Dick Groves
Editor, Cheese Reporter


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High Prices Have Their Consequences

The CME cash market price for butter reached a new record high last week, reaching $2.8400 per pound on Thursday and then rising to $2.8450 a pound on Friday, then kept setting more records this week, including $3.00 a pound today. Those records come just a couple of weeks after the butter price reached $2.8225 per pound and broke a record set in 1998.

Meanwhile, cheese prices continue at near-record levels. The CME Cheddar block price rose to $2.35 per pound last Tuesday and remains at that price. That would have been a new record, had the block market not reached $2.36 per pound back at the end of January and then reached $2.4325 per pound a couple of months later.

All of these new price records beg the question: What are the consequences of these record and near-record prices?

Well, a few stories in last week’s paper provide some possibilities. For example, while the value of US dairy exports in July topped $600 million for the fifth consecutive month, the percentage increase compared to a year earlier was the smallest thus far in 2014.

Indeed, the value of US dairy exports has actually declined for four straight months, after setting a new record of $717.0 million back in March. It wouldn’t be all that surprising if the value of August dairy exports is down from August of 2013 (when exports were valued at $613.5 million).

One specific product really stands out among the July export figures: butter. US butter exports during July totaled 8.9 million pounds, down 52 percent, or 9.5 million pounds, from July of 2013. That July butter export volume was the lowest since April of last year (8.8 million pounds).

Was the high US butter price among the reasons US butter exports are slowing down? That certainly seems to be the case. July’s average US butter price was around $2.46 per pound, the second-highest level ever, trailing only the $2.7566 per pound set in September of 1998 (that $2.46 average for July is now the third-highest ever, having been surpassed by August’s $2.5913).

So that’s one consequence of high US prices: it tends to make exporting more difficult. But that’s not universally true, as evidenced by, among other things, the fact that the Cheddar block price averaged a record-high $2.3554 per pound back in March, and in that same month US cheese exports set a new monthly record, at 79.6 million pounds.

Suffice it to say high domestic prices can hinder US dairy exports, but that’s not always the case.

World dairy market prices also matter, which is why US butter exports are so uncompetitive right now. In last week’s Global Dairy Trade auction, November butter sold for about $1.16 per pound. US butter exports may be hampered for several more months.

What about US dairy imports? Are they affected by high prices?

That would appear to be the case, at least to some extent. Just from a general standpoint, as we reported on our front page last week, the value of US dairy imports in July was up 39 percent from July of 2013, while cheese imports were up 15 percent and casein imports were 90 percent higher.

And then there’s butter and butter substitutes. During July, licensed butter imports totaled 1.9 million pounds, almost double their level in July of 2013. Licensed butter imports during the first seven months of this year, at 10 million pounds, were up 4.4 million pounds from the first seven months of last year.

Licensed imports of butter substitutes during July totaled 1.2 million pounds, up 1.1 million pounds from July of 2013. However, licensed imports of butter substitutes still trail year-earlier levels.

What this appears to indicate is that global butter exporters are finding the US market increasingly attractive these days. Given the direction US and world butter prices have taken since July, the US will likely be seeing more imports of butter and butter substitutes in the months ahead (and in August, for that matter), and less US butter heading overseas.

One other interesting note about the consequences of high prices: also as we reported last week, July cheese production was up 7 percent from July of 2013, by far the largest percentage increase in cheese production thus far in 2014; and July butter output was up 2.6 percent from July of 2013, again by far the largest percentage increase in butter production thus far in 2014 (indeed, butter output had been down in each of the first four months of this year).

All of these numbers serve to remind us of the fact that price is, at least idealistically speaking, a function of supply and demand. And high prices serve a couple of functions: to increase supply and reduce demand.

Obviously, this supply-demand stuff gets kind of messy when you get into the details. For example, cheese prices set new records in January and March of this year, but cheese production in those months posted two of the three smallest percentage increases of the year (2.3 percent and 1.0 percent, respectively). And Cheddar production actually declined in each of the first three months of 2014.

All of which demonstrates that price has a major influence on production, but it’s not the only influence. It’s noteworthy, and perhaps obvious, that US cheese production is beginning to increase impressively at the same time Wisconsin’s milk production has gone from running below year-ago levels (the state’s first-quarter output was down 2.3 percent) to well above year-ago levels (July milk production was up 3.4 percent).

Trade and production trends in the months ahead (including reports concerning August trends) will continue to reflect, in part, high US dairy product prices. DG

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