By LEE MIELKE
Mielke Market Weekly 

There doesn’t appear to be much "silver lining" in the "dark clouds" of global dairy product prices, based on USDA’s latest export data. Cheddar cheese exports were down 55.3 percent from a year ago and total cheese was down 22.3 percent. Butter exports were down 73.5 percent. Nonfat dry milk and skim milk powder (NFDM/SMP) was down 23.2 percent, whole milk powder was down 43.5 percent, and dry whey was down 12.9 percent

2015 dairy exports started surprisingly well, but June exports fell below 2013 levels, the largest year-to-year decline since October 2014, according to HighGround Dairy’s Eric Meyer, but it was the fourth consecutive month with exports exceeding 100 million pounds.

Meyer stated that, while he expected second half export volumes for cheese and NFDM/SMP to begin a downward trend, "June volumes may be indicating an early start to that decline. Both categories broke down a bit from their previous year-to-date averages and help confirm the weakness in the U.S. and global markets. Is this a slight blip or a continuing trend?"

"Given excess global milk supply, the anticipation of renewed cheese and SMP production in New Zealand this upcoming season and the spread between U.S. and Oceania prices, it is HighGround’s view that export volume losses will continue to accelerate versus the prior year and begin putting pressure on domestic prices in the coming months." To see more of Meyer’s analysis, write him at ericm@highgroundtrading.com

Adding to the bleak outlook, HighGround Dairy’s Curtis Bosma writes in his latest Feed Market Update, "Over the last several months, international dairy markets, particularly in New Zealand, have been like a ‘falling knife.’ Skim & whole milk powders offered at the Global DairyTrade (GDT) auction have made fresh 13 year lows for two consecutive auctions. Using the Farmgate Milk Price Calculator from our friends over at AgriHQ, the results from the most recent GDT auction produce a spot milk price of NZ$2.49 kilogram per milk solid."

"After converting for components and the current exchange rate, this is equal to a U.S. All-Milk Price below $6.00 per cwt. By no means do I believe that this is where U.S. milk prices are headed, but it does tell us just how severe the premium is that we hold over New Zealand," Bosma wrote.

"Dairy producers in the U.S. should take heed from these events because of the increasing reliance on exports as a source of demand," he warned. "Since overseas products are now so extremely discounted to the U.S., a loss of market share is likely for U.S. dairy exporters unless prices drop quickly."

"Domestic dairy prices tend to lag behind the international market by several months, but once recovery begins internationally, the U.S. could remain near the lows until market share is recaptured. HighGround believes that the dairy markets will continue to feel some downward pressure in the intermediate future. Seasonality could instigate some volatility through the end of the year, but an overall price recovery may take longer than most are expecting," he concludes.

There have been some interesting developments regarding the GDT. Land-O-Lakes, which joined the GDT last March to sell skim milk powder, withdrew this week, though it wasn’t a big player, and there have also been calls on Fonterra to pull out of the GDT. Wednesday, Aug. 12, the New Zealand-based cooperative announced a significant drop in quantities that it will offer at the GDT in the next 12 months.

I asked Matt Gould, editor and analyst for the Dairy and Food Market Analyst newsletter, if this was the beginning of the end of the GDT. "No," Gould answered, pointing out that the GDT was originally designed to be a "transparent pricing mechanism for New Zealand dairy farmers" to "show what a ton of whole milk powder or skim milk powder is worth and that gets passed to the dairy farmer."

Outside of New Zealand, Gould said, "It’s an international price-setting mechanism, representative of the world’s pricing, but that’s been called into question," he said, with Land-O-Lakes pulling out of the GDT last week as European dairy co-op Molkerei Ammerland did in April.

Gould emphasized how tough a year it’s been for New Zealand dairy producers and said the criticism of the GDT is "shooting the messenger," saying, "We don’t like the market signal even if it’s true."

Add to that, Fonterra’s latest forecast milk price is well below New Zealand’s cost of production. When asked what that means, Gould said that "a lot of cows will be sent to slaughter instead of through the milking parlor," so milk output will fall – and that pain is showing up in the rhetoric of calls for the end of the GDT.