How long can farmers expect higher milk prices?

Farmers may not see milk prices as high as last November, but University of Wisc dairy economists say they shouldn't see prices as low as last year.

Mark Stephenson, director of Dairy Policy Analysis at the University of Wisconsin-Madison and director of the Center for Dairy Profitability and his co-host Bob Cropp, emeritus professor in the Department of Agricultural and Applied Economics, University of Wisconsin-Madison, are both optimistic that milk prices for 2020 should be a welcome change for farmers that endured prices as low as $13.89 cwt. back in February of this year.

"Compared to the average of about $16.96 this year, I see milk prices averaging around $17.90, maybe even $18 in 2020," Cropp said during the December “Dairy Situation and Outlook” podcast this week. "I don't see a $20.45  like we had this year in November, but that is possible, especially since milk prices are very sensitive to small changes in milk production, milk sales or exports."

While milk prices may be stronger in the first quarter of 2020, Stephenson says farmers may not be able to fully capitalize on higher milk prices with lower quality feed undercutting milk per cow production levels. 

"I've been going to some meetings around the state and one of the main topics that producers and others are talking about is what are the alternative forages and feeds we might have? Who do we feed them to? How do we keep the production going in the herd?" he said. "So I think milk per cow is going to be challenged. This issue is much wider than Wisconsin."

According to Cropp's Dairy Situation and Outlook for December, the growth in milk production appears to be slowing. Compared to a year earlier November milk production was just 0.5% higher than a year ago, the net result of 0.3% fewer cows and 0.8% more milk per cow.

Milk production had increased 1.3% in September and 1.0% in October. Cow numbers also began a downward trend during the year but increased 5,000 in September and another 9,000 in October. November had no increase in cow numbers.

Depending upon December milk production the year could end with cows averaging 0.7% lower than a year ago and milk per cow 1.2% higher netting an increase in total milk production of just 0.5%.

Milk, cheese and butter

With fourth quarter Class III prices not seen since record highs in 2014 Class III will average about $16.96 for the year, $2.35 higher than the $14.61 average in 2018.

Class III was as low as $13.89 back in February. But, in October it was $18.72, November $20.45 and December will be around $19.40.

October total cheese production was 2.1% lower than a year ago,  thanks to good seasonal cheese sales along with September cheese exports 12% higher than a year ago and October 6% higher put cheese stocks below a year ago, all of which strengthened cheese prices.

The 40-pound block cheddar price was above $2 per pound from early October until November 12th and cheddar barrels were above $2 per pound from early October until the market dropped nearly 77 cents on Dec. 10.

"Cheese prices normally due fall after orders are filled for the holiday season. But, this appears to be an abnormal downward marked adjustment with some further upward correction likely," Cropp reported. "If not, Class III will fall below $16 again."

Some improvement in dry whey prices also supported higher Class III prices. Dry whey was $0.2725 per pound the end of October and increased to $0.3675 early December.

Since November 2016 butter was above $2 per pound until Nov. 27 of this year. Higher nonfat dry milk prices more than offset lower butter prices increasing the Class IV price. Nonfat dry milk was $1.0475 per pound in September and increased to $1.2375 per pound by the end of November, according to Cropp's report.

Higher cheese prices resulted in increased use of nonfat dry milk to standardized milk for cheese production and nonfat dry milk exports increased. While butter exports were 45% lower than a year ago January through October nonfat dry milk exports were 25% higher in September and 17% higher in October. Class IV will average about $16.47 for the year, about $2.24 higher than the $14.23 average in 2019.

Sustaining milk prices

Cropp says the big question is how long can we expect higher milk prices? As of now it looks like first quarter 2020 milk prices could average as much as $3 higher than a year ago, and continue to average higher through third quarter with prices averaging a little lower fourth quarter. It all depends upon the level of milk production, milk sales and dairy exports.

USDA is forecasting for 2020 just a 5,000 increase in the average number of cows with 1.7% more milk per cow netting a 1.7% increase in total milk production. After four and half years of depressed milk prices, Cropp says  dairy expansions are likely to be limited.

"We lost quite a few dairy farms and cow numbers in Wisconsin are down 7,000 head which is quite a few," said Cropp, adding that the number of dairy replacements is lower too.

"The size of the dairy herd could increase if farmers decide to keep some of the lower producing cows in the herd while the milk prices are higher," he said.

Cropp, however, disagreed with the USDA's forecasted increase in milk per cow.

"That seems to be on the high side," he said, pointing out the wet conditions that hampered harvest and forage quality may impact the increase in milk per cow. "The increase in milk production could be more like 1.3% to 1.4%."

Economy and exports

Cropp says a continued relatively strong economy with low unemployment and higher wages along with positive consumer confidence will increase total milk sales. However, fluid (beverage) milk sales will continue its downward trend but this will be more than offset by higher cheese sales.

Stephenson says the recent drop in cheese prices may be attributed to the discrepancy in U.S. cheese prices on the global market compared to Oceania and Europe.

"We can sustain that for a period of time, but at some point I think you get reeled back into the marketplace and I think that's part of what's going on right now," he said. "Either our prices are going to decline, or world prices are going to come up, but they are going to have to get into a better balance."

Milk production in all of the major dairy exporters except the U.S. is forecasted to be lower in 2020 or up less than one percent.

Cropp says the EU has experienced a major drought reducing feed supplies and increasing feed prices.

"Cow numbers have declined. Weather issues may keep New Zealand’s milk production increase to no more than one percent. Australia has also experienced a major drought reducing feed supplies and forcing a reduction in cow numbers," he said. "Milk production was down more than 5% this year with little if any increase expected in 2020."

The UW economist said weather issues has also damped Argentina’s milk production.

"So dairy exporters will have less dairy products available and dairy importers will need to turn to the U.S. for dairy products," he said.