Class III milk prices expected to take tumble in December

Bob Cropp
If milk production continues at this rate across the U.S., it will be a challenge for domestic sales and dairy exports to hold up milk prices.

Despite rather strong milk production, milk prices continue to strengthen in November. The September Class III was $16.43, strengthened to $21.61 in October and November will be close to $23 surpassing the previous November record high set in 2014 at $21.94.

Continued government purchases of cheese under the Farm to Families Food Box Program, cheese exports above a year ago and higher retail cheese purchases strengthened cheese prices and higher dry whey prices pushed the Class III price higher.

On the CME 40-pound block cheddar cheese hit $2 a pound on September 3rd and continued to increase reaching $2.7825 the end of October. Barrel cheese started September at $1.445 per pound increasing to $2 by October 6th and $2.53 the end of October.

Dry whey increased from $0.3350 per pound early September to $0.43 in November adding about $0.60 to the Class III price. But the Class III price will take a big tumble in December and could fall close to or below $16. Cheese prices are coming down rather fast in November which will impact the December price. The 40-pound block cheddar cheese price fell below $2 a pound on November 13th and today it is $1.6425. Barrels fell below $2 a pound on November 12th and today is $1.400.

Many unknowns for 2021

Forecasting milk prices into next year has so many unknowns. If the COVID-19 virus comes under control and things return more to normal by the second half of the year it would have a big impact on milk prices.

As of now the virus is hurting the U.S. economy and the world economy which does not bode well for domestic sales and dairy exports. Dairy producers have responded to much improved milk prices along with government payments and milk production is now running relatively high.

If milk production continues at this rate, it will be a challenge for domestic sales and dairy exports to hold up milk prices. Will dairy cooperatives implement base type milk production plans on dairy producers liked they did this year to slow milk production? Will some type of Farm to Families Food Box program continue into next year?

USDA’s milk production report showed October milk production to be up 2.3% from last year, the second month in a row with a 2.3% increase. The increase was the result of 0.5% more milk cows and 1.9% more milk per cow. Milk cow numbers started to increase in July and increased another 14,000 head September to October to bring the total increase to 40,000 head. 

With milk production increasing at this rate the combination of domestic sales and exports cannot prevent the price of milk from a rather big decline.

Of the 24 states just 7 had a lower October milk production than a year ago. Each of these states had reduced milk cow numbers. October milk production increases from a year ago for the top 5 dairy states that produce more than half of the nations production was: California 1.2%, Wisconsin 1.7%, Idaho 1.7%, New York 1.0%, and Texas 8.2%.

Of these states only Idaho and Texas had more milk cows than a year ago, 14,000 head and 28,000 head, respectively.

October milk production increases were led by South Dakota 12.9%, Indiana 10.7%, and Colorado 6.6%. Each had added a number of milk cows. Other relatively strong increases were Michigan 3.0%, Minnesota and Pennsylvania 2.5% and New Mexico 1.9%. Milk cow numbers were lower than a year ago in Minnesota and Pennsylvania.

Exports figure in

Dairy exports will be an important factor determining the level of milk prices for the remainder of 2020 and for 2021. Dairy exports have supported higher milk prices in 2020. September marked the 13th straight month that the volume of exports was higher than the year before. Through September exports were equivalent to 16.2% of U.S. milk production on a total milk solids basis. At this pace 2020 exports could exceed the 2018’s record year of exports.

September’s export expansion was the result of year-to-year growth in whey product exports primarily destined to China and better than expected cheese exports despite domestic cheddar cheese prices above world prices since May. Dry whey exports were 52% higher than a year ago and cheese exports were 4.2% higher.

Nonfat dry milk/skim milk powder exports that had been running well above year ago were 5.9% lower in September primarily the result of reduced exports to Mexico more than offsetting increases to South East Asia, Latin America and China grew. Butterfat exports were also 10% lower than a year ago. But exports will continue to face challenges in 2021.

COVID-19 has hurt world economies dampening world demand for dairy products. Also, milk production is not only improving in the U.S. but also in the major dairy exporting countries.

Of what we know now, milk prices next year are likely to be less volatile than this year and average lower than this year. USDA’s latest forecast has the Class III price averaging $18.55 this year and $17.25 next year. The average all milk price was forecasted to average $18.25 this year and $17.70 next year. No doubt this forecast will be revised as more comes known about developments next year.

Bob Cropp

Cropp is Professor Emeritus at the University of Wisconsin Cooperative Extension, University of Wisconsin-Madison