Direction of milk prices for the remainder of year still uncertain

Wisconsin State Farmer
The level of milk production and the containment of COVID-19 virus will play key roles in future dairy prices for the remainder of 2021.

Growing cow numbers and increased milk production have dairy experts walking on a knives edge when predicting the trajectory of milk prices for the coming year.

Mark Stephenson, director of Dairy Policy Analysis at the University of Wisconsin-Madison and director of the Center for Dairy Profitability and Bob Cropp, emeritus professor in the Department of Agricultural and Applied Economics, delved into the factors impacting milk prices for 2021 during the February “Dairy Situation and Outlook” podcast this week.

Cropp noted that February milk prices will finish the month a little weaker than January. Class III will drop below $16 to around $15.60 compared to $16.04 in January. Class IV will be around $13.30 compared to $13.75 in January.

"Cheese prices have been moving up and down all month and will average lower for the month than the January average of $1.5141 per pound for cheddar barrels and $1,7470 for 40-poind cheddar blocks. Currently barrels are $1.3825 per pound and blocks $1.57," he said.

Dry whey continued to show strength since October when the price was in the high 30’s per pound. Currently dry whey is $0.5475 per pound. This strength has added about $0.90 to the Class III price but not enough to offset lower cheese prices.

Butter averaged $1.3496 per pound in January. Butter reached a low of $1.21 per pound the start of February and increased to $1.55 on February 19th but has now fallen to $1.4875. While butter will average a little higher in February the nonfat dry milk price weakened some from an average of $1.1808 per pound in January to the current price of $1.090 which explains a weaker Class IV price in February.

Where are prices headed?

Cropp noted that the direction of milk prices for the remainder of the year remain uncertain and cannot be forecasted with a high degree of probability because milk prices can change a lot and quickly with any change in supply or demand.

"Crucial will be the level of milk production, and how soon the COVID-19 virus comes under control and things start to return more to normal," he said.

Cropp and Stephensen noted that many expansions in the Midwest added to the burgeoning national dairy herd. According to USDA numbers, milk production was is up 3% than a year ago in November and December, and slowed to just a 1.6% increase in January.

Milk cow numbers started to increase month to month back in July and increased another 8,000 from December to January. January milk cows were 0.9% higher than a year ago. But the slow down in milk production was due to just a 0.6% increase in milk per cow which in recent months was running 2%.

Looking at the top 5 dairy states, milk production which had been running above year ago levels fell 0.7% in California and 0.3% in Idaho due to lower milk per cow. Milk production was 3.1% higher in Wisconsin, 5.3% in Texas and 0.7% in New York.

January milk production in other key states showed production up 10.1% in Indiana, 9.6% in South Dakota, 5.7% in Colorado and Minnesota and 4.3% in Michigan. Each of these states had expanded cow numbers from a year ago.

Michigan alone added 13,000 cows to its herds since last year.

"Michigan's got a new processing plant that they're trying to fill up, so that doesn't surprise me that they're growing there," Stephenson said. "The same thing is happening in Indiana."

While milk production has slowed it is still at a level to put downward pressure on milk prices.

"It's less milk output than we had in the last couple of months. So it's good that we're taking our foot off of the pedal," Stephenson said. "But there have been reports out there of substantial sales below class prices in the last several weeks, some at $6 to $8 below."

Tightening margins

Cropp says milk production is likely to slow as we move through the year and believes that lower milk prices combined with higher feed costs will tighten margins over feed cost which could slow the increase in milk per cow.

"We've had corn and soybeans just walking their way up the price scale. And in the last month and a half to two months we've been seeing our milk prices deteriorating in the forecast," Stephenson said. "So the margins have gotten bigger."

Bob Cropp

As a result, Stephenson says the margins should trigger payments in the Dairy Margin Coverage program, at least at the $9.50 level for the coming months. 

The January cattle inventory showed dairy replacements expected to calve within the next 12 months 2% lower than a year before. So, cow numbers may stop increasing by the second half of the year.

USDA is forecasting cow numbers to average for the year 0.6% higher than 2020 with milk per cow up 1.4% resulting in 2021 milk production up 1.9% from 2020.

"We still have the spring flush coming up here and we have a lot of milk production coming on, so I think we need to be a little bit careful," Stephenson warned.

Return to normal?

Cropp says he is somewhat encouraging by the news that new cases of the COVID-19 virus are slowing and more people are expected to be vaccinated by summer.

"If so, restaurants should be able to open more fully, and with the possibility of in-person learning in schools and sports returning this fall, food service will strengthen – improving butter and cheese sales," he said.

But the return to normal maybe slow, however, as consumers may be reluctant to return fully to pre-virus consumption patterns. He says the level of government purchase of dairy products is not likely to be at the level of last year. And its uncertain whether or not the Farms to Families Food Box Program which runs through April will be extended.

Dairy export outlook

Despite the pandemic, Cropp and Stephenson says 2020 ranked as the best year for exports in both value and volume.

Dairy exports on a milk solids equivalent volume basis were up 12.9% and set a record high. Exports were 16.0% of U.S. milk production compared to the previous record of 15.5% set back in 2013.

For the year, nonfat dry milk/skim milk powder exports were up 15.9% with strong sales to Southeast Asia, whey products up 23.9% as China resumed increased imports, butterfat exports up 7.0% and cheese exports down just 0.1%.

Dairy exports in 2021 could continue to be a favorable factor for milk prices. The price of nonfat dry milk/skim milk powder, cheese and butter are currently very price competitive on export markets. The dollar also remains weak to other currencies.

Milk production in other major exporters is increasing but overall appears to be less than one percent. So, there will be some additional product available to compete with the U.S. And COVID-19 has slowed economies of most countries.

However, USDA is forecasting for 2021 increased butter and whey product exports with continued strong exports of nonfat dry milk/skim milk powder.

Stock levels remain at a relatively high level and need to be drawn down for stronger milk prices. Compared to a year ago, January 31 stocks of butter were 33% higher, American cheese 3% higher and total cheese 3% higher. Butter stocks had increased 20% from December but cheese stocks were about at the same level as December.

Mark Stephenson

"(Record exports in 2020) was both surprising and a good thing," Stephenson said, "because we aren't going to be able to eat our way out of these increasing stocks. We've going to have to export this product."

Class III Futures

Currently Class III futures are below $16 for February and March, returning to the low $16’s by April and in the low to mid $17’s May through December. Class IV dairy futures reach $14 by March, $15 by June and the low $16’s October through December as butter prices are expected to increase.

"If world demand keeps up, then I think we can feel pretty good seeing $17-$18/cwt for Class III. And with these prices we should see Class III and Class IV coming class together so we're not as likely to see the negative PPDs over the next several months," Stephenson said. "I think the biggest one is probably behind us now."

Such a price pattern for now seems reasonable with improved milk prices the second half of the year as milk production slows, milk and dairy product sales improve, and dairy exports are positive. But the possibility that milk prices could end up higher or lower than this remains.