Monday, April 16, 2018

Exports Continue to Show Progress

February export data showed improvement, but there is still a long way to go to balance production with domestic consumption and exports.  Exports of Nonfat Dry Milk/Skimmed Milk Powder (NDM/SMP) were especially strong with a gain of 28% over the prior month.  This was a huge increase considering the existing strong export levels of NDM/SMP.  Imports of NDM/SMP were down 7%.  This helped create an all-time record for net exports of NDM/SMP.  Exchange rates have not shifted much recently and remain significantly favorable for exports compared to year ago rates.

Cheese exports were better than last month, better than last year, and better than the year before (Chart I).  However, there is still a desperate need for even higher levels of cheese exports.  February exports were still well below 2014 and 2015 levels and cheese inventories are still very high (See Prior Post).

Chart I - Cheese Exports
To put this into perspective, Chart II shows cheese exports from 2000 to February 2018.  The chart shows rapid growth for the ten-year period from 2004 to 2014.  In 2015, cheese exports struggled and in 2016 they fell back to 2013 levels.  In 2017 there was strong March data, but then exports fell again.  The improvements to date since then have been mostly positive, but minimal.  To get rid of the excess cheese inventories and allow producer prices to improve, significant gains in cheese exports are needed.

Chart II - History of Cheese Exports
Cheese imports, shown in Chart III, were also positive.   Less cheese was imported in February 2018 than the last four years.  This is another positive, but small change.

Chart III - Cheese Imports
Aided by the combined increase in cheese exports and the decrease in imports, cheese net exports were near to the 2015 levels.  To reach the 2014 net export levels, cheese net exports must still grow by an additional 50%.  With the already high export volumes, an increase of 50% is huge.  The USDEC is the facilitator and their challenge is big, and very important to achieve.

Chart IV - Cheese Net Exports
Why are cheese exports so important?  By the formula shown below, it is easy to see why cheese prices are so important to the Class III milk price.

Class III Milk Price = 
9.6 x Cheese Price + 
5.9 x Dry Whey Price + 
0.4 x Butter Price - $3.20

The correlation between the cheese price and the Class III prices is depicted graphically in Chart V below.  A correlation of 96% reflects a very tight relationship between the price of cheese and the Class III milk price.  As goes the cheese price, so goes the producer milk price.

Chart V - Correlation between Cheese Prices and Class III Milk Prices
The Class III price is also currently the basis for the Class I price.  Class I milk and Class III milk combined make up the vast majority of the total producer milk.  That means that the movement of the uniform producer milk price is all about the price of cheese.

In the prior post, the extremely high inventory of NDM/SMP was covered.  The export volume was equally notable.  NDM/SMP exports were a record high, not just for the month, but an all time high.  While international NDM/SMP prices are very low, and this is likely to continue, the U.S. was able to make significant volume gains in exports.

Chart VI - NDM Exports
Where is all this NDM/SMP going?  The YTD growth is well spread among a number a nations.    The vast majority of NDM/SMP exports go the Mexico and there is nice growth YTD.  But there is also nice growth in exports to a number of other countries as shown in Chart VII.

Chart VII - NDM/SMP Exports by Country
The title of this post is "Exports Continue to Show Progress."  That really says it all.  The growth in exports is positive, but even more growth is needed to match current milk production.  Until equilibrium is reached, producer milk prices will continue to be low.  Significantly increased exports and lower milk production are the only cures for the current glut of milk and the high inventories of dairy commodities.