Global dairy thoughts Part 3: Do regulated milk checks reflect true value?

KYTour-223w.jpgBy Sherry Bunting, Farmshine, June 1, 2018

BROWNSTOWN, Pa. — To discuss the U.S. role in global dairy trade and the role of global trade in how the value of milk is, or is not, reflected in milk checks at the farm level, we first have to understand our product differences.

For starters, there are subtle differences between global skim milk powder (SMP) and domestic nonfat dry milk (NDFM), traders say they view the two as one market. Global SMP trends translate promptly to CME trends for NFDM.

Product listings describe SMP as a standardized product with a minimum 34% protein, whereas NFDM is variable, ranging as high as 38% protein. The U.S. price for NFDM normally lags the global price for SMP, in part because it lacks the standardized specifications. Thus, the lag is even more significant on a per-protein-unit basis.

The U.S. makes more SMP today than 10 years ago, but NFDM production, typically a byproduct of butter production, remains more than four times larger than SMP. Year-to-date SMP production through March trailed year-ago by 15% while NFDM production was up 15%.

According to the U.S. Dairy Export Council (USDEC), the U.S. exports 50% of its combined production of SMP and NFDM, and the U.S. has about 25% of the total export marketshare for these powders.

Butter is also different. Globally-traded European style butter is fermented (soured) before churning, mostly sold unsalted and contains 82 to 85% butterfat. U.S.-produced butter is churned from sweet cream that is not cultured, contains 80% fat, and is available salted or unsalted.

More European style butter is made today in the U.S. than 10 years ago, and it has curried favor with urban chefs for its cooking and baking properties.

Specialized dairy ingredients, like milk protein concentrate (MPC) and whey protein concentrate (WPC), are also significant globally and rely on specialized technologies and markets. The U.S. makes and exports a lot of whey products, WPC and WPI as byproducts of cheese production. These products have significant value to ingredient markets.

At a meeting in Lebanon, Pennsylvania last fall, Dr. Mark Stephenson, University of Wisconsin-Madison, indicated how some cheese plants view the whey products as primary to the cheese. Specialty plants have also come online to make MPC and MPI for infant formula, sports and geriatric beverages, and other products for dairy ingredient markets.

Another product that is important globally, and traded only on global platforms, is whole milk powder (WMP). It is a market equalizer. The global market performance of WMP gives insight about both the fat and the protein sides of the market.

China’s current demand for WMP may be driving what is now being described as a potential “acute” global shortage of butter.

Like whole fluid milk sales in the U.S., WMP sales globally represent whole milk finding one market rather than being broken down for various markets. Often, this product is purchased by countries that reconstitute it for drinking milk and flavored dairy beverages. The bakery and confection industries also utilize both SMP and WMP.

More U.S. plants are making WMP. Interestingly, USDA’s March Dairy Products Report showed production of WMP at 21.6 mil lbs — up 11% from February and a whopping 93% greater than a year ago. It was the highest level of WMP production since 1993.

GlobalThoughtsPart3_CHART#2In fact, going back through USDA records to 1983, the U.S. once made up to 700 metric tons of dry whole milk powder (Chart 2). We don’t hear about that.

In the 1980s we also exported a lot of WMP, up to 420 metric tons of it (Chart 3). We don’t hear about that either.

GlobalThoughtsPart3_CHART#3One reason we don’t make more WMP today is we have a large and growing domestic market for cheese and butter and cream products. U.S. manufacturers want to keep the cream and not sell it overseas, whereas other dairy-producing nations — like New Zealand with its much smaller consumer population — make a lot of WMP for Asia.

China is a large, but erratic, buyer of WMP. In first quarter 2018, the U.S. exported 20% more WMP than a year ago, but the amounts are small compared to skim powders.

In fact, the drive of consumers away from margarine has led to greater sales and production of butter in the U.S. As more butter is made, and more cream salvaged for other products, NFDM production also increases as part of that model.

 As fluid milk sales decline in the U.S., more WMP can be made, and as whole fluid milk demand is restricted by dietary guidelines, more fat becomes available as a byproduct to dairy processors.

Right now, China is buying a lot of WMP and paying higher prices. So high, in fact, that Australia is seeing limitations in infant formula sales in their country due to China’s pull on powder stocks from that country.

GlobalThoughtsPart3_CHART_#4One lesser-known category of exports that grew by 85% in the first three months of 2018 is UHT shelf-stable milk. China is the biggest buyer, and DFA is a primary supplier with its California Gold, a primarily 3.5% fat, shelf-stable drinking milk with a non-refrigerated shelf life of one year. This product is shipped to Walmart and other chains in China. These sales have grown significantly since 2006. (Chart 4)

(Interestingly, here in the U.S. during the first five months of 2018, major supply-chain-related absences of whole milk from supermarket shelves — while fat free and lowfat rows are stocked full — have been observed across a wide swath of the U.S., mainly east of the Mississippi, and across a variety of supermarket chains with a sort of random consistency)

With the U.S. system set to keep the cream and export as much powder as possible, problems arise when geopolitical factors interrupt that export market pipeline. This can have big consequences in a market where demand for cream vs. skim is out of whack — in part because the U.S. dairy industry’s processing, marketing, pricing, promotion and exporting schemes have been designed to work in tandem with 40 years of flawed lowfat government health guidelines.

A national dairy pricing hearing is needed to look at the reality of today’s domestic and global markets.

Are dairy farmers receiving the true value of the milk they produce? If the true value of milk components were passed through the supply-chain to the farm level more accurately, could this help encourage right-sized production growth?

Can the pricing of “growth milk” be more directly aligned to global market growth trends? We’ll explore that in a future part of this series, and it is an important question for the industry to tackle.

In Part Four, we’ll look at the differences in U.S. and global trading platforms and pricing.

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