Optimism continues for strong milk prices in 2022

Bob Cropp
The actual level of milk production, domestic sales and dairy exports will determine milk prices for the year. However, recent history clearly shows milk prices can change quickly with relatively small changes in milk production, domestic sales or dairy exports.

The year 2021 ended with increasing cheese, dry whey, butter, and nonfat dry milk prices pushing up milk prices. Class III was $17.83 in October, $18.03 in November and $18.36 in December averaging $17.08 for the year compared to $18.25 in 2020. Class IV was $17.04 in October, $18.79 in November and $19.88 in December averaging $16.08 for the year compared to $13.49 in 2020.

Relatively strong butter and cheese sales last quarter, lower milk production and strong exports pushed dairy product prices and milk prices higher. Milk cow numbers have been declining since May. By December milk cows had declined by 132,000 and were 0.7% lower than a year ago.

Milk per cow also has been below trend. December milk per cow was just 0.6% higher than a year ago. Last quarter milk production was 0.1% below a year ago.

Exports continue strong path

Dairy exports continued on a strong path in November. On a milk solids equivalent basis, the November export volume was 19% higher than a year ago. Through the first eleven months of 2021, U.S. dairy export volume was up 12% and on the path of setting a new yearly record.

Relatively good world demand for dairy products, milk production in Western Europe and New Zealand, two leading exporters has been below a year ago limiting their ability to increase exports, and U.S. dairy product prices being competitive on the world market all contributed to increased exports.

Strong optimism for milk prices

There is optimism for higher milk prices in 2022. While milk prices will be higher much higher feed costs and the cost of labor and other inputs will cut into margins.

Milk cow numbers are likely to continue to decline at least for the first half of the year resulting in smaller number of milk cows for the year. Higher feed costs may also lower the increase in milk per cow.

Milk production is forecasted to increase by less than one percent. USDA is forecasting and increase of just 0.7%. Normally domestic milk and dairy product sales can support favorable milk prices with an increase in milk production of no more than one percent. Production higher than this needs to be exported to support good milk prices.

The increase in milk production less than one percent and expected increased dairy exports will tighten the milk supply increasing milk prices.

Inflation and coronavirus could dampen domestic sales. Higher prices of food, gasoline, the cost to heat the home and most all other consumer goods will reduce consumer spending power. The extent coronavirus impacts consumers going to restaurants, in-person classroom teaching, sports and public events is unknown.

USDA forecast, world prices

USDA is forecasting continued growth in dairy exports in 2022. Milk production from the five major dairy exporters is expected to increase by just 0.7%. World demand is expected to continue to grow. As a result, world dairy product prices are expected to increase keeping U.S dairy product prices competitive.

However, the year is starting off with much higher U.S. dairy product prices. Currently, only the price of cheese is lower than world prices with the price of butter, nonfat dry milk, and dry whey higher.

Butter stocks are tight pushing up butter prices. December 31st stocks were 5% lower than November and 27.3% below year ago levels. However, cheese stocks are higher. December 31st American cheese stocks increased 1% from November and were 5.6% higher than a year ago. December 31st total cheese stocks increased 2% from November and were 3.5% higher than a year ago.

Will higher milk prices hold?

Less than a one percent increase in milk production, increase in domestic dairy product sales and higher dairy exports will support much higher milk prices for 2022. Current dairy product prices support much higher milk prices for the start of the year.

The question is will dairy product prices hold at these relatively high levels. The 40-pound cheddar block price was as high as $2.0525 per pound in January but has fallen to $1.795. The cheddar barrel price was as high as $1.8725 per pound and has fallen to $1.775. Dry why prices at $0.80 per pound, a record high adds support to the Class III price.

With these prices the January Class III price will be in the low $20’s. Butter has increased from $2.49 per pound the beginning of January to a high of $2.9350 but has fallen to $2.8475. Nonfat dry milk increased from $1.645 per pound early January to now $1.8125. The January Class IV price will be near $22.80.

What is the actual level of milk production, domestic sales and dairy exports will determine milk prices for the year. Recent history clearly shows milk prices can change quickly with relatively small changes in milk production, domestic sales or dairy exports.

Current Class III futures reach $21 in the first quarter and then in the $20’s. Class IV futures are as high as $24 in February, slowly declining and ending the year at $20.35.

USDA’s latest forecast has Class III averaging $19.65 for the year compared to $17.08 in 2021 and Class IV averaging $20.90 compared to $16.08 in 2021.Unless the unexpected occurs milk prices should turn out to be this high or even higher.

Bob Cropp

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