains at a respectable level of $.24/lb.
The dairy commodity markets remain turbulent. Articles on the high wholesale and retail price of butter are everywhere. It is not just a domestic issue, but a global issue. As covered in the prior post, butter prices mostly just move dollars from milk protein to butterfat or vice-versa. The dominant force for milk prices is the wholesale cheese price. The change in August was welcomed, but may be short lived. The low spot market prices quoted above, are not indicative of the futures cheese market, which is quoting continuing prices in the $1.60/lb. range for the remainder of the year. This will only be possible if cheese exports quickly pick up. New data on exports will be available next week and will be covered in the next post to this blog.