July Exports Show Tariff Impact
Cheese price have been performing admirably since early July with block cheese price reaching the highest level since November 15, 2017 last week. This was unexpected just two months ago and certainly is welcomed. Prices should increase during this time of year as schools are in session for the year with fluid milk demand higher. Buyers are looking ahead to upcoming end of the year demand and are either purchasing to fill orders or purchasing ahead for expected demand.
Milk prices still have a ways to go in order to improve the financial position of dairy farmers. This is the third year of low milk prices and it is taking its toll as farms continue to sell out. Until July, farms exiting the business and ceasing to produce milk has not had any impact on cow numbers. I suppose, it could be said that the nation’s dairy herd might have increased significantly more had those farms continued to milk cows. Nevertheless, cow numbers remained higher until July when cow numbers declined 8,000 head and the first time they fell below the previous year since 2015. This may have been the beginning of a trend for the contraction of the nation’s dairy herd. That is, as long as milk prices remain depressed. I have heard of some dairies that have not been able to sell replacements at a profitable price and have decided to add on to the current facilities and increase the dairy herd rather than sell them. Of course, this depends on which dairy plant they are shipping milk to as permission is required before proceeding with any expansion.
The impact of tariffs on dairy prices has been a heavy topic of discussion this summer. Although, the U.S. and Mexico reached a preliminary agreement to replace the previous NAFTA agreement, Canada was not part of that agreement with ongoing discussion needing to take place. There has been virtually no progress made on trade negotiations with China. However, cheese and dry whey prices have been increasing steadily despite the current tariffs on various dairy products. It appears there has been little impact from tariffs when looking at prices. However, looking at July export numbers, we can see otherwise.
Mexico continued to import nonfat dry milk/skim milk power with imports 31% higher than a year earlier during the month of July. However, cheese imports to the country were down one percent compared to June when exports had increased 43%. With a preliminary trade agreement being reached with Mexico, reduced cheese sales may be short-lived.
On the other hand, exports to China declined substantially. Cheese exports to China declined 56% from the previous year. However, this is not as devastating as it seems due to the fact that China, although demand for cheese is growing, only imported 494 metric tons of the total exports of 27,636 metric tons during July. Although the volume is not much in comparison, the disruption of gaining market share in China may be negatively impacted for quite some time. The greater impact was seen in whey exports to China which showed a decline of 26%. They are the largest buyer of dry whey and whey protein concentrate. This could have a substantial impact on this segment of the U.S. dairy industry if tariffs continue.
What has been interesting is that spot dry whey price has been steadily increasing reaching the highest price since spot trading began in March. Dry whey price was 26.25 cents per pound when daily spot trading began. The current price is 51.50 cents and continues to be well-supported. It is interesting to see that traders are not quite as optimistic with dry whey futures posting a high for December at 44 cents. Traders are keeping a discount rather than a premium to the market.
Fortunately, this time of year has increasing demand which can offset the impact of slower exports for the time being. The end of the year and the beginning of 2019 remain a concern if tariff issues are not resolved and demand does not improve.
Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.
The thoughts expressed and the basic data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed herein are subject to change without notice. Hypothetical or simulated performance results have certain inherent limitations. Simulated results do not represent actual trading. Simulated trading programs are subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. There is risk of loss in commodity trading may not be suitable for recipients of this publication. This material has been prepared by an employee or agent of AgDairy LLC and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions.