Roller-coaster milk prices bring uncertainty in dairy country

A roller-coaster of milk pricing over the last few months has led to what one long-time dairy writer calls “the age of precarious” for the dairy industry. Pete Hardin, who for 41 years has published The Milkweed, offering analysis of everything in the dairy industry, calls it a “meltdown of the milk pricing system.” He and others think the time is right for changing how milk is priced in light of the coronavirus-buffeted highs and lows that the industry is still trying to navigate.

As the National Milk Producers Federation – the organization for cooperatives – noted, May and June brought both highs and lows in the unpredictable world of dairy pricing. But with exports and prices rising, they believe 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-pound block cheese on the Chicago Mercantile Exchange (CME) cash market reached a record high in June.

RELATED: Current milk prices show need for major program changes

RELATED:Investigate price floor strategies even as milk prices rise

Then that record was topped on July 13. 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 quickly 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 hundredweight jump in the federal order Class III (cheese milk) price from May to June. The previous largest one-month Class III price increase was $5.17 per hundredweight, reached in April 2004. Trade also has experienced rising momentum. Dairy exports from the United States in May represented 17.7 percent of the nation’s milk solids production, the largest ever for the month of May.

Hardin noted that on July 13, the price of block Cheddar at the CME hit an unheard-of $3 per pound. “Prior to this recent run-up the all-time record before that was $2.30 a pound.”

Contributing to that new record high was the yo-yo of dairy demand. Before the pandemic’s effects hit, slightly over 40 percent of dairy demand was in the food service sector – meals that people ate away from home. When that sector was shut down, shock waves swept through the dairy manufacturing industry and on to dairy farms.

By late April, the price of block Cheddar was down to $1 a pound at the CME. Within 12 weeks it reached that all-time high of $3 a pound. “It’s unbelievable. Nobody predicted that,” Hardin said. He puts it down to a tremendous surge in supermarket sales of dairy products as many more meals are being prepared and consumed at home.

While many restaurants tried to stay alive and serve their public with takeout food only during the stay-at-home orders across the country, the volume of dairy products stocked by those food service outlets was still down tremendously. At the same time, people flocked to supermarkets and bought dairy products to take home and prepare meals with.

According to retail scanner data obtained by Hardin, butter sales showed year-over-year sales gains up 112 percent in one week in March. Subsequent weeks showed weekly gains over the same week last year of 62 to 69 percent. Cheese at retail showed a gain of 78 percent that same week that butter took the huge jump, and then showed steady year-over-year gains of 31 to 36 percent through early April and strong gains each week through the end of May.

Consumers, who were used to getting half of their meals outside of the home before the pandemic, shifted where they got their food and figured out that dairy was a good way to add flavor to those meals they were now cooking at home. Dairy products like sour cream and cream cheese showed spectacular gains too.

Hardin notes that it took the dairy industry a while to catch up to this dramatic change in consumer habits. In some cases farmers were asked to dump milk because the processor was heavily (or exclusively) involved in sales to food service outlets. Others had the advantage of being strictly involved in sales to retail supermarkets.

“Every cheese plant, every cheese marketer is different, just like every farm is different,” Hardin said. “Weyauwega Cheese sells virtually all of its products through supermarkets. They almost sold out of cheese in early June and could have sold more cheese if they had had it.

“If a cheese maker/marketer was heavily in sales to the restaurant trade, they were in trouble. It was the two extremes and everybody’s situation is different.”

Butter makers had to shift production from the packaging of pats used in restaurants to pounds and quarter pounds that go into the retail trade.

Export contracts

A second factor that helped bring the price of dairy products back up was that many West Coast dairy firms lined up exports to Asia, including whole-milk powder and cheese. There were so many sales to Asia as these manufacturers took steps to cope with the downturn in the domestic market, that in some cases local buyers were shorted on products, Hardin said. “But these cheese plants were doing what they had to do to survive.”

RELATED: Negative PPDs offset milk rally

Many of these export contracts, made in March and April, will expire in July and that adds another layer of uncertainty in today’s dairy market, he added. Asia was ripe for purchase of nutritious dairy foods because the region is having its own challenges with poultry and swine diseases that have cut into their domestically produced food supplies.

A third factor affecting the supply of dairy products is the government program that created “food boxes” to be distributed to local food pantries. Many of the firms that received contracts to purchase and distribute food – including dairy products specifically – had no experience in purchasing things like cheese, Hardin noted. And in their inexperience they bid up prices at the CME.

A fourth factor relates to the supply of fresh meat in supermarkets. Earlier in the pandemic, some hog and beef slaughtering facilities were forced to shut down due to coronavirus outbreaks among their workers. With meat in short supply for various periods of time, consumers shifted their attention to the dairy case where alternative protein sources were available.

These various factors added up to a “spectacular change in demand,” Hardin said. “It has been mind boggling.”

And while demand for dairy products was skyrocketing, in many cases farmers were asked to dump milk which meant that there was less milk available for processing.

Dick Bylsma, National Director of Dairy Sales for NFO, tells Wisconsin State Farmer that in the Northeast federal milk order in April there were 131 million pounds of milk dumped, which amounts to 3.1 percent of the milk on that federal order. “It’s as big a shame to dump milk as it is to not have enough milk,” he said.

Cheese inventory values

All of these yo-yo swings in dairy prices affect cheesemakers who hold cheese on inventory. Many cheese varieties, by their very nature, must be aged and therefore sit in a cheesemakers’ inventory. That includes aged Cheddar, Parmesan, blue cheese and Swiss to name a few. Inventory values are generally based on CME block and barrel prices.

A hypothetical warehouse full of cheese could have been valued at $4 million in February and then dropped to a value of $2 million in April and now could be valued at $6 million as of July 13, when that market hit its peak. Hardin notes that because of these wild swings, cheese processors don’t want to be stuck with excess inventory. “But that is one of the risks that the cheese plants are facing. The farmer can’t shut off the spigot and for the guys holding inventory, it’s hard to predict what’s ahead.”

Still the wisdom of the industry is that people have to eat every day. Even if we live in a “Hamburger Helper economy, because people have lost their jobs because of the pandemic” Hardin said they are discovering that a little cheese makes it taste that much better. “Cheese has really shined in this whole situation. And that’s important in a state like Wisconsin where 85 to 90 percent of our milk goes into making cheese.”