Growing Price Gap Likely to Attract Copious Imports

How long will it take for imports of cheese and butter to start to dampen U.S. dairy product prices?

The gap between U.S. and world dairy product prices continues to widen—so much so that large import quantities of butter and even cheese appear inevitable, particularly as European exporters scramble to find new markets in the wake of the Russian import ban on dairy products from Europe, New Zealand, and the United States.

"The U.S. market is particularly attractive for dairy product exporters. In fact, U.S. prices are high enough to encourage Europe to send cheese and butter to our shores even without geopolitical issues," says Sarina Sharp, agricultural economist with the Daily Dairy Report, Chicago, Ill. "The disparity between U.S. and European butter prices is even high enough to overcome the cost of tariffs, which means U.S. butter and anhydrous milkfat import volumes could reach astounding levels."

Widening gap

Since peaking in mid-June, cheddar cheese prices at the Global Dairy Trade (GDT) auction have fallen 29.8 percent. This week’s average winning GDT price for cheddar was $3,077/metric ton, or $1.40/lb., the lowest GDT price for cheddar since November 2012. The same day, CME spot cheddar block cheese was bid up to a five-month high of $2.395, and barrel cheese prices hit a new all-time record high of $2.405.

CME spot butter prices are also at record-high levels, while butter and anhydrous milkfat moved lower at the GDT, further widening the gulf between U.S. and overseas butterfat prices. U.S. spot butter prices are now above the important psychological resistance level of $3/lb., but Fonterra sold butter, adjusted to the U.S. equivalent of 80 percent butterfat, for October delivery at $1.17 at this week’s auction—well under half the cost of U.S. butter.

So how long will it take for imports of cheese and butter to start to dampen U.S. dairy product prices?

"In some ways, overseas markets are already dampening U.S. prices," notes Sharp. "Nearby cheese and butter prices are at record highs and still climbing, but futures predict a pronounced decline in prices as the calendar turns."

According to September 17 settlement prices for dairy futures, January butter prices are expected to be 35 percent lower than September prices, while block cheese prices are expected to drop by 18.5 percent over the same period. Furthermore, the 2015 futures prices indicate cheese and butter prices will continue to slip through 2015.

No near-term price decline

"Although today’s price gap basically assures that the U.S. will import large volumes of cheese and butter, those supplies will not arrive soon enough to impact near-term prices," says Sharp. "Buyers are short of both butter and cheese, and the holidays are looming. Buyers will likely have to pay very high prices for cheese, butter, and cream throughout October and perhaps even into November."

Eventually, though, U.S. dairy product prices will succumb to pressure from foreign competition, but dairy producers will be the last to receive the signal to slow production. Manufacturers will continue to honor contracts negotiated when the cheese and butter markets were climbing, Sharp notes, and it will take time for those prices to completely work their way through the National Dairy Products Sales Report survey prices and into producers’ milk checks.

"Markets today are telling producers to add cows and expand production, and they are responding with enthusiasm," says Sharp.

Eroding feed costs, which are likely to remain depressed throughout 2015, will help shore up profit margins even as milk prices slip. And that could further delay a slowdown in milk production.