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October Dairy Market Update

During the first-half of 2014 US dairy exports soared, setting volume records for dairy products shipped overseas. If August is an indication of what is to come for U.S. dairy exports in the second half of 2014, it may be a completely different performance altogether. Mid-year, U.S. dairy exports look to have hit headwinds from two directions – a stronger dollar and higher domestic prices. At the start of the year, the US dollar (USD) to euro exchange rate was 72.66¢. Just last week the USD to euro exchange rate was 79.39¢ – a 9.2% gain since the start of the year. The same is true when comparing the USD to the New Zealand dollar (NZD). The USD to NZD exchange rate started 2014 at $1.22 and has since climbed to $1.28 resulting in a 5% gain since January. All else being equal; U.S. dairy products are suddenly more expensive than those same products from Europe and New Zealand suggesting U.S. prices should adjust by the increased exchange rates simply to stay even.

U.S. nonfat dry milk (NDM) and skim milk powder (SMP) exports had a mediocre showing in August. Manufacturers exported just 100.2 million pounds during the month, 10.4% less than the prior year and 13% less than July. U.S. NDM/SMP exports averaged $1.76/lb. far higher than comparable prices from Europe and New Zealand. Volumes to Vietnam, Algeria and Mexico, were lower than July accounting for most of the month-to-month declines. Although US volumes to China and Egypt increased 2,244MT and 1,323MT, respectively it was not enough to offset losses in other regions.

    High domestic butter prices this summer likely caused U.S. butter trade to reverse course in August. U.S. butter exports fell to just over 8 million pounds, down 60% from the prior year and 32% less than July. At the same time, U.S. butter imports rose to 5.7 million pounds in August. U.S. buyers imported 1.75 million pounds of over-quota butter with Ireland accounting for more than half of the volume. New Zealand anhydrous milkfat (AMF) was 40% of the butterfat import volumes at 2.3 million pounds. Although the average import price was $1.91/lb. – on an equivalent 80% butterfat basis importers were able to secure product at $1.546 – a remarkable savings even when considering tariffs and cost to land the product in the United States.

    U.S. whey protein concentrate (WPC) with less than 80% protein exports are still running well below the five-year average pace. WPC (<80% protein) exports were just 15.8 million pounds, 36% less than the prior year and 32% less than July. August was the lowest export volume of the year. Lower volumes to China accounted for most of the year-over-year declines. A year ago, China accounted for 54% of U.S. WPC (<80% protein) exports in August – this year China was just 24% of the total. Volumes to China plummeted by 6.8 million pounds from July as well.

    Despite a weaker performance in most categories, U.S. dairy exports did have a few bright spots. Total U.S. cheese exports were 69 million pounds in August, 11.4% more than a year ago and just 2.6% less than the prior month. Most of the gains continue to be in fresh cheese exports. Fresh cheese includes mozzarella used for pizza cheese. During August, manufacturers exported 25.8 million pounds of fresh cheese. South Korea continues to be the largest destination for U.S. fresh cheese tallying up 37% of total exports in August, followed by Australia (15.5%) and Mexico (10%).  Strong demand for fresh cheese was more than enough to offset declines in Cheddar cheese exports during the month. U.S. Cheddar cheese exports fell to 10.2 million pounds, down 25% vs. a year ago and 20% lower than the prior month.  August is the second month that Cheddar exports have fallen behind the prior year’s pace. As has been the case, strong domestic markets have made U.S. Cheddar cheese a more costly alternative to European or Oceania cheeses.

    Whey protein isolates (WPI) with more than 80% protein exports surged in August to 5.9 million pounds, up 28% vs. last year and 22% more than July. Most of the volume gains are attributable to increase purchased from China. Exports to China jumped to 2.5 million pounds, 107% higher than July. Through August, year-to-date WPC/WPI (>80% protein) exports are running 24% more than the same period in 2013.

    Cheese and whey products could fare better than butter and powder exports headed into the end of 2014. Strong demand for pizza and therefore pizza cheese are supporting U.S. exports. Due to robust demand for mozzarella cheese, higher prices have done little to slow exports. Similarly, high protein dairy products are also performing well and expected to do so in the second half of the year. Butter, NDM, SMP and Cheddar cheese are seeing stiff competition from Europe and New Zealand that could stymie exports in the second-half of the year.