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Is worst of COVID-19 plunge in dairy economy over?

NMPF and DMI
Market turnaround in the dairy industry has been caused by actions and developments that have reduced milk supply and strengthened dairy product demand.

The worst of the coronavirus-induced plunge in the dairy economy may be over. The sharp drop in dairy product prices in April, prompted by the pandemic, has been followed by a strong recovery in cash market prices in May that’s continuing into June.

Cash cheese prices rebounded dramatically from $1.00 a pound in the first half of April to record levels in less than eight weeks. Cash butter prices, to a lesser extent, have also rebounded from April lows.

This market turnaround has been caused by actions and developments that have reduced milk supply and strengthened dairy product demand. Dairy cooperatives widely implemented temporary base-excess price plans, while dairy farmers changed their feeding and milking practices and culled some additional cows. Government purchases of dairy products expanded substantially as Congress provided billions of dollars in emergency relief to the Department of Agriculture.

More recently, food service establishments resumed significant dairy purchases to replenish empty stocks in anticipation of staged re-openings. And retail sales of key dairy products have been above year-earlier levels throughout the pandemic episode, as consumers largely went back to the basics of grocery shopping and home cooking.

Dairy-farmer income will also be boosted by federal direct payments of $6.20 per cwt. for first quarter milk production. These developments together have improved the financial outlook for the nation’s dairy farmers markedly from how it first appeared during March’s collapse driven by the COVID-19 pandemic.

Commercial use of dairy products

Significant effects of the coronavirus pandemic on domestic consumption of dairy products became visible in USDA data for April. Domestic commercial use of American-type and of other varieties of cheese were both down by about 10.5 percent that month from April 2019, while butter use was about 3.5 percent higher. This reflected the different proportions of these two basic dairy products in food-service versus retail purchases. Domestic use of milk in all products was 5.0 and 6.2 percent lower, respectively, on a milkfat and a skim solids milk equivalent basis in April, compared with a year earlier.

U.S. dairy trade

The U.S. exported more than one-half of one percent more of its production of total milk solids during February–April than it did during the same period a year earlier. The increase was due to gains in overseas sales of milk powders, dry whey products and other dairy ingredients, which outweighed declines in cheese, milkfat and other food product exports.

During the February–April period, imports of milk protein concentrate and casein were up substantially above year-ago levels in March but below the previous year’s level in April. Imports of whole milk powder were well above last year’s levels in both March and April, while imports of the major cheese categories were well below a year ago in those two months.

Milk production

The crisis conditions in the U.S. dairy industry over the past few months have significantly affected milk production. Revised data show U.S. cow numbers in March were 52 thousand head more than in March 2019. With this number, this past March witnessed by far the most aggressive dairy herd expansion during the third month of a herd expansion cycle in more than 20 years. But preliminary numbers for April were 49 thousand more than April 2019, making this past April the first time since early 2005 that the fourth month of a dairy herd expansion cycle showed a smaller annual increase than the third month.

Milk production itself increased in April at a slower year-over-year rate, or dropped at a faster one, compared to March in every one of the 24 monthly-reporting states except for two with very slightly faster April increases. April U.S. milk production was up over a year ago by 1.4 percent, compared with 2.8 percent in March and 1.8 percent in February (adjusted for leap year).

Significantly, U.S. average daily milk production per cow dropped from March to April for the first time since at least 1998. The pandemic’s impacts caused U.S. dairy farmers to take actions that universally halted, at least temporarily, one of the most energetic dairy herd and milk production expansions in at least two decades. That’s one of several key factors currently strengthening the milk price outlook for the second half this year.

Dairy products

Cheddar cheese production in April was almost 8 percent higher than in April 2019, while mozzarella production was down by about 5.5 percent at the same time. These major changes affected the three-month, February–April results as well, as shown. Butter sales at retail are up by almost 33 percent over a year ago during the first five months of 2020. Reflecting this, reported butter production was up over a year ago by 5.4 percent in February, 8.4 percent in March and by 25.1 percent (preliminary) in April. Nonfat dry milk production was 9.3 percent higher than a year earlier, likely stimulated by increased demand for milk fortification in cheese production.

Dairy product inventories

Stocks of many of the key dairy products reached long-time or record-high levels at the end of April. This was not unexpected given the pandemic-related disruptions the dairy industry has experienced beginning in March. April-ending cold storage stocks of butter were the highest since the fall of 1993. American-type cheese stocks were last above April-ending levels in the fall of 1985. April stocks were the highest on record for other than American-type cheese and for nonfat dry milk.

Dairy product and Federal Order class prices

The price of butter reported by USDA’s Agricultural Marketing Service in the National Dairy Product Sales Report (NDPSR) turned up in May from its April low, but NDPSR cheese and nonfat dry milk prices continued to drop. These price changes reduced all federal order class prices in May from their April levels, presaging a May all-milk price even lower than April’s already sharply lower level.

Retail prices increased from April to May for natural cheddar cheese, processed cheese and yogurt but were down slightly for fluid milk products and ice cream. These increases reflected stronger retail sales for those products, although butter, which has experienced particularly strong retail sales gains in recent months, showed a continued retail price drop from both a month and a year ago in May, both driven by the steady decline in wholesale butter prices that started in the fall of 2019.

Milk and feed prices

The U.S. average all-milk price strongly reflected the effects of the Covid-19 pandemic on the U.S. dairy industry in April, dropping $3.60 per cwt., or 20 percent, off the March price. This was the largest one-month drop in the national all-milk price since at least 1980, in both absolute as well as percentage terms. The largest previous one-month price plunges in dollar value was $2.90 per cwt., in January 2015; the biggest percentage drop was 17 percent, in April 1999.

The monthly margin under the Dairy Margin Coverage program fell by $3.13 per cwt. from March to April, with the drop in the milk price being partially offset by a $0.48 per cwt. drop in the DMC feed cost formula, due to lower costs of corn and soybean meal. The April margin will generate a payment for that month to all producers currently enrolled in the program for margin coverage levels from $6.50 per cwt. up through $9.50 per cwt.

Looking ahead

April and May will be the two worst months of 2020 for dairy farmers for both prices and margins. But beyond these two months, the dairy futures-based outlook has improved significantly since the end of April. At that time, the outlook was for a very slow and painful recovery for margins throughout the remainder of 2020, with June being as bad as May and DMC margins remaining below $9.50 per cwt. through the end of the year.

But by the end of May, the outlook indicated the margin would be up not far below that level in June, and then remain above $10 per cwt. for July through December. By mid-June, dairy futures markets indicated that milk prices would remain well above $18.00 per cwt. every month during the entire second half of 2020, and average during that period about $18.60 per cwt., which was the average price for all of 2019.

And if the total estimated Coronavirus Food Assistance Program (CFAP) direct payment amounts are thought of as supplements to milk prices during the two months of expected very low prices and margins, April and May, together with average DMC payments, those augmented prices would also average about the same $18.60 per cwt. for those two months.