After uncertain, volatile year, Cropp sees better milk prices ahead

Jan Shepel
Correspondent
Last year was anything but normal for farmers, businesses and consumers says dairy economist Robert Cropp, who believes better days are ahead for the industry.

After an 18-month hiatus, brought on by the coronavirus pandemic and the desire to avoid in-person meetings, a Dairy Exchange including people from dairy’s academic, journalistic, business and administrative worlds was convened at the Wisconsin Department of Agriculture, Trade and Consumer Protection. While some still chose to attend the meeting online, dozens of others donned masks and came in person (including this reporter.)

Also among them was dairy economist emeritus Robert Cropp who has not missed a single one of these quarterly gatherings sponsored by DATCP at the agency’s headquarters in Madison. Cropp presented his observations on the dairy price situation and his predictions for prices going into next year.

Bob Cropp

Cropp projects the 2022 average Class III (cheese milk) price at $18.00 per hundredweight with Class IV averaging $17.55. “The USDA is not that optimistic. They have their Class III projection averaging $17.10 and Class IV averaging $17.15,” he told the group.

Looking back to 2020 milk prices, he said, the market was “uncertain, volatile and impossible to forecast with any accuracy.”  Last year was “anything but normal,” he said, due to Covid-19 which shut down restaurants, schools and most of public life.  Since food service accounts for about half of butter and cheese sales there were big losses there.  Home purchases of dairy products increased but those sales weren’t enough to make up for the losses in food service, he said.

That loss of a huge part of the dairy market created surplus milk. Dairy cooperatives and proprietary milk processors implemented base plans (quotas) for producers; some producers were asked to dump milk, farmers culled cows and changed their feeding practices to reduce production and milk production declined by May.

As people lost jobs and income, there was mounting concern about food insecurity.  Long lines formed at food banks and hunger relief organizations.  The federal government responded with plans to get more food out to people needing it.  One of the new programs was the Farmers to Families Food Box program that included dairy products in the mix of groceries to be given away.

The program began in May 2020, with four more rounds, extending to May 31 of this year.

The federal government Farmers to Families Food Box program that included dairy products in the mix of groceries to be given away, worked to skew cheese prices which ultimately impacted dairy producers.

While the program had the laudable goal of putting cheese (and other dairy products) in consumers’ hands, purchases of cheese that were included in these food boxes helped cause record cheese price volatility.  Many of the organizations that got contracts to assemble and distribute food boxes had no knowledge of cheese buying and in many cases their purchases drove up the price of cheese dramatically.

On April 15, 2020, the average price of 40-lb block cheddar cheese per pound was $1.  By June 2, the price had risen to $2.50.  By July 13 it was $3 a pound.

That demand led to monthly Class III (cheese milk) prices of $24.64 per hundredweight in July, which was a record for that month; and $23.34 per hundredweight for November, also a record for the month.

Because of those market conditions, the Class III price was higher than Class I, resulting in record negative Producer Price Differentials – as much as $5.43 per hundredweight.  Dairy farmers under federal milk marketing orders with component pricing of milk are paid the milk component values per pound of protein, butterfat and other solids on their milk sold, plus the added value per-hundredweight of the percentages of the milk in the market used for Class I (beverage), Class II (soft products) and Class IV (butter and nonfat dry milk.)

“This added value per hundredweight is called the Producer Price Differential or PPD,” he explained.  It is a term that dairy farmers became woefully familiar with in 2020.

If Cropp’s price predictions are born out -- with the spread between Class III and Class IV being tighter in 2022, negative PPDs are unlikely.

Government payments

While farmers didn’t reap the benefits of those record prices for Class III milk, due to the negative PPDs, he noted that they did get government help to offset low milk prices – an average of $2.45 per hundredweight from the Coronavirus Food Assistance Program (CFAP).

Farmers who failed to enroll in the dairy safety net program last year learned their lesson.  This year over 78% of Wisconsin dairy producers are enrolled in the Dairy Margin Coverage (DMC) program. Those who are enrolled with a $9.50 margin on up to 95% of their milk production history have received payments every month in 2021-- ranging from $2.36 per hundredweight in January to $4.25 in August. “And there will be a September payment,” Cropp said.

Because of the market volatility and ensuing government payments...U.S. farmers responded by increasing cow numbers starting in July 2020 and going into 2021.

Because of all that volatility and those government payments, or perhaps because more milk was needed to make ends meet, U.S. farmers responded by increasing cow numbers starting in July 2020 and going into 2021.  Milk cow numbers peaked in May of this year and have declined by 85,000 head through September.  September’s dairy cow total this year is still 27,000 higher than last year (+0.3%).

The number of cows and the amount of milk produced per cow are two of the key factors used by economists to determine supply and demand and price predictions for milk going forward.

Milk production per cow dropped slightly in August and September this year.  Together with lower cow numbers, total U.S. milk production dropped to just about what it was a year ago, although that’s still above what it was in 2019.

Broken down for the top dairy states, California had a 1.6% increase in production but no change in milk cow numbers while Wisconsin had a 3.1% increase in milk production over 2020 with the addition of 22,000 cows.  New York was even higher with a 5.5% increase in milk production and 27,000 more cows.

Cropp predicted that higher feed costs will tighten margins through the end of the year and said he expected to see a continued slow decline in milk cow numbers.  Dairy cow slaughter has been running 4-5% higher than a year ago, he noted.  Milk production per cow will still increase, he said, but that increase will be lower.

Domestic demand – especially food service – has returned to a more “normal” pattern as public events like sports, conferences and dining out have returned.  “Cheese sales are running well ahead of a year ago,” he said.  Butter sales last year set new records as people re-learned how to cook at home.  Beverage milk sales reversed a long-term slide last year, but this year the old trend has returned.  From January through August, beverage milk sales are down 4.8%.

Exports have been a bright spot as the dairy industry pulled out of the mess created by last year’s market.

Exports are bright spot

Exports have been a bright spot as the dairy industry pulled out of the mess created by last year’s market. Exports in August 2021 were 13% higher than a year earlier and those August export figures marked the seventh straight month of growth.

According to the Wisconsin Department of Agriculture, Trade and Consumer Protection, the state exported more than $3.37 billion in agricultural and food products to 145 countries in 2020, an increase of 1.37% or nearly $45 million in value compared to the same period last year. 

Cropp says compared to a year ago, nonfat dry milk and skim milk powder exports were up by 15.3% in August, compared to a year earlier. Dry whey exports were up 9.2%, cheese was up 18.1% and butterfat was up a whopping 150.5%.  One reason for the growth in exports was that U.S. prices are very competitive on the world market.

He also noted that milk production in other major export regions – Western Europe and New Zealand especially -- had experienced milk production volumes that are pretty flat.

China has returned as a major buyer. Sales to the top U.S. export market – Mexico -- have increased and there is strong dairy export growth in Southeast Asia.

The market for dairy in Mexico (from January through August) stands at $1.2 billion; Canada’s market for the same period was $552.6 million and China was $491.4 million. South Korea and Philippines purchased $282 and $276 million worth of dairy products, respectively.

American cheese stocks have been building since June. As of September 30 those cheese stocks are 9.3% higher than a year ago.  During that same time frame, butter stocks have decreased.  When final September numbers came out, butter stocks were 4% lower than year-earlier levels.

Cropp pointed out that 40-pound Cheddar blocks hit a high of $1.79 (per pound) in April and fell sharply to $1.49 in June.  Since then, prices have been on a steady rise and have now regained that April price peak.

Cropp pointed out that 40-pound Cheddar blocks hit a high of $1.79 (per pound) in April and fell sharply to $1.49 in June.  Since then, prices have been on a steady rise and have now regained that April price peak.

A year ago, dry whey was 40 cents a pound and now stands at 62 cents, which has increased the Class III price by about $1.20 per hundredweight.  Class III prices, in late April and early May reached almost to $19 per hundredweight and then dipped through August; they are now nearly back up to that high point.

The PPD was negative from January through May. In May the PPD reached negative $1.44. However, from June through September, PPDs have been in positive territory.

Cropp believes that higher feed prices and tightness in forage supplies will slow milk production, at least until late spring or summer. He expects to see a reduction in cow numbers as farmers cull their lower-producing cows more heavily.  The higher feed prices may also impact milk per cow as producers adjust their rations.

Other costs

Labor costs and other input costs, he predicts, will dampen dairy expansion decisions.  All these factors should yield a smaller increase in milk production. Cropp sees total milk production increasing by 1.5% or less.  He figures the overall average number of cows will be 0.3% lower (25,000 head) and milk per cow will only increase 1.4%.  Taken together those two factors mean an increase of only 1.2% in total milk production for the U.S. dairy industry.

Cropp says labor costs and other input costs such as feed may dampen dairy expansion decisions.  These factors should yield a smaller increase in milk production helping to push milk prices upward.

For favorable milk prices, Cropp said we need to see about a 1% growth in milk production domestically; and any growth in milk production over 1% needs to find an export market.

Cropp said the overall U.S. economy is projected to continue growing but there are still questions regarding Covid-19, Delta variant and how the pandemic could still affect in-person learning in schools and public events.

Dairy exports are projected to continue to be strong and even grow next year due to very little growth in the dairy export strongholds of Europe and because U.S. dairy prices continue to be competitive with other major exporters.

But Cropp noted that domestic sales and dairy exports may be impacted by shortages of personnel to operate milk plants and trucks to deliver product to customers. They could also be affected by bottlenecks and labor shortages at seaports. Some shipping containers are going back to Southeast Asia empty because the companies don’t want to take the excessive amount of time it takes to refill them.