Dairy makes the dining quarter great

By Mike North, president, Commodity Risk Management Group

In the dairy community, there is nothing quite like the dining quarter. The mere mention of such a term takes people’s mind in several different directions.

Football fans migrate toward the image of a big play that blows open the game just ahead of the final seconds. The business person in us thinks of taxes, year-end reporting, inventories and other fiscal activities. 

But for those of us in dairy, it is that time of the year when all of our efforts rise to a level of celebration in kitchens across America. Butter finds its way into the traditional recipes that have been made since you were a child. Cheese platters welcome guests at every party. Eggnog, sour cream and cream cheese come out in full force to add that extra flare to holiday gatherings. Dairy adds all the exclamation points to our fourth-quarter dining.

But is that the extent of our industry? If you do a Google images search of dairy products, you will find the stereotypical photos including a pitcher or bottle of milk, a tray of butter and a full variety of cheeses. We have long discussed the growing need for exports to clear the growing supply of U.S. milk.  But is it the products in these photos that the world demands? In short, no…and yes.

Regarding fluid milk, exports are difficult for all the obvious reasons. As we work our way around the photograph, butter exports have paled next to our growing import of the product. However, that is largely a function of economic conditions in recent years. A strong dollar and inflated American prices relative to world values caused an imbalance that foreign exporters were willing to capture by sending product to the United States. That has slowly reversed with exports again outpacing imports, but just barely.

What about cheese? The flow of exports of the many different varieties of U.S. cheese has been steady over the years…and growing. While we still have not surpassed 2014 levels, we have continued to rebuild consumption following the 2015 “crash.” Exports of this homegrown favorite now average just under 30,000 metric tons per month. At its peak, exports were approximately 10 percent greater. These are good numbers. However, if our focus stops at those products that simply “make the cover,” we will be overlooking the most important categories when it comes to our export initiatives – powders and proteins. While we may export nearly 30,000 metric tons of cheese, these other categories are even larger – by approximately 4½ times.

So, when we talk about exports, you can largely throw the typical photograph away. Products like non-fat dried milk (NFDM), lactose, skim milk powder (SMP), dried whey, milk protein concentrate, whey protein isolates and other ingredient-type products are the giants in this space. And the list goes on. It all makes sense when you think about it – less water, less/no requirement for refrigeration and the ability to be transported into remote areas. These are all great advantages. More importantly, they are flexible. Buyers can mix and match these products in whatever food creation they care to. It is clear that while we talk about exports, the markets of greatest focus differ from the typical market conversation.

Regarding NFDM/SMP, this single market accounts for one third of total U.S. exports. Together with whole milk powder, this category represents three quarters of Oceania exports. The Class VII pricing system in Canada has caused this category to be its largest dairy export (though it comes with great controversy). Europe has also channeled much of its export focus in this space. Unfortunately, the intense focus has produced enormous inventories in this space as well. Between the U.S. and EU-28, more than 550,000 metric tons sit in storage. This represents the largest supply in history. 

The reality of this for U.S. dairy farmers is that while butter prices remain higher than most other years, the large inventories of powder have weighed on powder prices and ultimately Class IV milk values. Thereto, because powder is also a protein product, it has depressed whey values and further eroded Class III milk markets. In the wake of decent cheese and butter prices, this sheds light on why milk prices have not been as robust as many believed they should have been. This also helps answer the question of when milk prices will turn around. Change powder prices and the ripple effect can help to change milk prices.

Indeed, we must still promote and enjoy the wonderful products that this time of the year brings to our tables. With them, we cannot lose sight of the many other products that continue to balance our efforts in world markets.

I wish you a joyous Christmas with your family and a prosperous new year!