Just when things start looking up on the farm, COVID-19 knocks on the door
After enduring what seemed an endless stream of bad news and low prices for years, farmers optimism began to grow at the end of 2019. Milk prices had crawled up out of the basement and broke the $20 cwt. mark. Just maybe things would be better as in the coming decade.
During their last Dairy Situation and Outlook podcast in December, 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, the dairy economists warned farmers that while farmers may not see milk prices as high as November 2019, they shouldn't see prices as low as 2018.
However, some market analysts predict that milk prices could reflect what farmers were paid during the last recession a decade ago. The price impact of the spread of COVID-19 could be felt for a long time.
In his March Dairy Situation and Outlook report, Cropp said that just months ago, the forecast was for milk prices to average as much as $1 or more higher than 2019.
"Milk production would recover slowly, strong economy with low unemployment and higher wages spelled a modest growth in domestic demand, and a relatively low growth in world milk production offered an opportunity for higher dairy exports especially nonfat dry milk/skim milk powder and cheese," Cropp said. "The coronavirus has changed matters and things change daily creating a lot of uncertainty where things might be headed."
Cropp reported that the fall for dairy product prices started to fall off after the holiday season. Cheese was above $2 a pound mid-October to mid-November. Butter was above $2 per pound until the end of November. Nonfat dry milk was high as $1.2675 per pound in December.
As of January 1, cheddar barrels were $1.6425, 40-pound blocks $1.9025, butter $1.95 and nonfat dry milk $1.2275. By March 19 barrel prices would fall to $1.3875, 40-pound blocks to $1.8625, butter at $1.70 and nonfat dry milk at $0.9625.
"As a result, Class III which was $20.45 back in November was $17.05 in January, $17 in February will be about $16.30 in March," Cropp said.
Class IV prices followed a similar trajectory. Prices stood at $16.70 in December and trended downward, $16.30 in January, $16.23 in February will be about 14.85 in March.
"Prices are headed even lower for the immediate months ahead. Dairy futures change hourly but now Class III futures April through December are below $16 which would give an average $15.92 Class III for the year, over $1.00 lower than the $16.96 average last year," Cropp said.
Class IV futures May through August are below $14 reaching just $15.20 in December which would give an average of $14.57 for the year, about $1.70 lower than the $16.30 average last year.
COVID-19 spread key
How long before the coronavirus comes under control will be a major factor where milk prices will end up, Cropp says.
"There is a strong possibility milk prices could rally second half of the year, he said.
Cropp says the level of milk production will be important. At the tail end of 2019, Stephenson said that while the U.S. had enjoyed a strong economy, he felt the country was past the peak of the business cycle and that a downturn was coming - or even the possibility of a recession.
He also noted that low quality feed would have an impact on production and the spring flush a critical factor for future milk prices. Cropp agrees.
"A rather mild winter has been positive for milk per cow. A strong spring flush would put downward pressure on milk prices," Cropp said.
Cow numbers, production
USDA’s estimate of February milk production Leap Year adjusted showed milk production coming on rather strong. The adjusted February milk production was 1.7% higher than a year ago the result of 0.2% more cows and 1.5% more milk per cow.
He noted that milk cow numbers increased 5,000 head January to February and 27,000 head December to February. The U.S. saw major cow expansions in the West with cow numbers up 11,000 in Colorado, 27,000 in Idaho, 11,000 in New Mexico, 32,000 Texas and 6,000 in Kansas.
However, cow numbers were down 6,000 in Arizona and 3,000 in California. In contrast, Midwest numbers were down 5,000 in Iowa and Minnesota, and 10,000 in Wisconsin with Michigan and South Dakota cow numbers up 3,000 and 4,000 respectively. Numbers were also down in the Northeast with a loss of 1,000 cows in New York, and 17,000 in Pennsylvania.
Using the adjusted Leap Year data, relatively strong increases in milk production occurred in Colorado 7.5%, Idaho 5.5%, Texas 7.0% and Kansas 5.4%. Milk production was also up 2.6% in California, 2.6% in New Mexico, 1.1% in Michigan, 1.9% in New York, 4.7% in South Dakota, just 0.2% in Minnesota.
Milk production was down 2.1% in Iowa and 0.8% in Wisconsin.
"An increase in U.S. milk production at this level will push milk prices down," Cropp said, adding that the latest USDA forecast has milk production for the year up 1.5% (Leap Year adjusted), the result of an average of 9,000 more milk cows and 1.4% more milk per cow. "But, with relatively low milk prices the first half of the year, the size of the dairy herd may end up being less and the increase in milk per cow less since production was 1.0% higher in 2019."
The coronavirus is not positive for the economy and will impact milk and dairy product sales.
"The closing of schools will impact milk sales since about 8% of beverage milk sales are to schools," Cropp said. "This lost volume will need to be made into cheese or some other dairy product."
Tom Vilsack, U.S.Dairy Export Council President and CEO, says national ag organizations are looking for a solution.
"There are people working very, very hard on making sure that as programs are being developed, as support is being created during this crisis, that the dairy is not forgotten and is included," he said during an interview with RFD-TV. "Hopefully that provides some assistance and helps us as we try to move through this crisis."
Cropp says cancellation of conferences, closing of restaurants, sport events, colleges etc. will impact butter and cheese sales.
"People will still eat, buy groceries, order food through drive-throughs and online. But many people will have reduced incomes which will hurt dairy product sales," he said.
Nate Donnay senior dairy analyst at INTL FCStone, told Farm Journal MILK, that a 20% decline in restaurant sales across the country for 3 months would likely equate to total milk equivalent disappearance being down 1-2% for the year.
“That would likely reduce dairy prices by about 15% from what they otherwise would have been,” he told MILK, adding that with all the state shutdowns and restaurant closings, assuming a 20% drop in prices “might not be enough.”
Cropp is hoping for better thing for the second half of the year.
"Schools will open in late summer increasing beverage milk sales and we can expect butter and cheese sales to increase during the holiday season," he said.
Vilsack said the nation was seeing significant energy in the export market as 2019 came to a close.
"November was the best November we've ever had in exports. December was the second best and January was the best month for exports in the last five years. So we were beginning to see the reflection of some of those pressures being lifted: increased sales and increased opportunity,"Vilsack told MILK.
Cropp said dairy exports started out strong in January. Export volume was 21% higher than a year ago and was equivalent to 15.1% of total milk solids, the most ever for January and compared to 12.5% a year ago.
"Compared to a year earlier nonfat dry milk/skim milk powder exports where 41% higher, total whey product exports 18% higher and cheese even," he said, adding that the pandemic is impacting economies around the world. "This will not be positive for exports. But there will be exports."
The increase in world milk production is expected to be no more than 1%. Cropp pointed out that EU milk production is running a little higher than expected with a mild winter but will still be a modest increase.
In the southern hemisphere, New Zealand is currently experiencing a major drought, while south of the border U.S./Mexican border, the nation's largest customer will continue to purchase cheese and nonfat dry milk.
"As we move through the year China could very well increase imports. China is dropping retaliatory tariffs on U.S. cheese in March. So, while exports may not be higher than 2019, they will still be at a level to provide support to milk prices," Cropp said.
Cropp expects to see milk prices changing daily, prodded by rather small changed in milk production, milk and dairy product sales and exports.
"There is a lot of uncertainty now as to where milk prices will end up," he said.
The UW-Madison dairy economist says it now appears that Class III milk prices will average about $16.80 first quarter, but may average only about $15.40 second quarter, $16.50 third quarter, $17.25 fourth quarter — averaging $16.50 for the year, about $0.50 lower than $16.96 last year.
"These prices are much more optimistic than current Class III futures. As we move through the year and see what is happening with milk production, milk and dairy product sales and exports, milk prices will be revised and hopefully revised upward, he said. "But, as of now what looked like a better year now looks like another difficult year for dairy farmers."