Because the export/import data is complex to analyze, this post will deal only with cheese exports and imports. Cheese prices are dependent on the size of cheese inventories. More inventory results in lower cheese prices. Lower cheese prices result in lower milk prices. Increased dairy exports are often sighted as the cure for the U.S. milk surplus. To dent the current bloated inventory of cheese, exports would have to reach “off-the-chart” levels of exports. Read on, to see the detail supporting this statement. The next post will cover butter exports and imports exclusively.
In the prior post, cheese pricing, production, and inventories were covered. With cheese pricing up and cheese production constrained to prior year levels, there was a glimmer of hope for higher cheese prices and higher Class III milk prices. The bad news was that cheese inventories continued to increase. In fact, the inventories grew by 4% in the first quarter, well above consumption increases and that growth was on top of already bloated cheese inventories.
|Chart I – Inventories of Cheese by Year|
Cheese exports did increase by 10% in the first quarter of 2019, which was another good sign. More export should increase demand and help lower cheese inventories. However, as mentioned above, the inventories grew even with this higher level of cheese exports. In this post, cheese exports will be analyzed in detail to see if the higher level of cheese exports has staying power. And if these higher levels can be maintained are they sufficient to prevent additional increases in cheese inventories.
Chart II shows monthly exports of cheese by year for 2015 through 2019 YTD. In the first quarter of the year, exports followed the annual pattern of increasing month by month. The exports were also higher than any of the prior four years and 10% higher than 2018.
|Chart II – Cheese Exports by Year|
The top export markets for U.S. cheese are Mexico, South Korea, Japan, and Australia. In 2018, they accounted for 64% of the U.S. cheese exports. As shown in Chart III, these four countries are long term stable importers of U.S. cheese. Their annual purchases are fairly constant with no major increases or decreases or trends.
|Chart III – Cheese Exports for the top Four Export Markets|
Chart IV compares the first quarter of 2019 cheese exports to the first quarter of 2015 through 2018 for these same four top export customers. The 2019 increases came from South Korea and Japan. The increase for South Korea was up 46% over the prior year and Japan was up 30% over the prior year. Based on history, this is very uncharacteristic and therefore probably not sustainable. Mexico’s volume was slightly down, perhaps due to the tariffs imposed during the negotiations for USMCA. Those tariffs have now been eliminated and there may a temporary surge as the depleted inventories in Mexico are replenished.
|Chart IV – Cheese Exports for Q1 for the top Four Export Markets|
|Chart V – Cheese Imports by Year|
Charts VI and VII compare imports of cheese by country of origin for 2015 and 2018. The largest countries of origin for cheese imports are Italy and France. Together, imports from these two countries make up close to 30% of the total imports. These imports can be characterized as branded specialty niche cheese products. Other imports are based on some additional niche products and commodity imports based on varying exchange rates.
Branded niche products have a stable market which does not typically change rapidly. The commodity products that are imported can vary in volume based on global supply and demand and exchange rates.
The conclusion from this analysis is that overall, import volumes can be expected to remain stable at least for the short term.
|Chart VI – 2015 Imports by Country of Origin|
|Chart VII – 2018 Imports of Country of Origin|
With stable cheese imports, net cheese exports (exports less imports) closely match the pattern of exports. Exports are a larger volume than imports and in the first quarter of 2019 were much more volatile.
|Chart VIII – Cheese Net Exports|
Cheese exports for the first quarter of 2019 were equal to 6.7% of domestic cheese production vs. 6.1% in the same period of 2018. This increase represents about a 9 KMT per quarter increase over the prior year. At the end of the first quarter of 2019, there were 627 KMT of cheese in storage and cheese inventories had just increased by 55 KMT in the first quarter of 2019 over the prior year. Clearly, even with the most positive scenarios, exports alone will not be enough to reduce the bloated U.S. cheese inventories.
The “dream” of exports significantly reducing current cheese inventories is not an analytical reality.
The only way to reduce cheese inventories is to reduce milk production and the resulting excess which is being “parked in cheese inventories. Only lower inventories will make a lasting increase in cheese prices. Cheese prices are mathematically linked to the Class III milk price and will therefore only move with changes in the cheese price.
Editor’s Note: John Geuss is a dairy consultant based in Florida. This information appears in his Milk Price blog column sponsored by Addiseo and is published here with permission. He may be contacted at [email protected]