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Dairy markets see highs and lows in coronavirus-buffeted roller-coaster

National Milk Producers Federation/ Dairy Management Inc.
Rising exports and price momentum raise hopes for dairy producers headi into third quarter.

May and June saw both highs and lows in the coronavirus-buffeted roller-coaster of dairy’s second quarter of 2020. But with exports and prices rising, the highs hold the momentum heading into the year’s third quarter, raising hopes that spring’s severe disruptions have been effectively offset by producer production cutbacks and federal government assistance.

The USDA-reported U.S. average all-milk price reached an almost eleven-year low in May, while the daily price of 40# block cheese on the CME cash market reached a record high in June – a record topped in July. Sharp reductions in milk and milk solids production, major government purchases of dairy products for food assistance programs, increased retail sales of dairy products, and a temporary spike in food service restocking purchases rapidly flipped a switch from severe oversupply to substantial market tightness within a span of weeks, dramatically raising milk and dairy-product prices.

Among the most noteworthy of these was an $8.90 per cwt. jump in the federal order Class III price from May to June. The previous largest one-month Class III price increase was $5.17 per cwt., reached in April 2004. Trade also has experienced rising momentum. U.S. dairy exports in may represented 17.7 percent of the nation’s milk solids production, the largest ever for the month of May.

Commercial Use of Dairy Products

Domestic commercial use of milk in all products in all markets, including food service and retail, continued to lag behind a year earlier, particularly when measured on a skim solids basis. This partly reflects a substantial increase in dry skim ingredient exports during period, which has pulled skim solids from domestic uses, as well as increased domestic sales of retail butter. Domestic use of dry skim milk to fortify cheese milk with lower-priced protein increased significantly in May, but domestic use of all whey complex products was down sharply over a year earlier that month.

Domestic commercial use of cheese continued lower than last year during the period as food-service use has remained weak.

U.S. Dairy Trade

U.S. exports of skim milk powder surged in May, raising total U.S. dairy exports to 17.7 percent of total domestic milk solids production that month and to 16.2 percent for the three-month March–May period. The May percentage, a record for that month, was boosted by the drop in U.S. milk and milk solids production. Exports of other major dairy ingredient products were up over a year earlier by mostly double-digit percentages. Cheese exports, which had been mostly below year-ago levels in all major categories during the first four months of 2020, switched to year-over-year gains in all major categories in May.

Imports of milk protein concentrate and casein were both up strongly over a year ago in March but then both down sharply in April. MPC imports continued down in May, but casein imports surged again that month. The net result, for the March–May period, was that concentrated milk protein ingredient imports, namely MPC and casein, have switched places from recent periods, with casein now showing the stronger growth.

Milk Production

Milk production and production per cow in the United States both increased by less than one percent during the March–May period compared with a year ago. But milk production slowed remarkably within that time frame, going from 2.8 higher than a year earlier in March to 1.1 percent below a year ago in May. It took market forces almost 30 months to accomplish a similar decline between November 2016 and March 2019. U.S. average production per cow was down by 1.5 percent in May. This was the second-largest annual drop in per cow productivity during a single month since 1999.

Still, cow numbers are still ahead of last year. Producers are cutting production, many in response to the base-excess plans established by many cooperatives to improve the supply-demand balance. Given the size of the national dairy herd, it appears many of these cutbacks were made through changes in feeding, milking frequency, and other areas of management, as it appears producers are holding onto cows in anticipation of the currently favorable price outlook for the second half of 2020, making resumed production growth a likely possibility.

Dairy Products

The dairy product production mix shifted in the spring. A bigger portion of milk and milk solids were dedicated to the production of American-type cheese during the March–May period, but a smaller part went to production of other type cheese and to cheese overall. But for the month of May itself, production of all types of cheese fell less than that for total milk and milk solids production.

Butter production claimed a significantly larger share of total U.S. milkfat production during each month of the March–May period. The same was true of nonfat dry milk and skim milk powder relative to total skim solids production during April and May.

Dairy Product Inventories

Cold storage stocks of both American-type and other cheese receded slightly at the end of May from their long-time and all-time high levels of a month earlier, but butter stocks increased further in May, to the highest level since a brief period in the early 1990s when milkfat was in heavy surplus, and unusually high levels of butter stocks accumulated.

The slight fall in cheese stocks reflected increased government purchases and the start up of food service supply restocking, but these forces have not increased butter use to the same extent. Butter supply has, however, been affected by increased cream use in the production of ice cream other frozen dairy products.

Dairy Product and Federal Order Class Prices

The monthly price of cheese reported by USDA’s Agricultural Marketing Service from the National Dairy Product Sales Report (NDPSR) turned up strongly in June from its coronavirus-related low point in May. Nonfat dry milk prices did the same, but with a much smaller rebound, while NDPSR butter prices hit their low point in April.

The relationships between the Class III price and the Class I mover, Class IV and Class II prices in June provides a strong indication that producer price differentials (PPDs) in federal orders will be negative and large in June, leading to significant de-pooling of Class III milk.

Milk and Feed Prices

The U.S. average all-milk price for May was reported by USDA at $13.60 per cwt., the lowest monthly national milk price since September 2009, almost eleven years ago. The monthly Dairy Margin Coverage program margin for May was $5.37 per cwt., the lowest monthly margin since July 2013, even allowing for the change made to the feed cost factor for alfalfa hay when the program was changed from the Margin Protection Program starting in 2019.

These two statistics likely will mark the deepest point of impact on the financial structure of the U.S. dairy industry from the coronavirus pandemic, as the industry’s supply-demand balance underwent a fundamental alteration during May. As one indication of this, the daily price of block and barrel cheese both topped $2.00 a pound before the month ended, a level that has risen even further since.

Looking Ahead

After dropping a by record amount during a single month in April, the U.S. average all-milk price, when finally reported by USDA, is poised to post two record-level increases in June and July. As of mid-July, the dairy futures markets indicate that the June all-milk price will rise by $3.50 per cwt. from May’s almost eleven-year low and by a further $3.00 per cwt. in July. Prior to June, the largest one-month increase in the national average milk price was $2.60 per cwt., in April 2004. These price moves establish a new level of milk price volatility and firmly cement the reputation of 2020 as an unprecedented roller coaster for the dairy industry.

The outlook for U.S. average milk prices for all of 2020 continues to rise and is approaching 2019’s average of $18.60 per cwt., not including the substantial CFAP payments for which all dairy operations are eligible this year. USDA’s monthly estimates of the 2020 average all-milk price were about $2.00 per cwt. below the then-current commodity-based price forecasts in April and May, reflecting an attempt to capture the amount of unpaid and underpaid dumped and distressed milk earlier this year. This differential dropped to about $1.00 per cwt. under in June, but then virtually disappeared in its most recent estimate released on July 10. The futures continue to indicate that the DMC margins will remain well above $9.50 per cwt. during the months of the second half of the year, while the June margin will come in at about that level.

This Dairy Market Report is supplied  by National Milk Producers Federation and Dairy Management Inc.