Wisconsin agriculture fared better in 2021 than 2020

Bob Cropp
Special to the Wisconsin State Farmer
Wisconsin agriculture fared better in 2021 than 2020 says dairy economist Bob Cropp.

Wisconsin agriculture fared better in 2021 than 2020.

Despite drought conditions crops turned out good in 2021. Corn averaged 172 bushels per acre, just one bushel less than 2020. Improved genetics has made corn more tolerant to drought and some timely rains made for a good corn crop. Soybeans also did good averaging 54 bushels per acre, up two bushels from 2020. The drought did lower yields of alfalfa hay.

Prices were much improved over 2020. October corn was $4.79 per bushel compared to $3.37 in 2020. October soybeans were $11.80 per bushel compared to $9.55 in 2020.

2021 better year for dairy producers

Dairy producers also had a better year in 2021 than 2020. A brief review of milk pricing helps to compare these two years. The vast majority of Wisconsin milk is priced under a federal milk marketing order (FMMO). The producer pay price of some cheese plants is not regulated by a FMMO. To be regulated they would have had to supply some milk to a milk bottler.

Other milk plants and dairy cooperatives are under a FMMO. FMMOs establish monthly minimum producer pay prices according to how milk is used. Class I is for milk used for beverage, Class II soft products like yogurt and cream, Class III cheese and Class IV butter and nonfat dry milk.

Record milk price volatility

Dairy producers experienced record milk price volatility in 2020. This was driven by record cheese price volatility. The price of 40-pound cheddar cheese was $1.94 per pound in January, dropped to a low of $1.00 in April, rebounded to $3.00 in July, fell to $1.58 in August, rebounded to $2.78 in November only to fall to $1.58 in December.

Cheese price volatility meant record Class III price volatility. Since over 90 percent of Wisconsin milk is used for cheese Wisconsin dairy producers experienced record milk price volatility. 

Dairy producers experienced record milk price volatility in 2020, mostly driven by record cheese price volatility.  Dairy producers in 2021 have not experienced as much milk price volatility nor the negative PPDs as 2020.

The Class III price was $17.05 in January, $12.14 in May, $21.04 in June, a record for the month of July at $24.54, $16.43 in September, a record for the month of November at $23.34 and ending in December at $15.72.

This record price volatility was the result of two factors. COVID-19 resulted in the closing of restaurants, schools, conferences and etc. About 50 percent of butter and cheese sales are through food service. The loss of these sales resulted in surplus milk and sharply falling milk prices. Dairy cooperatives implemented base pay plans to producers to encourage less milk production. Some producers were asked to dump milk.

By May U.S. milk production fell below a year ago. In response to low milk prices the government launched the Farm to Families Food Box Program. Companies were reimbursed for purchasing dairy products to be distributed though food pantries. The first round was May 1st to June 30th. There were three more rounds. Mainly cheese was purchased. When companies bought a lot of cheese the price of cheese would increase. After purchases were made the price of cheese would fall back down.

Negative PPDs and more

Dairy producers in 2020 faced another issue. Cows are milked today and the bottled milk might be in the store the next day. Bottlers need to know the cost of milk, so they know what to charge the store.

So, Class I is priced in advanced of the month to which it applies. December Class I price was set in November. Class III and Class IV prices are set after the month. We will not know the price of Class III and IV until early January. So, there is a six-week difference in pricing Class I verses III and IV.

Class I is priced by using the average of advanced Class III and IV prices plus adding a differential of $1.60 to $1.80 depending on where the milk plant is located. When cheese prices rise fast the advanced Class III price does not capture this increase.

In addition, since the Farm to Families Food Box program bought cheese and not butter and nonfat dry milk, the Class IV price did not increase and was much lower than Class III, making the average of the advanced Class III and IV much lower than Class III. Even after adding the Class I differential the Class III price was higher than Class I. Class III was also higher than Class II and IV.

Dairy producers are paid the Class III butterfat, protein, and other solids price per pound on all their milk. In addition, normally Class I is higher than the Class III, and this difference on the portion of milk in the FMMO used as Class I is an added value per hundredweight paid to producers as a Producer Price Differential (PPD).

But, with the Class III price higher than Class I this difference is not an added value per hundredweight to the milk check but a lower value, so producers experienced a negative PPD which was deducted from the milk check. Any added value per hundredweight from Class II and IV above Class III is also part of the PPD calculation. But Class III was higher than these Classes too. PPDs were negative from June to December and as much as $4.86 per hundredweight in June and $5.43 in November.

A return to normal?

Dairy producers in 2021 have not experienced as much milk price volatility nor the negative PPDs as 2020.

Dairy producers in 2021 have not experienced as much milk price volatility nor the negative PPDs as 2020. The Farm to Families Food Box program expired in May so there were not large government purchases of cheese to make cheese prices very volatile. The Class III price was a low of $15.75 in February and a high of $18.96 in May, but month to month changes were not large.

The biggest month to month change was $18.96 in May to $17.21 in June, a $1.75 change. The Class III price still exceeded Class I January through May but the negative PPDs were much smaller ranging from $0.51 per hundredweight in March to $1.44 in May.

PPDs were positive June through September and were just $0.16 negative in October, $0.18 positive in November and will be positive in December.

Also, with things returning more to normal with restaurants more fully open, in person learning in schools and colleges, conferences being held and spectators in sports events dairy product sales have been much improved over 2020.

Cheese and butter sales were above a year ago. In 2020 with more at home meals beverage milk sales bucked the downward trend and increased. But with returning to more away from home meals beverage milk sales in 2021 are running about five percent lower than 2020.

Exports a bright spot

A bright spot in the dairy industry has been dairy exports. Dairy exports started to increase the last half of 2019 and set a record high in 2020. In 2020 the volume of exports on a milk equivalent basis was a record 16 percent of U.S. milk production.

Exports continue to increase in 2021. The volume of exports January through October was up 11 percent from a year ago and on the way of setting a new record.

Milk cow numbers up and down

In 2020 Wisconsin milk cow numbers were declining. The average number of milk cows for the year was 9,000 fewer than 2019. Total milk production for the year was just 0.5 percent higher than 2019.

But in 2021 milk cows started to increase and by November there was 18,000 more milk cows than 2020. The year will end with milk production about 3 percent higher than 2020.

This differs from U.S. milk production. U.S milk production January through July was 2.7 percent higher than a year ago but was just 0.6 percent higher in August, no change in September, just 0.1 percent higher in October and 0.4 percent lower in November. Milk production for the year will be just 1.3 percent higher than 2020.

Milk cow numbers started to increase in July of 2020, peaked in May of 2021 and by November cow numbers had fallen by 122,000. Dairy producers are culling more cows out of the herd in response to reduced forage supplies from drought and higher feed prices. Most Wisconsin dairy producers grow their forages and corn and are not impacted as much from higher feed prices.

Year end milk prices

The combination of a slight increase in U.S milk production August through November, improved dairy product sales and higher dairy exports strengthen Wisconsin milk prices. Milk prices will end the year strong with Class III near $18.50 and Class IV near $19.75.

For the year Class III will average about $17.10. This is lower than the 2020 average of $18.25 but in 2021 dairy producers did not experience as much price volatility making it easier to manage cash flow nor the large negative PPDs. The Class IV price will average near $16.05 compared to $13.49 in 2020.

Dairy producers who were signed up for the Dairy Margin Coverage program (DMC) received substantial payments in 2021. In 2021, 78.5 percent of Wisconsin dairy producers were signed up. Those who signed up for a margin coverage of $6.00 to $9.50 received payments. Payments at the $9.50 lever ranged from $0.73 per hundredweight in October to $4.25 in August.

Continued congestion at export ports will remain a challenge for dairy exports.

Looking ahead to 2022

There is uncertainty as we look far into 2022. As of now 2022 is shaping up to be a good year. Corn prices are forecasted to stay in the $5’s per bushel and soybeans in the $12’s per bushel.

However rising prices of fertilizer, crop chemicals, fuel and machinery will increase the cost to plant and harvest the crop. One uncertainty is the 2022 growing season. Much of the state was experiencing drought in 2021. So improved moisture is needed for good 2022 crops.

Dairy is also shaping up to be a good year, but milk prices can change a lot with small changes in milk production, domestic sales and/or dairy exports. With high feed prices and labor costs, as well as the cost of building materials and most all other inputs U.S. milk cow numbers are forecasted to continue to decline in 2022.

As a result, milk production is forecasted to increase by less than one percent. Milk production growth at this low level will support higher milk prices. The sale of butter, cheese and other dairy products is expected to increase. However, inflation driving up food prices, the price of gasoline and the cost to heat homes reduces consumer purchasing power which may reduce consumers going to restaurants and spending on dairy products in grocery stores.

Further, sales could be dampened if COVID-19 and the new Omicron variant results in consumers becoming reluctant to go to restaurants and public events.

Dairy exports are expected to remain strong. Milk production of other major exporters such as the EU-27 and New Zealand is forecasted to show limited growth in 2022 leaving opportunities for U.S. exports. U.S. dairy product prices are expected to remain competitive on the world market.

Continued congestion at export ports will remain a challenge for dairy exports. There is also uncertainty if the Omicron variant in countries U.S. exports to results in restaurant closings and fewer tourists reducing their import volume.

But assuming these uncertainties do not become serious issues we are looking for good milk prices in 2022. Both the Class III and Class IV prices could be at least in the $18’s but there are forecasts of the $19’s and even the $20’s. USDA forecasts the Class III to average $18.15 for the year and Class IV to average $19. Class III and IV prices should be closer together making negative PPDs unlikely in 2022.

But higher prices are not guaranteed. History tells us milk prices can change quickly from what is forecasted. Dairy producers should consider taking advantage of these higher prices by using available price risk management tools.

Bob Cropp

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