August Dairy Market Update
Dairy Prices Settling
After historic downturns across the Commodity board within Global Dairy for the entire summer of 2015, it appears as though prices are rebounding slightly and finding some support as we head into the Fall. Throughout these decreases in price, the cheese and butter markets have remained the strongest and most insulated from the malaise affecting overseas’ dairy markets. Although the United States exported 15.4% of its annual milk production, the distribution of these products is skewed toward milk and whey powders. In 2014, the United States exported 52% of its milk powder produced and 58% of whey, compared to just 8.6% of its butterfat and 7.1% of it cheese, according to the U.S. Dairy Export Council. The details on how much of each product category was exported in relation to total production help explain why domestic milk and whey powder prices are more susceptible to international price weakness, as well as why cheese and butter prices remain resilient in the face of weaker prices from Europe and New Zealand.
U.S. manufacturers are exporting more cheese than they historically have, even record-smashing 2014 accounted for just 7% of cheese production, meaning that 93% of cheese remained in the United States. Therefore, U.S. cheese prices are more dependent on the strength or weakness of the domestic market. Currently, lower fuel prices, stronger restaurant traffic flow and strong pizza demand are all helping to keep the U.S. cheese market balanced, bordering on tight ahead of the holiday season. As a result, cheese prices this year have moved between $1.60 and $1.80. Although U.S. cheese prices attempted to reach the $1.80/lb. level a few times this year, the highest price CME blocks achieved was $1.78 so far. Still, this is a far cry from EU and New Zealand cheese prices at $1.1338/lb. and $1.3608/lb., respectively. Likely, international prices are an anchor on U.S. prices, preventing them from garnering further strength as the trade-off for higher domestic prices could lower U.S. exports as the product becomes relatively expensive overseas. In spite of its strong domestic markets, eventually, U.S. cheese prices tend to drift toward international prices when the holiday season passes.
U.S. butter exports were nearly 9% of total butter production in 2014, but given strong domestic demand, the U.S. has turned from net butter exporter to a net importer in 2015. In late 2013, the Food and Drug Administration (FDA) issued guidance that it was considering removing the GRAS (generally recognized as safe) designation from trans-fats; in 2015 the FDA finalized that rule. As such, per capita butter demand in the United States is on the rise driven by foodies, clean labeling and fewer substitutes. While EU and Oceania butter prices, at an 80% butterfat equivalent, languish at $1.2937/lb. and $1.2723/lb., respectively, CME butter prices just topped $2 for the third time this year. U.S. butterfat demand appears nearly insatiable over the last two years. Despite a lofty $2/lb. price, U.S. butter prices are well below last year’s record bettering $3.
Non fat dry milk (NFDM) saw its price go down to historic lows with no support system in place. Poor nearby prospects for international NDM demand caused the CME spot nonfat dry milk (NDM) prices to establish a new low-point of 69¢ at the start of August. Similarly, the National Dairy Product Sales Report (NDPSR) NDM price fell to 79.98¢ on Aug. 1 and the lowest price since data collection began in September 1998. We also have witnessed the growth of inventory levels reaching historic highs while buyers continued to sit on their hands watching global dairy product prices set fresh lows each week as markets searched for a bottom. The market might have found its bottom as it looked to New Zealand’s GDT auction on August 18th when Skim milk prices were up over 10%, and then again on the Sept 1st auction when Skim milk powder was up almost 12%. With the two increases, the market is taking this as a sign of stabilization. It should be noted, that even though these prices have increased over 22%, they remain at a discount compared to their counterparts in the US and the EU.
It’s our view that NFDM prices gain some further traction in the short term as waiting buyers begin to feel the need to put on coverage that will ultimately give the market a lift in the 4th quarter. The overall market fundamentals, however, are ultimately resting on global milk production. This data is not overly bullish today and will be a cap on future inflationary pressures. Milk production in the US totaled 17.7 billion pounds- representing a 1.2% increase over the prior year. Although not overly bullish, when coupled with 3% growth in the EU and a NZ season start up forecast to be normal/good, it certainly is not bearish. Add in the existing Stock levels and the argument could certainly suggest that we are not out of this bearish market yet. Ultimately, if prices are to rebound, we will need some milk contraction, both in the US and in the EU.
Similar to NFDM, Dry Whey markets experienced a historic drop from the beginning of June to the end of August, dropping from .67/lb. to under .30/lb. (.299). As with most things, there were multiple factors driving the price lower. Cheese production continues to grow while demand for Sweet Whey powder continues to decline, due in most part to alternatives being sought to replace the high priced carbohydrate ingredient.
WPC 34 and their high protein cousins (WPC 80 & WPI) also experienced similar percentage declines to NFDM and Dry Whey. Market prices for WPC 80 in December of 2014 were above $4.00/lb., whereas today, reported market prices fell below $2.00/lb. during the summer and are now searching for a similar bottom to that of Non Fat Dry Milk. Prices for WPC 80 have not seen this level since well before 2009. As cheese makers have been more successful around the globe, additional investment has been made to make more cheese and convert more Sweet Dry Whey Powder to perceived higher returns in WPC products. Demand for WPC product is still growing at a robust rate and “Protein” as a nutritional claim is as popular as ever with almost every consumer product group wanting to claim “Protein” on a label. This bodes well for continued demand growth and we do see prices rising in 2016 back to a more historical level. The graph below aptly depicts the historic relativity of these current price levels.
NDM/WHEY/ WPC 34 2007-PRESENT
Looking ahead, it’s easier to see bullish dairy prices at these levels vs. bearish given the low level of prices. That being said, it’s too early to say that we are out of the woods from this bearish market.