Forget where you are and what time it is right now. Close your eyes and set your brain as if today was at the end of July 2013.
Milk Class III price stands at $17.38/cwt; class IV at $18.90/cwt. The USDA announces the ending stocks for various dairy products (how much sits in warehouses). The ending stocks of American cheese are estimated at 710 million pounds, up from 630 million pounds in July 2012. Ending stocks for butter are at 325 million pounds, up from 250 million pounds in July 2012. For non-fat dry milk (NFDM), stocks are at 230 million pounds vs. 150 million pounds in July 2012.
In short, all major dairy products inventories are running very high: we are stockpiling dairy products.
This prompted a famous dairy economist from Wisconsin to forecast a major downward slide in milk prices, perhaps even a price crash. But here we are in early February 2014 with a January Class III price of $21.15/cwt and a Class IV price at $22.29. So was the dairy economist an idiot or what?
What happened is that the game is no longer being played in Wisconsin — or California. The U.S. has become a major dairy exporter and years of efforts by the U.S. Dairy Export Council are finally paying back.
As a percentage of total U.S. production, we are now exporting more dairy products (roughly 16 percent of national milk solids production) than corn (roughly 11 percent of national production).
Our dairy exports in 2013 increased by 18 percent in volume and a whopping 31 percent in value to reach $6.72 billion. We exported roughly 550,000 metric tons of NFDM/skim milk powder (SMP), 312,000 metric tons of cheese, and 90,000 metric tons of butterfat.
Whole lotta milk
If you are like me, you have no idea how much milk is needed to make a metric ton of anything. So let me do the conversion for you.
It would take about 13.5 billion pounds of milk to make our 2013 exports of NFDM/SMP, 6.9 billion pounds of milk for our 2013 cheese exports, and 5 billion pounds to make our butterfat exports.
Mind you, these numbers are not additive: you do make both butter and NFDM out of a cwt of milk. But in all, nearly 16 percent of our total milk solids production was exported last year.
Put differently, we exported the equivalent of 31.2 billion pounds of milk, or more than the total annual milk production from New York, Ohio and Pennsylvania combined.
I have mentioned the critical role played by the U.S. Dairy Export Council in increasing our exports over time. Building up export markets for U.S. dairy products takes a lot of time. In many countries, buyers need to form strong relationships with sellers before they will commit to an order.
The U.S. had also built a reputation of being an opportunistic exporter: exporting only in times of domestic surpluses. If you are a buyer in China, Saudi Arabia or Morocco, you want to deal with a supplier who can reliably fill your pipeline.
The second problem that we face is that our major competitors (Oceania, European Union) have a freight advantage in delivering products to many of the major importing countries.
This is where the CWT (Cooperatives Working Together) is playing a pivotal role. For the last three years, CWT (primarily dairy cooperatives representing over 70 percent of the milk produced in the U.S.) has focused on providing financial assistance to the export of targeted dairy products.
In 2013, more than 80 percent of the exported American-style cheese and 50 percent of exported butter received some form of export assistance from CWT.
The positive economic impact on our domestic milk prices from our dairy exports in general, and the CWT assisted exports in particular is unquestionable.
The money set aside in CWT by dairy producers has arguably been their best investment in the last three or four years.
What if my co-op doesn’t export! You still get a huge benefit. For example, most of the NFDM/SMP exports originate from California. Imagine if the equivalent of 10 billion pounds of California milk was trying to find a place on our domestic market. Do you really think that the CME cash cheese price would still be trading well above $2/lb.?
The good news
It is unlikely that the current prices will be sustained; at some point they are doomed to drop. The questions are when, how, and how much.
I really don’t know when… As for the ‘how’, all indications are that our exports are to remain strong at least in the first half of the year. How much? I don’t know, but all indications are that milk supply would start being affected with a Class III price under $18/cwt.
In short, I see excellent prices and margins in the coming months.