What Is a Dairy Surplus Today?
For many decades the U.S. dairy industry was inward looking. While some dairy products were exported and some imported (about 5% in each case) the quantities were pretty much a wash. In addition, the Price Support Program often purchased cheese, butter and nonfat dry milk. So, while the Price Support Program kept the price from falling below the trigger level for any significant length of time, the government stocks that accumulated hung over the market and could dampen price recoveries.
In contrast to this situation, today dairy exports account for about 13% of U.S. milk solids produced and the Price Support is too low to be relevant, meaning that there are essentially no government stocks. Given these changes, some relevant questions are how to interpret the stocks of dairy products reported in the “Cold Storage” report and how much of these products it takes to represent a surplus that would adversely affect milk prices?
As of the most recent Cold Storage report (August), total cheese stocks stood at 1.085 billion lb. Historically, this would be considered a very large value (more than 25% higher than the average value) that would be bullish for milk prices. However, consider that 382.6 million lb of cheese were exported last year and that through the first 6 months of 2011 263.4 million lb were exported. Thus, the growth in exports has made the larger stocks not only palatable but, perhaps, necessary.
The U.S. still imports about 300 to 350 million lb of cheese each year. In general, the U.S. imports relatively expensive specialty cheese and exports less expensive commodity cheese. The countries importing the largest amount of cheese from the U.S. today are Mexico (for a long time the destination for the largest export), Korea and Japan.
Butter and nonfat dry milk are also important dairy exports. The destinations receiving the largest amount of U.S. butter in 2011 were Saudi Arabia, Belgium, and Egypt. The destinations receiving the largest amount of nonfat dry milk were Mexico, Vietnam, and the Philippines. Because most U.S. dairy exports are commodity products, as you can see, most of the major destinations are developing countries.
So, while imports have been very useful in soaking up U.S. dairy products, having 13% of U.S. milk solids exported means that the volatility in the world markets will more directly affect U.S. dairy farmers, cooperatives and processors. Back to the initial motivation for writing this article, understanding the dairy fundamentals today includes monitoring milk production in New Zealand and the European Union, and demand in Asia. Important also are exchange rates, trade agreements, and even such things as the credit crisis in Europe.
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