Delayed Dairy Products report bears bad tidings

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Though 18 days delayed due to the government shutdown, the August Dairy Products report released on Monday did not disappoint, says Eric Meyer, president, dairy division, HighGround Dairy, Chicago. Production of manufactured products across nearly all dairy commodities is much higher than expected and both dry whey and NDM stocks are at very high levels for this time of year. 

“Big volumes of cheese were produced in August,” Meyer notes. “That is the one glaring statistic in this report — no matter how you slice the data.” 

However, August’s mild weather did have an impact on ice cream and frozen product demand, which meant more milk and cream were available for cheese and butter production. 

“With the exception of whey protein concentrate and lactose, we view this report as bearish versus expectations,” he adds.

Butter production rose for the third straight month and had its strongest annual growth rate since February when adjusted on a daily basis. In fact, similar to American cheese, butter production was stronger in August versus July for just the third time since 1998 (2008 being the other year). Meyer also notes that dry whey production has been lighter than the previous year for every month in 2013 (eight straight).

“After a run this bad, one would think stocks would begin dwindling,” he says. “Think again. The stocks situation almost appears to be getting worse.” 

Dry whey stocks, while down 6.7 percent vs. July of 2013 are now more than 50 percent higher than a year ago. Meyer adds. 

USDA breaks out production of both Nonfat Dry Milk (NDM) and Skim Milk Powder (SMP) in this report, which gives the industry a good look into the growth of the export market as most countries use SMP for their needs. For 11 of the past 12 months (Dec 2012 being the exception), NDM production has trailed the previous year with much of that volume shifting to SMP.

“Between February and June, SMP production was more than double its corresponding month in 2012!” he writes.

And while SMP production growth continues to impress — 43 percent & 36.5 percent higher in June & July, respectively — NDM production also made a slightly positive turn (up 0.6 percent) in August to push NDM/SMP combined volumes to their highest year-over-year growth since May 2012 (up 10.5 percent). Extremely strong global demand for milk powders has U.S. NDM prices at levels not seen since 2007 and January to July exports were up 18 percent versus 2012.

“So with all this powder demand and less production of NDM through July, stocks would be falling in dramatic fashion, right? Not so,” Meyer says.

USDA is reporting NDM stocks to have fallen by just 11.9 million pounds (down 5.9 percent), much less than the prior four-year average decline of 16.1 percent. However, stocks did increase between July and August in both 2007 and 2008. 2007 is notable because international prices for NDM spiked in May to $5,000 MT and remained at or above those levels through mid-October that year. Oceania SMP prices peaked at $5,450 MT ($2.47 per pound) in August 2007 and US monthly NASS prices topped out at $2.06 per pound in October that year.

“So while it is not unprecedented to have increasing stocks with increasing prices in August, we are surprised that inventories are not declining at a more rapid pace given how high they have been this year,” he writes. “Perhaps extreme price levels for NDM has caused some pushback on domestic demand.

“We anticipate this market will continue to be supported by the conditions overseas, but once supply and demand are back in balance for SMP, we can make a case for a solid downside price retracement here in the states,” he concludes.



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