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If the economy remains stable, milk prices could crack the $20/cwt. mark next year, says a UW dairy economist.

That was the optimistic prediction made by Dr. Mark Stephenson, director of Dairy Policy Analysis at the University of Wisconsin-Madison and director of the Center for Dairy Profitability during the July “Dairy Situation and Outlook” podcast this week.

Stephenson and co-host Bob Cropp, emeritus professor in the Department of Agricultural and Applied Economics, University of Wisconsin-Madison, examined the trajectory of milk prices all the way into 2020, and the factors driving the upward movement of the market.

Cropp says reduction in milk production and cow numbers across Wisconsin and the U.S. bode well for improved milk prices in the months ahead.

"Cow numbers declined 91,000 head from a year ago. We're down 29,000 head since January alone," said Cropp, citing recent USDA National Agricultural Statistics Service data. "National milk production in May was below year-ago levels for the second consecutive month."

Stephenson said the decline in milk production is a nationwide trend.

"It's not just a month to month change for a few states, this is all of them," said Stephenson, pointing to the regional shift of falling production levels in southeastern states. "Folks in Michigan say their milk is no longer coming to Wisconsin, it's moving to the southeast. This jerking plant capacity around is tough for an industry. We don't know where the milk is or where it's going to be coming from."

Bright spot

Cropp says the latest cold storage report is also good news for milk prices. Surplus stocks of U.S. butter and American-style cheese have both fallen 2.6 percent over a year ago, with total cheese stocks down a half percent.

Cheese was a bright spot in the export picture, with cheese exports running about 9 percent higher over a year ago in May.

"Our largest market in Mexico was down 7 percent. However, there's been quite a shift in exports to southeast Asia, Japan and South Korea, which makes up for that," Cropp said. "With the tariffs lifted between the U.S. and Mexico, that should help export sales in the last quarter of the year."

Stephenson said trade disruptions across the globe have caused countries to forge new trading pacts with other nations.

"There's a bit of this trade wars stuff that's like musical chairs: You get up and march around and you find new partners. It's just disruptive," he said.

Strong finish

Cropp predicts that milk prices will end the year on a high note. 

"Class III milk prices are going to be over $17/cwt. for July, which is about $3.50 higher than back in January and February of this year," Cropp said. "Class IV is going to be close to $17/cwt. And, of course, that's held up pretty good all year because butter has stayed right in there (price-wise)." 

Cropp says that hot weather in some parts of the country has also impacted milk production per cow, and that markets are moving into holiday demand which will boost prices.

"I really think that $18/cwt. Class III milk prices are possible in the last quarter," said Cropp who has been forecasting market trends for decades for the University of Wisconsin. "To get there, we have to have cheese prices at about $1.90/lb. Blocks are currently at $1.79 and barrels at $1.71."

While Stephenson agrees that milk prices will surpass the $18/cwt. mark, he doesn't believe the market will sustain it for a whole quarter - "but we'll be pretty close," he said.

$20 in 2020?

Cropp predicts that milk prices will average 50 cents to $1 higher for next year, mainly because prices were already so low at the start of 2019.

"Prices will probably drop down the first quarter right after the holidays to the high $16's and then stay in the $17 range for the rest of the year," Cropp said.

Stephenson said if the economy remains stable, milk prices could even go higher.

"We're not carrying a lot of excessive stocks now—not here, and not in the rest of the world. We've got demand that I think is going to be good to stable," Stephenson said.

He does, however,  believe a softening economy could skew the picture.

"I think we could be at the top of the business cycle. The real question is, how soft does it get? Is it as bad as a recession or just a slowdown in growth?" he said. "That could change my points of view."

Nevertheless, Stephenson said the milk supply would have a hard time rebounding.

"Producers coming out of this are going to want to respond to better prices. But we can't afford big capital expenditures—you got to restore some balance sheets. We have a lot fewer heifers in the pipeline than a year ago, so we can't respond like before by throwing a lot of heifers at our herd," he said. "Those things will keep our milk supply from responding as rapidly. I'm not looking at another 2014, but I think we're going to have some milk prices up there nudging the $20's."

While the USDA is forecasting an increase of 1.5 percent in milk production, Cropp believes that's on the high side.

"There's going to be come issues with forage quality as well as the tight supply of good quality hay. Feed prices will also be higher which is going to impact the production per cow," Cropp said. "So that would support a little higher price."

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