US COMMODITIES CORNER
US dairies dealing with 'new and different' SMP pricing dynamic
The US dairy industry has always been a domestic industry. Milk was produced in the US, processed in the US, and consumed in the US. The dynamics of consumer tastes, retail product prices, and domestic inventories dictated milk demand and prices. Over time, less fluid milk was consumed and more cheese and yogurt were consumed. The wholesale price of cheese primarily determined the value of milk.
Dairy exports were a small factor, amounting to only a few percent of production.
These exports were primarily to Mexico. In analyzing and reporting the dynamics of dairy pricing, exports were only a small consideration.
The US first got a taste of the powerful impact of exports in 2007/08.
Exports increased dramatically due to exchange rates and tight global supplies, and then they dropped dramatically. In 2007 US milk prices exceeded $20 per hundredweight (cwt). In 2009, the prices dropped close to $10 per cwt.
The most consistent and significant US dairy export product is skim milk powder (SMP).
The US has consistently increased exports of SMP. In 2013, the US became the leading global exporter of SMP. In 2014, exports are 10% above 2013 levels. May 2014 exports were a record high.
Year to date, 16.3% of milk solids produced in the US were exported. More than half of this was SMP.
Of the SMP produced in the US 60% is exported.
The majority of US milk pricing is done with formulas through the US Department of Agriculture (USDA) Federal Milk Marketing Order (FMMO) system.
Typically, the overall price is dominated by the price of cheese and the milk going to cheese production.
That base price is then used to set the price of drinking milk, which is the second biggest category of milk use.
However, when the calculated price of milk for SMP is higher than the price of milk for cheese, the SMP milk price is used to set the price of drinking milk.
Beginning in 2013 and continuing in 2014, the strong global market for SMP has driven high SMP prices and strong exports.
Currently the global SMP price is dropping, but it is still high enough to keep the price of milk for SMP at a high enough level to influence the price for the majority of U.S. milk.
The price of SMP in the US is now determined by the global price for SMP. It is not set by domestic events.
This is a new dynamic for the US dairy industry and one that will undoubtedly continue to grow.
What happens around the globe now has a significant influence on the price a milk producer gets for his milk.
John Geuss (left) is the editor of US dairy commodities blog, MilkPrice.
For John's detailed month-by-month examination of American dairy commodity movements, click here.
