Dairy experts are still optimistic that milk prices will continue into the fourth quarter despite a much softer forecast from the USDA and dairy futures.

Mark Stephenson, director of Dairy Policy Analysis at the University of Wisconsin-Madison and director of the Center for Dairy Profitability and Bob Cropp, emeritus professor in the Department of Agricultural and Applied Economics, supported their argument for stronger pricing during the August “Dairy Situation and Outlook” podcast this week.

"Cow numbers and production is down and this flat to slightly negative milk production is pulling down stocks," said Cropp. "Class III futures shows September peaking at about $17.80 and then declining in the fourth quarter and ending in December around $17.00. However, milk prices can do better; butter and cheese will be in the strong seasonal sales period Thanksgiving through the holidays, and schools will be starting, increasing fluid milk sales, leaving less for dairy product production."

In his report, Cropp notes that milk prices have shown improvement since early in the year. Class III was a low of $13.89 in February and increased $3.66 by July to $17.55. Class IV was $15.48 in January and increased $1.52 to $16.90 in July.

"But, with small changes in dairy product prices August will see a small increase in the Class III price and a small decrease in the Class IV price," he said.

On the CME, barrel cheese was as high as $1.78 per pound in July, started August at $1.6925 and is now $1.750. The 40-pound blocks were as high as $1.86 per pound in July, started August at $1.82 and are now $1.9075. Dry whey was $0.32 per pound in July and has improved to $0.370.

The little improvement in cheese and dry whey prices will put the August Class III price near $17.60. Lower butter and nonfat dry milk prices will put the August Class IV price lower to near $16.60.

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Cropp says milk prices next year will depend on the level of milk production.

"USDA’s is forecasting milk production to be 1.6% higher due to milk cow numbers averaging 0.2% higher and milk per cow 1.4% higher. But, I think this is on the high side," he said. "We still have producers exiting the dairy industry, cow slaughter numbers are higher, and dairy replacement heifers are down at 44.1 per 100 milk cows, the lowest since 2009."

Cropp said financial stress continues to put a damper on dairy expansions as well.

In addition, stocks of good quality hay are tight and feed prices higher.

"Corn and soybean meal prices will average higher. The result may lower the increase in milk per cow," Cropp said.

While Stephenson says he continues to be optimistic about the direction of dairy prices, he does recognize there are unanswered questions about the general economy, and a potential slowing of the world economy that could impact dairy exports.

"There are some signs (signaling) an economic slowdown or a recession, but I don't think we're going to get there. I think we may see a slowing of the economy but I'm not convinced about a severe recession," Stephenson said.

Despite rumblings of an economic slowdown, USDA is still forecasting 2020 exports to be 5.3% higher on a milk fat basis than 2019 and 4.4% higher on a total milk solids basis.

"So there is a lot that can sway milk prices higher or lower," Cropp said. "Dairy futures are currently not overly optimistic about 2020 milk prices. Class III futures stay below $17 through July and only get to the low $17’s the reminder of the year."

Class IV futures are in the high $16’s first quarter than the $17’s the remainder of the year. USDA likewise is not overly optimistic as to how much higher milk prices will be in 2020. USDA forecasts Class III to average $16.55, just $0.25 higher than the forecast for this year, and Class IV to average $16.45, just $0.15 higher.

"But, with $1.90 blocks of cheese and if we could get barrels up a bit, I think there still is a good probability that we could reach that $18 milk mark," Cropp said.

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