November Class and Component Prices are now available. November was a very positive month for dairy prices. As shown in the dashboard chart below, many prices were up substantially. This resulted in a Class III price of $16.76/cwt., which is higher than any Class III price in 2015 and the second highest price in 2016. Based on the futures market, December prices should continue this increase. Is this another "Trump rally?" Are the President Elect's statements on killing TPP and renegotiating NAFTA having an impact or has there been a change in the fundamentals? The analytics examined below suggest that fundamentals underlying dairy pricing are only slightly improved, but this could be interpreted as the start of a trend.
The long-term trends for components are showing a return to more normal component prices. Milk protein increased 22% while butterfat remained close to the prior month. The price for Other Solids is returning to a more positive value after a year of very low near zero prices.
Behind all this good news is a good balance of inventories. Not all data is yet available for October and November, but the data that is available shows lower inventory levels of the commodities behind the component prices. Lower inventories typically bring prices up.
Cheese inventories are still high compared to 2012 through 2014 levels but they are declining slightly. As reviewed in the November 13 post to this blog, exports of cheese remain anemic and imports remain near record high levels. While current production data is not yet available, a decrease in production must be behind this.
Inventories of butter are following the normal cyclical pattern with a significant decrease in October. The current price of butter at $1.90/lb. is nearer to traditional levels and well below the "bubble" levels of the last 12 months.
Some of the price increase for milk protein is caused by the current lower butter price. The chart below shows an analysis of the milk protein price broken into the contribution made by the cheese price and the butter price. The decrease in the butter price and the increase in the cheese price have contributed equally to the higher milk protein prices. See the August 8, 2010 post to this blog for more detail on this relationship.
The futures market is showing a return to butter prices above $2/lb. and cheese prices are expected to hold steady. If the market follows this pattern, butterfat will increase in value and milk protein will decrease. Changes in the price of butter have a minor influence on the Class III milk price, but do cause a shift between the price of milk protein and butterfat.
Dry whey pricing is the basis for the producer price of Other Solids. Dry whey is largely an export item and has for the last year, been at very low prices. During 2016, dry whey prices have increased steadily. They started the year at just $.24/lb. and reached $.37/lb. in November. Inventories of dry whey are at a very low point and the futures market is showing further price increases. A return of Other Solids pricing above $.40/lb. can be expected. While Other Solids are currently contributing $1/cwt. to the Class III price, this could increase to $1.25/cwt. with the expected continuing increase in the value of dry whey.
In November, milk protein contributed 50% of the value in milk. This makes a very clear case for prioritizing efforts to maximize milk protein. The butter price is expected to increase, shifting the pricing toward butterfat and away from milk protein. If this occurs, the pie chart would again favor butterfat as the major contributor to the Class III price. However, U.S. butter pricing remains well above the international price of butter, which may hold butter to a lower price than is currently expected in the futures market. These dynamics will continue to be followed in this blog as they play out.
Additional data will soon be available on production, exports and imports. The next post will cover an analysis of these analytics. For now, futures pricing is showing some additional increase in the Class III price to the $17/cwt. level in December and throughout 2017.