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Dairy Market Report

April 2020


OVERVIEW


The coronavirus has so suddenly transformed the global marketplace that U.S. dairy statistics, which by their nature look backward, resemble glimpses from a vanished world. The entire U.S. dairy industry is now deep in crisis mode, seeking ways to contain

the price and supply chain damage brought about by coronavirus and wondering when and how it might eventually emerge from the current emergency.


These factors compound a dairy market where domestic commercial use in all products during the first months of 2020 was already weakening, although U.S. dairy exports were strong. The national dairy cow herd was entering into another cycle of expansion, setting the stage for what could have been two to three percent year-over-year increases in milk production. Butter and nonfat dry milk stocks were building, leading to weakening prices, but cheese was still holding up, relatively speaking. And the DMC margin in February was still over $10 per hundredweight, above the level necessary to trigger federal assistance. But in late March and early April, as it became clearer that total demand for U.S. produced milk and dairy products would suffer serious losses, cheese prices collapsed in the CME cash markets while butter and nonfat dry milk cash prices continued to erode.


Commercial Use of Dairy Products


U.S. domestic commercial use of milk in all products was below year-ago levels on both a milkfat and a skim solids basis during December–February. The larger drop in domestic skim solids use reflected increased exports of dry skim ingredient products, since total commercial use was essentially flat during the period. Lower domestic

use of many of the major dairy product categories except cheese contributed to the overall loss of domestic dairy use.

U.S. Dairy Trade


U.S. dairy exports showed important gains during the December through February period. Almost all of the high-volume dry skim ingredient exports showed double-digit volume gains over a year earlier. The exception was dry whey, which finally snapped a 17-month string of China-driven annual losses in February, to register a slight gain for the period. Butter, milkfat and American-type cheese exports were down by double digits, but exports of all other cheese were almost flat. Total exports as a percent of U.S. milk solids production increased by a respectable 1.7 percentage points from a year ago during the period.


U.S. butter imports were down by more than one-third from a year earlier, but imported milk protein concentrate was up by almost a quarter. Casein did not follow this increased demand for imported concentrated milk protein products but stayed basically flat, as did cheese imports.

Milk Production


The U.S. dairy cow herd started growing again, year-overyear, in January, following a 19 month period of shrinkage. Given historical trends, it appeared almost certain that the industry was heading into another herd growth episode, just as the demand shock of the COVID-19 crisis has started gathering steam.


To explain further: For more than twenty years, during which USDA has published monthly estimates of U.S. total dairy cow numbers, almost all of those numbers can be sorted into clear-cut, consecutive cycles, or episodes, of annual growth or decline. These episodes are at least twelve consecutive months during which U.S. total dairy cows are consistently increasing or consistently decreasing year-over-year, with a peak change during that period approaching plus or minus 100 thousand cows, and with graphs of these monthly changes that closely resemble classic bell-shaped curves. Since late 2004, there have been eight such clearly defined episodes. One of these was a unique period without a clear direction of change, but five were episodes of herd growth, while just two were of herd decline: one during 2009-2010 and the one just ended.


The first three of the five herd growth episodes took place when U.S. dairy exports were growing briskly, resulting in rapid expansion of total demand for U.S. dairy products that

required more dairy cows to supply. But the two most recent growth episodes, following 2014, happened when export growth, and hence total demand growth, had slowed, creating a less favorable supply-demand balance and depressed milk prices. The brief price recovery in the latter part of 2019 was materially aided by reduced cow numbers. Given more than twenty years of history of clearly-defined episodes of dairy herd growth and shrinkage, any reversal in declining cow numbers could presage lower prices.

Dairy Products


Growth in Cheddar and American-type cheese production slightly exceeded that of total milk and milk solids production during December–February, but production of other cheese increased at a slower rate. Butter and nonfat dry milk/skim milk powder production significantly outpaced milk production growth during the period, which is reflected in changes in their stocks and prices.


Dairy Product Inventories


Butter stocks are strongly seasonal, but they have been becoming excessive even by seasonal standards since the end of 2019. By the end of February, they were in excess of

normal levels for that month by the equivalent of more than two weeks’ of total commercial use. Nonfat dry milk stocks were also becoming excessive, but cheese and dry whey had not yet done so.

Dairy Product and Federal Order Class Prices


Federal milk marketing order prices for March show the effects of the COVID-19 just starting to show up in the monthly dairy price statistics. Butter prices had been weakening steadily since late last summer and were more than half a dollar a pound below a year ago, but nonfat dry milk prices had been improving steadily through February, when developing weakness in world markets reversed this trend. Cheese prices were still above year-ago levels but starting to weaken. Class I, III and IV prices were all lower in March than a month earlier, particularly the butter and powder-driven Class IV price. March retail cheddar cheese prices were down from a month earlier, retail butter was well below a year earlier, while fluid milk at retail was up on the month and the year.


Milk and Feed Prices


February data illustrate how strikingly different in behavior are the two basic components of the Dairy Margin Coverage (DMC) margin formula in their current market environments. The all-milk price for the month was down by $2.10 per cwt. from three months earlier but was also $2.10 per cwt. higher than February a year earlier. The February DMC feed cost, by contrast, is down by just six cents a hundredweight from

a year earlier and 4 cents higher than three months earlier. All three components of the feed cost formula are relatively low and stable, due to large supplies and stocks and continued uncertainty about export demand. But milk prices have been volatile due to the shifting outlook for domestic milk production and developing uncertainty about foreign import demand, even before the coronavirus began to have a serious impact on the domestic and global economies, and they will become much more so.


Looking Ahead


USDA’s April dairy outlook, the first forecast to incorporate market impacts of the Covid-19 pandemic, projected a starkly lower 2020 average milk price than it had just a month earlier. Its April estimate of the 2020 U.S. all-milk price was $14.35/cwt., almost $4 below its March estimate of $18.25/cwt. At the same time, CME dairy futures were indicating a 2020 all-milk average price is the range of $16.35/cwt. to $16.45/cwt. The futures indications for this year’s prices had dropped fairly steadily through March, but bottomed out at around $16 at the end of the month and even rebounded a bit since then, even in the face of the late March–early April CME cash market meltdown.


USDA’s April forecast held its estimate of 2020 annual milk marketed unchanged from a month earlier, at 221.2 billion pounds, but a new footnote indicated that this estimate included milk that would not be processed. This would be milk that was dumped but for which producers would receive some level of compensation, which would be consistent with its low estimate of average milk prices for the year.


Dairy Market Report

April 2020

Dairy Managmeent Inc., National Milk Producers Foundation