A stark contrast developed this spring in fundamentals. While production and herd size continued to march higher, burgeoning exports have not only grown but have also filled the resulting domestic demand gap (at least for cheese).
Now that milk production growth is showing moderation, the export surge is sufficient to make up for lackluster cheese demand. The scale of exports is enough that fall-winter market plans need to take under consideration this flow shift on longer-term pricing.
Cheese demand has fallen precipitously from year-ago levels. Year-to-date total cheese disappearance is down 2.87% through June. This has driven inventories to seasonally high levels (rising 1.6% to 13.9 million pounds compared to June 2007). The 13.9 million pounds is not that large a hurdle, considering that a decline in imports account for 0.5% of the disappearance decline.
The trade's premise is that the gap will grow under low demand and continued high milk/cheese production. But this is uncertain, particularly considering that if the $1.70s hold for cheese, it will be a 20¢ to 25¢ drop from the 2008 average price thus far. With a price drop at the start of the fall buying season, the fall demand picture improves and, with it, cheese balance and pricing. .All of this is before a prospective challenge for milk flow from the butter/powder side and cheese exports.
Non-fat dry milk exports are on pace to exceed 1 billion pounds for the year, selling 516.4 million pounds through June 2008, an 83% lift from year-to-date June 2007. The highest export year, 2006, sold 631.5 million pounds, which will easily be topped in the third quarter. Not only is the scale of powder sales impressive, the corresponding share of production is also pulling a substantial amount of production from domestic channels.
Butter exports have also grown (99.9 million pounds year-to-date June 2008, a rise of 683%), adding to tightness in butter and milk supply. As a portion of fluid plus yogurt plus cheese plus dry milk plus butter, milk equivalent exports through June 2008 (including butter) represent a 6.6% share (5.6 billion pounds), nearly double the 3.6% share (3.5 billion pounds) a year ago.
Domestically available milk of the same channels through June is the same as it was a year ago (83.7 billion pounds versus 83.3 billion pounds). With June's domestic supply falling negative (–1.7%) and exports steady, the trend is for a tighter domestic milk supply.
The third "leg” is what is happening with butter and powder stocks. With butter disappearance rising 20.5% year-to-date June 2008, stocks began falling a few months early to pull June stocks 6.9% below a year ago. Powder has also retreated from its high of 153.5 million pounds to 126.7 million pounds. With muted powder prices spurning sales in excess of stocks (turnover exceeding 103% since April), stocks of both butter and powder will continue to decline and add pricing pressures.
Cheese is the lone holdout from turning into balance. With recent price moves timed with historically aggressive sales, there is good reason to believe stocks will balance in short order.Milk production also appears to moderate a growth cycle prevalent since last summer and this will impact all three channels (cheese, butter, powder) into the spring. Milk-to-feed price spreads cannot seemingly recover to year-ago levels, and it seems best to cover feed needs if the business is liquid. Then wait for fundamentals to pull milk pricing from its current trough.
Marv Hoekema is president of Dairy Decisions Consulting LLC. You can contact him at firstname.lastname@example.org.
You are reading an extended version of this column that appeared in the September issue.
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