July 23, 2020
Jim Dickrell
If you are doing monthly cash flows, be ready for a negative Producer Price Differential (PPD) again this month. In some cases, July PPDs may be even more negative than in June.
“Without a doubt PPDs will be negative,” says Mark Stephenson, a dairy economist with the University of Minnesota. “This time, it won’t be because of rapidly rising prices and the lag of Class I, it will be because of the large gap between Class III and IV prices. Right now, futures are predicting that there will be an unheard of $10 gap.
“This means that the Class I will be calculated on the average of those two prices +74¢. 74¢ plus the Class I differential in most regions is still well less than the Class III price which means that the PPDs will be negative. In the Upper Midwest that huge spread could potentially cause a PPD that is more negative than the June milk price was,” he says.
The exact amount of the PPD will again depend on how much milk is depooled. Stephenson’s economic model predicts an Upper Midwest PPD of -1.39 if no Class III milk is depooled. In the worst-case scenario, with all Class III depooled, the PPD could fall to -$8.66.
“The real value will be between those bounds, but I wouldn’t be surprised if it is even larger than the -$3.81 that we saw in June [in the Upper Midwest],” says Stephenson.
In addition, current futures prices in Stephenson’s model suggest negative PPDs in the Upper Midwest for the rest of the year—with or without depooling. For August, the Class I mover was announced this week at $19.78 while the Class III price was $24.36 and the Class IV price was $13.78.
milkbusiness.com
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