Dairy expert: Good year for milk prices ahead
MADISON – “I think this is going to be a good year for milk prices,” reported Mark Stephenson, director of dairy policy analysis for the University of Wisconsin-Madison’s department of Agricultural and Applied Economics.
Stephenson spoke in person during an Agricultural Outlook Forum on the UW-Madison campus January 25. Attendance was down for the annual event, doubtless due to Covid concerns, but during the daylong event as many as 60 people were following along on the Renk Agribusiness Institute’s You Tube channel (including this reporter.) That Renk Institute sponsors the forum each January.
Note: To see graphs and charts used by Stephenson in his presentation, go to renk.aae.wisc.edu/2022-agricultural-outlook-forum/. A link on that page allows visitors to view a video of his presentation and others that were given during the forum.
Stephenson said he’s “optimistic” that U.S. all-milk prices in 2022 will be $4.25 to $4.30 per hundredweight higher than they were last year. “It’s going to be a pretty good year but farmers should continue to look at risk management options and control their variable costs.”
One of the reasons for his optimism is that 80 percent of U.S. meals are being prepared at home and that is contributing to continued good domestic demand for all sorts of dairy products. In addition, exports of U.S. dairy products are good “across all categories” and the other regions of the world that are known for dairy exports “can’t keep up,” he said.
Exports from the United States are now equal to 17.5 to 18 percent of total milk production across the gamut of dairy products – butterfat, cheese, lactose, non-fat milk powder and whey.
Demand from China is strong and growing over the last three years. Mexico’s dairy purchases were lower in 2020, but our neighbor to the South returned to buying U.S. dairy products in 2021, he said. “That has as much to do with a poor economy in Mexico than anything else.”
Southeast Asia is also a growing dairy export destination. “We are still a source of supply for the world.” The prices for U.S. dairy products – butter, cheese and powder – all remain competitive on the world market and our competitors, including New Zealand and Europe are producing less milk and are less competitive.
Stephenson said that the big-three dairy nations in Europe, Germany, France and the UK, are all producing milk at below year-earlier levels. Others, like Netherlands, are constrained by things like how much phosphorus they can spread on their land. “Some of these are not just passing opportunities related to weather but are actually more persistent constraints that they are likely to see.”
One of the challenges for exports – dairy and otherwise -- is the cost of shipping containers. Stephenson noted that an average cost to use a shipping container before the disruption of the pandemic was $3,000 (from the Port of Los Angeles to Shanghai.) It then skyrocketed to $20,000. Now the cost of a shipping container stands at about $12,000 – which is still four times what the cost was pre-pandemic. The conditions leading to those bloated prices and port congestion, he said, “are not easily undone.”
Also creating headwinds for exports is the value of the U.S. dollar which continues to gain strength. The United States and its currency are considered to be a safe harbor for investments, where local currencies around the world might be considerably more risky. “The strong dollar may sound like a good thing but not when we’re trying to export dairy or other products.” Dairy exports still look good, but he noted that continued “strengthening” of the dollar may make our exports less attractive around the world.
As far as U.S. dairy exports go, Stephenson noted that 70 percent of our domestically produced powder goes into the export market and we are always competitive in that segment of the export market. Our cheese and butter prices are currently competitive with world market prices, he added. “Export demand is good.”
He’s factoring domestic demand for dairy into his all-milk price projections. The increased consumption of people who are cooking and eating more meals at home is a “good story” for dairy. Consumption is “way up” for cheese, yogurt, and butter, he said. Dairy consumption per capita has been on a fairly steep upward trajectory from 1975 to 2020. Stephenson showed a graph with per-person consumption of milk-equivalent (all products) standing right around 650 pounds per year.
Fluid still down
Fluid milk consumption has not been as good a story. There has been a steady decline in fluid milk purchases since 2010, which continues a longstanding trend. While there was an upward blip in consumption in 2020, when lockdowns hit families and they may have purchased an “extra gallon of milk” when they were at the store, the downward trend has resumed.
When Covid hit, the dairy industry was thrown a series of curve balls. First, extra dairy purchases by consumers called for more production, then the shutdown of food service and restaurants caused a loss of many large markets. “It was a different kind of eating and by April 2020 overnight we had too much milk,” he said.
That’s when many milk handlers instituted milk supply control programs. Dairy farmers remember the videos and photos of tanker loads of milk being dumped into manure lagoons to balance supply and demand.
Then, when the government instituted the Farmers to Food Box program, which channeled food to people who had lost their jobs and didn’t know where their next meal was coming from, suddenly there was not enough milk. The pandemic and its ramifications have had a huge impact on the dairy industry.
Another factor that economists like Stephenson use to predict future milk prices is the milk supply, dairy cow numbers and production per cow. Back in 2019, before anyone had heard of the coronavirus, dairy cow numbers were up. The market was signaling to dairy farmers to produce more milk. Once the pandemic hit and milk supplies were too great, many farmers culled cows heavily to lower their production and reduce the milk they were shipping.
Stephenson pointed to a new dairy plant in central Michigan that will soon be able to process 8 million pounds of milk per day, and other plants that have added capacity over the last few years.
Farmers exited dairy
Poor margins and poor profits, especially in the West, he said, caused many farmers to give up and get out of the business of producing milk. And there were some large farm failures, he added. The cow numbers in May and June of 2021 represented a 38-year high but numbers retrenched quickly in the face of supply controls from the processor side.
In addition to culling, farmers who stayed in the business “took their foot off the gas” and adjusted their rations so their cows would not produce as much milk. What has been surprising, he added, is that once supply controls ended and farmers started to feed their cows a stronger ration, those cows responded with more milk production.
“It’s curious to me that we are able to put our foot back on that gas pedal so quickly. It used to be that we thought that once the top is off a cow’s lactation curve they were done for that lactation; and that you couldn’t get it back. And apparently with better feeding and management we can do that now,” he said.
Dairy cow numbers retreated in 2020 and numbers are now nearly where they were at the end of 2018 and 2019 – that is, much lower than they were at the end of 2020.
Still, one of the factors contributing to predictions of better milk prices is lower overall production. In many regions of the United States, milk production is below year earlier levels.
On a macro level, Stephenson commented that inflation is a concern and remains a “big unknown.” Forty years ago, he said, it was really an energy issue, caused by the OPEC nations forming an oil cartel. Today the cost-push creating inflation is being caused by labor shortages. Millenials have decided that one member of the couple stays home;
"These things would have happened with or without Covid but Covid precipitated it all at the same time. The labor shortage is pushing wages up and the labor shortage is real.”
With one million cases of the disease per day now “we may be ‘done’ with Covid, but Covid’s not done with us,” he said.