Rising milk production, dairy stocks put downward pressure on prices
Milk production continues to run well above a year ago. December milk production was 3.1% higher than a year ago marking the second straight month above 3%. Milk cow numbers have been increasing since July with another 12,000 in December bringing the total increase to 100,000. December cow numbers were 1.1% higher than a year ago. Of the 24 selected states just 8 had fewer milk cows than a year ago. Milk per cow continues well above the normal trend being up 2.0%.
Each of the five top dairy states that produce over half of the milk production had relatively strong increases in December. The increases were: California 3.2%, Wisconsin 2.6%, Idaho 1.2%, Texas 7.5% and New York 2.2%. South Dakota led all states with an increase of 11.9% followed by Indiana 9.8%, Colorado 6.3%, Kansas 5.1%, Michigan 4.9%, Illinois and Minnesota 4.7%, Iowa 4.3% and New Mexico 3.7%. Of the 24 selected states just six had lower production with Florida leading with 5.0% followed by Vermont with 3.1%.
With this relatively high milk production dairy stocks are building. Butter and cheese stocks both built from November 30th to December 31st. Compared to a year ago December 31st stocks of butter were 44.4% higher, American cheese stocks 6.8% higher, and total cheese stocks 5.7% higher.
Relatively high milk production and higher dairy stocks are putting downward pressure on the price of cheese and butter.
In early January, 40-pound cheddar cheese blocks were $1.6175 per pound and barrels $1.4825 per pound. Then it was announced that a fifth round of the Farms to Families Food Box Program would run from January through April of 2021. The cheese market responded with blocks reaching $1.9625 per pound by Jan.11 and barrels $1.6525 by Jan. 7.
But realizing cheese purchases under the program probably can not hold prices at these levels, prices fell Monday with blocks at $1.61 and barrels at $1.3925. Butter showed similar price moves starting in January at $1.29 per pound reaching $1.4550 by Jan. 20 and has fallen to $1.36.
Nonfat dry milk has shown strength starting January at $1.1475 per pound and reaching $1.2150 before falling to now at $1.1625 per pound. Dry whey continued to strengthen in January starting at $0.4650 per pound to now at $0.54 per pound. With some strengthening in dairy product prices the Class III price will be near $16.15 in January compared to $15.72 in December and the Class IV price near $13.80 compared to $13.36 in December.
The outlook for milk prices remains uncertain. With the growth in milk production improved domestic sales of milk and dairy products and favorable dairy exports will be needed to maintain and to increase milk prices.
Until COVID-19 comes more under control, dairy product sales will be dampened. Hopefully with the vaccine things will be different and sales will improve by the second half of the year with restaurants more fully opened and schools returning to in person learning.
After a 14-month of year-over-year volume growth, November exports were down slightly, 0.2%. Compared to a year ago, dry whey exports were 27% higher due to continued strong sales to China, but nonfat dry milk/skim milk powder exports were 8% lower, cheese 16% lower and butterfat 3% lower.
Looking ahead, exports going into next year could remain positive for milk prices especially for nonfat dry milk/skim milk powder, whey products and butterfat as prices remain competitive with world prices. Milk production for 2021 by the five largest dairy exporters (EU-28, New Zealand, U.S., Argentina and Australia) is forecasted to be up about 1%.
COVID-19 continues to restrict domestic demand in each of these exporters so most of increased milk production will be available for export. Also, it will take time for the world economies to recover from the recession caused by COVID-19.
Government purchases of dairy products will provide support to milk prices. There is $400 million under the Dairy Donation Program to pay for milk to be processed into dairy products and donated to nonprofit entities. There will be purchases of fluid milk, butter and cheese under Section 32 of the Act of August 24,1935. And from January through April there will be purchases under the Farms to Families Food Box Program. It is not certain that the new administration will continue this program beyond April.
So, with the current amount of milk being produced we could see the Class III price in the $16’s first half of the year and the $17’s the second half if COVID-19 is more under control and things turn more to normal.
The Class IV price could be in the $14’s and $15’s the first half of the year and the $16’s the second half. But none of this certain and a lot could change this forecast. USDA in their last forecast was not quite this optimistic. USDA forecasted Class III to average $16.90 compared to $18.25 last year and Class IV to average $14.10 compared to $13.48 last year.
Cropp is Professor Emeritus at the University of Wisconsin Cooperative Extension, University of Wisconsin-Madison.