By: Will Babler and Luke Strub, Atten Babler Commodities LLC
U.S. Dairy Product Stocks
U.S. dairy product stocks have accumulated throughout the summer months as production continues to expand and export demand remains weak. Combined U.S. butter, cheese, dry whey and nonfat dry milk (NFDM) stocks increased 13.8% year-over-year (YOY) in Jul ’15, finishing at the highest July figure experienced over the past 32 years. Individually, U.S. butter stocks finished up over 40% YOY in Jul ’15, U.S. dry whey stocks reached a record high for the month of July, U.S. cheese stocks reached a 31 year high and U.S. NFDM stocks reached a record high level for the third consecutive month.
Weak Export Demand
Domestic demand for dairy products continues to grow however declining exports has resulted in a net reduction in demand for U.S. dairy products, driving stocks higher. The accumulation of U.S. butter and cheese stocks is particularly concerning as these products are currently trading at significant premiums to international prices, making them more difficult to export at current price levels. Throughout Aug ’15, U.S. butter and cheese prices traded at 73% and 18% premiums to international average prices, respectively, far greater than the U.S. dry whey and NFDM price premiums.
The export environment has not only been affected by significant domestic price premiums but also from an increasing U.S. dollar (USD). The USD has continued to strengthen against a basket of the currencies of major global importers of U.S. dairy products over recent months, resulting in less purchasing power for the traditional buyers of U.S. dairy products. This dynamic ultimately results in less foreign demand for U.S. products, all other factors being equal.
Declining U.S. butter and cheese exports has resulted in an increase in product stocks despite domestic demand outpacing production growth throughout the first half of 2015. On an absolute basis, combined U.S. butter and cheese production increased YOY by 105 million pounds from Jan ’15 – Jun ’15 however this increase in supply was more than offset by domestic demand increasing YOY by 118 million pounds YOY throughout the same period. Combined U.S. butter and cheese net trade, however, has declined YOY by 163 million pounds throughout the first half of 2015, resulting in the vast majority of the recent increase in high milkfat product stocks.
Although domestic demand for dairy products continues to expand, U.S. dairy export growth remains a crucial component of the U.S. dairy supply and demand balance. If prices do not adjust and domestic high milkfat products remain at a significant price premium, stocks may continue to build heading into the final quarter of 2015.
Will Babler is a principal with Atten Babler Commodities LLC. The firm serves producers, processors and end users in the dairy industry by providing education, margin management programs and futures and options brokerage services. You can reach Atten Babler Commodities at 800-884-8290, [email protected] or www.attenbabler.com.
The information and comments contained herein are provided as general commentary of market conditions and are not and should not be interpreted as trading advice or recommendation. The information and comments contained herein are not and should not be interpreted to be predictive of any future market event or condition. Information contained herein is obtained from sources believed to be reliable, but cannot be guaranteed as to its accuracy or completeness.