How bad will it get for dairy?
April 6, 2020
Mark Stephenson, Center for Dairy Profitability, UW-Madison
You’ve all heard the maxim that markets hate uncertainty. If a pandemic isn’t uncertainty, I don’t know what is. I suspect that the markets will continue to be heavily pessimistic about milk prices for the next several weeks.
But it is important to remember that futures markets are not spot markets where real product actually gets sold. And spot markets are not the same as wholesale markets, which report actual, regular sale prices to USDA and which are used to calculate the minimum class prices in Federal Milk Marketing Orders. And, federal order minimum prices are not the same as what farmers actually receive in their milk checks. That’s because dairy farms typically sell higher-component milk than standard test, and premiums are commonly paid above the federal order minimum.
In looking at the Class III and IV futures prices right now, I would forecast something like a $14 farm price bottom in the May to June time period. In 2009, those farm prices bottomed out in the mid-$11 range, so this forecast isn’t as low as that, but it would be worse than the lowest prices we’ve seen in the last five years. Low gasoline prices and ethanol prices are also keeping a lid on corn prices, so there may be some relief for purchased feeds, although dairy quality alfalfa is expensive and difficult to come by.
Just a few months ago, in early December, we were finishing the enrollment period for the 2020 Dairy Margin Coverage (DMC) program. At that time, forecasts were more optimistic, and we were not expecting any payments for the program. Consequently, less than half of producers enrolled in the program, and many producers elected to stay at the catastrophic level of $4 protection. Today, our forecasts show DMC payments beginning with next month's milk at the $9.50 level of coverage and continuing through the rest of the year. In fact, the May and June margins are forecast to fall below $6.
Is there relief?
Producers who enrolled in the DMC and signed up at the $9.50 level would receive as much as $3.50 payment on covered milk production for May and June. Looking at the remainder of the year, I would currently forecast an average payment of about $1.85 per hundredweight (cwt.). There has been some discussion about reopening the DMC enrollment to provide producers with another chance to enroll for the year. That didn’t happen with the massive relief bill (CARES) just passed by Congress and signed by the president, but there is talk about another relief bill which might include a DMC do-over for producers.
The CARES act did include some significant funding for agriculture.
There isn’t much specificity yet about how much of the funding will make its way to the dairy industry or how it will be accessed, but there was $9.5 billion for the USDA Office of the Secretary, $14 billion for Commodity Credit Corporation (CCC) replenishment, and an additional $15.8 billion for SNAP (food and nutrition). And there is the Paycheck Protection Program that provides forgivable loans through the Small Business Administration (SBA).
I’m guessing here, but the $9.5 billion may be used for direct payments to agriculture, kind of like we received from the Market Facilitation Payments or purchases for food giveaway programs. The CCC funding is identified for "replenishment" and will be mostly used to cover the Market Facilitation Payments that were already made last year. And the SNAP funds will be needed to provide newly out-of-work individuals with the ability to purchase food. But dairy farms are eligible for the SBA loans, which will be administered through the Farm Credit system. All of these programs could help the dairy industry, but some of them will take weeks, if not months, to have an impact.
Out East, the problem is twofold. In some instances, plants cannot use all the product. In other instances, plants are operating below capacity because those plants cannot fully staff the facilities.