Importance of exports to milk price intensifies

By Sara Dorland, managing partner at Ceres Dairy Risk Management

Expanding milk supplies provides the most significant opportunity for U.S. dairy producers looking to grow operations. Volume is vital to revenue because it is one of the key determinants of on-farm profitability.

However, the prospect of capturing growth is complicated given the cost of investment, base plans and the other half of the revenue calculation — milk price. As the U.S. increases milk output, more solids will head overseas because the current rate of milk production exceeds domestic demand. That will increase the influence of foreign markets on domestic milk prices.

While the cost of producing milk is rising globally, U.S. producers, who benefit because they are some of the most efficient in the world, should take the time to understand how global supply-and-demand factors can affect domestic markets, both favorably and unfavorably.

Because of the diversified supply chain and varied approaches to milk production, the U.S. can quickly scale up or down its milk supply, often making it the balancer of global supply. With world demand scaling up since 2019, U.S. exports are a growing share of milk solids. This year, U.S. exporters are setting new records. Through June 2021, the U.S. has exported 12.7 percent more milk solids than during the first six months of 2020, led by higher nonfat dry milk, skim milk powder and whey powder exports.

Whey prices benefited from substantially more year-over-year demand from China during the first half of this year. During the first half of 2020, the National Dairy Products Sales Report whey prices averaged 36.65 cents, and this year it averaged 56.93 cents over the same period. Every 1-cent change in whey powder prices impacts the Class III milk price by 6 cents, suggesting the higher whey price added $1.20/cwt. to the Class III value so far this year. It also helps to explain why Class III milk prices remain elevated and U.S. cheese prices are much lower than they were in June and July 2020.

Regardless of the price increase, cheese exports are still higher than they were last year through June, but during the second quarter, exports faced a headwind. Last year’s low prices helped move a lot of cheese offshore. While U.S. cheese prices are competitive this year, demand uncertainty and shipping issues have thwarted efforts to ship more cheese, especially to Southeast Asia, causing exports to slow.

Mozzarella and pizza shreds are some of the most popular varieties of cheese the U.S. exports. Mozzarella production in May and June slowed compared to last year, with June dropping 4.9 percent vs. the previous year, according to USDA’s latest Dairy Products report. But given concerns about ongoing Covid-19 lockdowns and the spread of the delta variant, overseas foodservice demand for items like pizza cheese is less certain. In addition, persistent shipping issues have wreaked havoc on exporters, causing cancellations and driving higher stocks.

As a result, U.S. processors are focusing on domestic products like Cheddar cheese. While household consumption of cheese continues to expand, additional cheese capacity added last year as well as fewer government purchases mean exports are vital to achieving a supply-and-demand balance. When there is too much supply, processors tend to sell cheese at the CME, as they did in July, which can weigh on price. The converse is also true; when exports increase and demand exceeds supply, fewer loads head to Chicago.

While many factors can influence the Class III milk price, exports are becoming more influential each year. And the ebb and flow of cheese, milk powders and whey exports will continue to impact domestic milk and dairy product prices — both directly and indirectly.