Producers must appreciate and understand the risks in the global dairy market when making risk management decisions at home.
By Carl Babler, Atten Babler Commodities
The export of U.S. dairy products has become an increasingly important part of the U.S. dairy industry over the past several years. Net exports of U.S. milk production now exceed 10% on a milk solids basis. It is important for dairy producers to understand the dynamics of this part of the market since it has largely been the outlet for soaking up growth in supplies and supporting prices.
U.S. dairy exports are largely made up of nonfat dry milk and, from time to time, a significant amount of butter. Cheese has historically been a net import, but in recent years has shown a steady growth and now makes up a small amount of exports.
Dairy exports represent a bright spot, supporting growth in the U.S. dairy industry, especially in light of a relatively stagnant domestic market. Over the last decade, domestic dairy demand has grown only about 11% while export demand has grown 113%.
The export growth story has not been a smooth ride. Year-over-year changes in exports have swung wildly compared to the generally single digit year-over-year changes in domestic demand.
Much of the volatility is driven by weather in New Zealand, the world’s largest dairy exporter. Their grazing production model is highly reliant on consistent rainfall. In years of severe and moderate drought in Oceania, the U.S. has stepped in to fill the void in global dairy trade.
As the world dairy export market grows, the linkages between product prices have increased significantly. This increases the sensitivity of U.S. prices to world weather, production, growth and policy changes. As evidenced by the incredible growth in global dairy trade over the last decade, this is a phenomenon that is unlikely to end any time soon. Accordingly, producers must appreciate and understand the risks in the global dairy market when making risk management decisions at home.
Risk in purchasing options is the option premium paid plus commissions and fees. Selling futures and/or options leaves you vulnerable to unlimited risk. Transaction cost used throughout this report includes both commissions and fees. Atten Babler Commodities LLC uses sources that they believe to be reliable, but they cannot warrant the accuracy of any of the data included in this report. Past performance is not indicative of future results. Unless otherwise stated the information contained herein is meant for educational purposes only and is not a solicitation to buy futures or options. The author of this piece currently hedges for his own account and has financial interest in the following derivative products mentioned within: milk.
Carl Babler is a principal with Atten Babler Commodities of Galena, Ill. Contact him[email protected] or 877-259-6087.