Bob Cropp weighs in on current dairy situation and outlook
Milk prices fell the end of the year and we can expect lower prices going into next year. In November, the Class III price set a record high for the month at $23.34. The Class III price for December will fall by more than $7 to below $16. But still the Class III price will average about $18.25 this year compared to $16.96 last year.
Relatively strong milk production, the end of the Farm to Family Food Box cheese purchases and some further restrictions on restaurant and bars have brought down cheese prices. Cheese prices normally do decline after purchases for the holiday season comes to an end. But prices this year fell much more than normal.
On the CME 40-pound cheddar blocks were $2.7825 per pound the end of October. Prices started falling early November then rather sharply by the middle of November reaching just $1.66 the end of November. Prices have moved up and down a little in December and have averaged $1.62 per pound thus far for the month.
The story is similar for cheddar barrels. Barrels were $2.53 per pound the end of October but just $1.415 the end of November and have averaged $1.43 thus far for December. The Class III price has received some strength from higher dry whey prices but not nearly enough to offset lower cheese prices. Dry whey averaged $0.4257 per pound in November and $0.46 thus far for the month of December.
On the CME butter prices have strengthen some. Butter was $1.3625 per pound the end of November and has averaged $1.48 thus far for the month of December. Nonfat dry milk prices have also strengthened. Nonfat dry milk was $1.11 per pound the end of November and averaged $1.14 thus far for December. Higher butter and nonfat dry milk prices will push the Class IV price higher from $13.30 in November to about $13.50 for December. Class IV will average about $13.45 this year compared to $16.30 last year.
There are a lot of unknowns that can impact milk prices next year. Will there be government purchases of cheese and other dairy products like the Farm to Families Food Box program we saw this year that pushed cheese prices and the Class III price much higher?
The vaccine for COVID-19 is now coming available. It will take some time before all who what the vaccine will get the vaccine. But by the second half of next year the virus should be under much better control allowing for restaurants and bars to more fully open, schools and colleges to return to in classroom instruction, sporting events, conferences etc. returning to more normal all of which should improve sales of dairy product for the second half of the year.
The level of milk production and dairy exports will be important factors determining the level of milk prices. There will be increased cheese production capability next year with the nation’s largest cheese plant in Michigan just starting up. Increased cheese production will put downward pressure on milk prices.
Milk production continues to run well above year ago levels. November milk production was 3.0% higher than a year ago. This follows the previous two months with increases of 2.3% each. This is far too much milk for the market to handle without lower milk prices. Dairy herd expansion which started in July continues with another 12,000 cows added October to November. There were 62,000 more cows in November than a year ago, an increase of 0.7%.
On top of this increases in milk per cow is extraordinarily strong with November up 2.3%. November increases in milk production for the top 5 producing states was: California 2.6%, Wisconsin 2.7%, Idaho 2.0%, New York 2.1%, and Texas 9.8%. Other leading increase in November milk production were South Dakota 13.4%, Indiana 10.9%, Colorado 7.1%, Kansas 6.0%, Ohio 4.8%, Minnesota 3.9%, Michigan 3.6%, and New Mexico 2.5%. Major declines in milk production were Florida 4.3%, Vermont 3.3%, and Arizona 2.1%.
Dairy exports have been a very positive factor this year. The volume of October exports was up 14% from a year ago, a record for the month of October and the 14th straight month of year-over-year gains. The increase was led by whey product exports to China up 328% from a year ago and a 20% increase in nonfat dry milk/skim milk powder exports to Southeast Asia. October compared to a year ago showed nonfat dry milk/skim milk powder exports up 8.6%, whey products up 64%, and cheese down 12.8%.
If the pace of exports holds, 2020 will be a record year in exports. Exports for next year could still be favorable. U.S. price of cheese, nonfat dry milk/skim milk powder, butter and dry whey are all price competitive with Western Europe and Oceania. However not only is milk production increasing in the U.S. it is increasing in other major exporters.
Milk prices could be much less volatile next year. But without some continuation of a Farm to Families Food Box program for the first half of next year and/or some base type program implement by dairy cooperatives to slow milk production we could see the Class III price below $16 for the first quarter of next year.
Class III prices could move into the $16’s by second quarter and the $17’s for the last half of the year as things return more to normal. Class III futures currently show a pricing pattern like this. But, unless the current rate of increases in milk production slows down these prices could be on the high side. And it will take time for things to return to normal.
A lot of restaurants went out of business. Consumers may be slow in returning to restaurants. There is no certainty that milk prices will turn out as just described. The bottom line is much uncertainty exists for milk prices next year. USDA’s latest price forecast has Class III averaging just $15.60 next year and Class IV averaging $13.60.
Cropp is Professor Emeritus at the University of Wisconsin Cooperative Extension, University of Wisconsin-Madison.