Analyst: June PPD "Blowing the Doors Off Anything We've Seen Before"
July 10, 2020
The pandemic continues to impact some dairy farmer’s bottom lines. Now, some dairy producers will likely receive a smaller milk check than they anticipated later this month. It will include a deduction larger than many milk producers have seen in years.
The reason is because of the Producer Price Differential (PPD). According to Farm Journal’s MILK, the PPD for the Central Federal Milk Marketing Order was -$7.51 per cwt.
“Unfortunately, it’s just real tough going right now in the dairy industry,” says Matt Schwab from Northeast Michigan.
Schwab knows what it’s like to be a dairy farmer. He used to be one. Now, he works with many of them in Northeast Michigan.
“We lost three dairies here in a month, last month,” says Schwab. “There’s not too many left in our area.”
Schwab says what’s concerning now – is many dairies will continue to struggle. This time many will see deductions in their milk checks.
It has to do with Federal Milk Marketing Order – which 80% of U.S. milk is marketed and pooled with as well.
“[The PPD is] just an accounting exercise,” says Mark Stephenson, a dairy policy analyst at UW-Madison. “Most of the time, it’s positive. Sometimes, it’s negative because we pay too much out in component value.”
If negative, the total price is subtracted from the farmer’s milk check. Normally, farmers receive a negative PPD when the spread between Class III and Class IV milk prices are high.
“Every time you see a milk check that’s got a negative number on it, that’s like a sad thing but it’s a negative number off a high price,” says Andrew Novakovic, an agricultural economist with Cornell University. “In a way, it’s really just accounting. It’s not as negative as it sounds.”
However, this time is expected to be different as the PPD is set to be historically negative, at least a negative -$5/cwt.
“What we’re expecting to see this June is -$8/cwt. This is just blowing the doors off of anything we’ve ever seen before,” says Novakovic.
Economists say it could potentially cover a couple of months’ worth of paychecks.
“In June, when we get the pool calculations here in a couple of weeks, I think we’ll have negative PPDs everywhere,” says Stephenson.
“The only time we saw a bigger swing was during the Great Recession,” says Novakovic. “That down, up, down, swing that we had was over 5 years. This one is over 6 months.”
There’s another reason why the PPD is negative and why it could potentially happen more frequently. The 2018 Farm Bill changed the Class I milk pricing formula in an effort to make risk management easier.
“However, what they didn’t think about was that sometimes we get a big spread between these two things,” says Stephenson. “Once again, we can pay out a lot of money on Class III components like we’re going to do this time around and Class IV is taking a big draw from the pool.”
As those in the industry wait to hear the deductions, they hope it isn’t long-lasting.
“Some real good friends of mine are trying to raise their family on an 80-cow dairy,” says Schwab. “[They are] great people and hard workers but it may just not play out for them to survive.”
People both in and out of the business hopes the industry can withstand it.