Milk Price Drastically Different Than Beginning of 2020 Due to Market, Government Help
October 1, 2020
This year has been anything but predictable for dairy prices between dumping milk, the pandemic and price recovery. For the dairy industry, how producers started the year is a drastic difference than where they're at now. "In our dairy, it’s been a great year,” says Brody Stapel, a farmer in Cedar Grove, Wisconsin. “We were pretty hesitant going in. We took some protections early on in the market as in last fall,” says “We were able to weather a lot of what happened this year." Rewind to earlier in the year. Some producers were forced to dump milk and prices crashed amid a global pandemic. "We went from comparing milk and cheese prices to what they looked like right after the global financial crisis to just a couple of months later looking at record cheese prices and incredibly strong milk prices,” says Alyssa Badger, the director of operations for HighGround Dairy. Even now, prices for Class III are different. "I think our market prices are up at a level that was tolerable,” says Mark Stephenson, the director of dairy markets and policy at UW-Madison. “Maybe not as good as you wanted in what should have been a recovery year but they aren't at unlivable levels." There are a couple of reasons why. Stephenson says strong domestic demand through retail, good exports and somewhat tighter milk supplies helps. The government is stepping in, purchasing product with a cheese-buying program. USDA also buying dairy for the Farmers to Families Food Box Program, which has been extended. "Vendors are in place now up to 2022,” says Fuess. “If USDA [and] the administration decides this is a good, easy way to support prices, we could see additional rounds into the winter or into next year." The programs are helping soak up milk production, which is nearly 2 percent higher than a year ago.
However, there are some concerns how it impacts price.
"If we see production resuming at 1.5 to 2 percent increase, somewhere in there, we’re going to be in trouble with the price of milk” says Andrew Novakovic, departments of agricultural economics at Cornell University.
“We’ve seen weekly cow-slaughter rates at multi-year lows,” says Fuess. “That also tells us the herd size is expanding and we could be quickly moving into an oversupply milk situation into the winter months, especially if demand is questionable.”
This comes as the fate of the restaurant industry remains uncertain. The National Restaurant Association saying sales rose in August while 71% of full service operators say they do not expect their restaurant sales to return to pre-Covid-19 levels within the next six months. "Once the government steps away and stops injecting money into these food box programs, we’re not sure how we’re going to soak up all of this excess product,” says Badger. It could all impact price but dairy producers are also getting government payments. One of them is the Coronavirus Food Assistance Program (CFAP). A second round was announced by President Trump.
“If you measure that across the average of all milk production this year of 2020, that in of itself, would add $1.55 per hundredweight to the dairy farm’s milk price,” says Stephenson. “That’s significant. This CFAP 2.0 is actually $1.20 payment but on the last three-quarters of the year. That comes out to about 80 cents per hundredweight.”
Other economists agree CFAP adds a ‘significant’ amount of income that a producer has in 2020.
"I think farmers will see an incredible amount of cash flowing into their checkbooks, whether that's from CFAP payments, whether that’s from dairy margin coverage [or] whether that is from some hedging,” says Fuess.
“I think every farmer would just assume [to] earn [their] money in the marketplace,” says Novakovic. “But, we still cash the check.” Badger says HighGround Dairy anticipates The Class III milk price will settle roughly above $16 per hundredweight. She anticipates more of a drop-off into the $14 per hundredweight price but finding more support again the end of next year.
“Our average forecast for Class III milk price throughout 2021 is $15.33 per hundredweight,” says Badger. “[It’s] still a relatively solid year for producers.”
However, the wildcards are retail demand, exports and government buying.
Some producers are receiving a smaller milk check, depending on region due to the Producer Price Differential. Stephenson says as we move into September, those negative PPD values may not be as extreme, but still present.
“The September milk check should be [a] positive PPD in most orders,” says Stephenson. “There will be a few orders, particularly out in the West [such as] California, the Northwest, Southwest, which will have [a] negative PPD but it’s not going to be a big negative.”
It’s a year of a pandemic, buying, changes and aid. All of these things were not expected at the beginning of the year. "I think if you averaged our income over the last five years, we've had such decreased income over the last four years that we’ve needed a year like this to replace capital that’s been worn out,” says Stapel.