Late last year, the expectation was for 2020 to be a price recovery year in the dairy industry.
It’s taken a combination of coronavirus-relief payments and milk price insurance payments for that to be close to reality during a rollercoaster of a year caused by the global coronavirus pandemic, according to UW-Madison Center for Dairy Profitability Director Mark Stephenson.
With a combination of payments through programs like the U.S. Department of Agriculture Farm Service Agency’s Dairy Margin Coverage Program and the federal Coronavirus Food Assistance Program, Class III milk income in 2020 has been above $21 per hundredweight, Stephenson said in his “Pandemic, Prices and PPDs… What will 2021 Offer?” presentation during an Oct. 22 UW-Extension Dairy Market and Nutrition Update webinar.
“We haven’t seen anything like that since 2011, ‘12, ‘13, ‘14,” he said. “This almost looks like recovery in terms of milk income per hundredweight.
“It’s better than we thought, but we won’t be able to rely on CFAP payments next year. But the (Dairy Margin Coverage Program) will be there and so will Dairy (Revenue Protection) and other things.”
Because the world is still in the grips of the coronavirus pandemic, Stephenson cautioned that any 2021 price forecast “comes with a bucket full of salt, not a grain,” but as of now his forecasts show milk prices in the $17 to $18 range next year.
“That is at the higher end of what we might be able to expect,” he said. “There’s more downside potential in my forecast than there is upside.
“We just don’t have a handbook written for a pandemic. Honestly, a lot of this is based on the optimism we see in futures markets, and I will tell you that, if anything, I think this is more optimistic than we’ll actually see.”
While forecasters didn’t see COVID-19 coming when enrollment in the 2020 Dairy Margin Coverage Program was open late last year, Stephenson said producers who opted to take coverage in DMC or Dairy-RP, which is designed to insure against unexpected declines in the quarterly revenue from milk sales, protected themselves better than they could have imagined.
DMC makes payments when the national average income-over-feed-cost margin falls below a farmer-selected coverage level. The 2020 DMC enrollment was less than a third of 2019’s enrollment, due at least in part to an economic outlook that forecast little to no payments for the program this year.
“If you bought programs like Dairy-RP in the fourth quarter of 2019 and put a floor under your prices, you’ve received substantial payments this year,” he said.
Stephenson recommended producers at least sign up for $9.50 Tier 1 protection for the 2021 DMC program year. Projections for the first half to two-thirds of 2021 could have payments at that level, he said.
Enrollment for the 2021 DMC program year started Oct. 13 and runs through Dec. 11.
“I’m going to go so far as to say this is coverage you can’t afford to not have in place,” he said. “Clearly, markets are volatile and could change, but we’re anticipating payments.”
With more than 44 million cases and 1 million deaths worldwide, Wisconsin a hotspot as case numbers grow daily, and the U.S. headed into a third surge in the number of COVID-19 cases, Stephenson said the dairy industry is currently at the mercy of the coronavirus pandemic.
“The pandemic is clearly in the driver’s seat still,” Stephenson said. “This is something that we’re going to have to deal with for some time yet. And it’s impacting prices ... more volatility than I’ve ever seen.”
An early blow to the dairy industry came in April and May as consumers shifted from out-of-home eating to preparing meals at home. As dining preferences shifted, the dairy industry was left with an excess of supply to markets typically serving restaurants while grocery shoppers saw shortages on store shelves.
Stephenson said a recent restaurant performance index shows the restaurant industry is facing a more difficult time now than in the previous recession in 2008-09.
“It’s been a really tough time for restaurants, and market channels have had to adapt to where consumers are and what the demand has been,” he said.
Total cheese consumption from retail and food service is down about 0.4% from April to mid-October compared to the same time period last year.
“It was expected to be down much further than that, maybe as much as 5%,” Stephenson said. “That didn’t happen, thank goodness.”
Historically half of cheese consumed has been outside the home, so the makers of processed cheese have had to adapt. However, surging pizza sales have “been a real bright spot for the dairy industry through this,” Stephenson said.
The USDA’s Farmers to Family Food Box program has created new demand for cheese, which is having a big impact on prices, he said. Estimates show the program has provided a market for 4% to 5% of U.S. milk production.
“The dairy products that have been included in these giveaways have been significant, in the purchases made by the government to distribute food to food-insecure families,” he said.
While total fluid milk sales had been dropping since 2010, the coronavirus pandemic and the ensuing safer-at-home order in Wisconsin and similar moves in other states has halted that decline.
“As people have stayed home, they’ve gone back to buying milk,” he said. “Sales are up. It’s reversed a longstanding trend, hardly back to where we were in 2010, but it’s moving in a nice direction.”
Stephenson said another benefit to the dairy industry during the pandemic is that butter sales at retail are up 7%.
“Pandemic cooking is a real thing,” he said. “Even though you’ve lost a lot of usage in restaurant and out-of-home eating, it’s more than made up for by in-home eating.
“It’s going to be interesting to see how, when we get past this pandemic, the retail sales hold up.”
Overall, he said, pandemic prices have not been as bad as expected. Still, concerns about a recession in the U.S. and worldwide mean the industry is looking at volatility in the near future.
“The virus-induced supply chain disruptions, I think, is going to mean that even when the pandemic is over we still are going to be working our way out of an economy that is not going to feel great for some time to come,” Stephenson said.
Butter stocks are building, which Stephenson said is concerning to him despite domestic sales being up. And with high cheese prices, exports have slowed. But that isn’t as concerning because domestic markets are strong, he said.
“We’d like to sell some cheese overseas, and we may need to develop that further,” he said. “But we don’t need that quite as much as we do powder and perhaps even butter.”
Due to the initial supply-chain disruptions at the onset of the coronavirus pandemic in the U.S., farmers made efforts to slow down milk production. Those efforts came at a time when production would typically be nearing flush, Stephenson said. Since then, however, better prices have led to increasing production.
“The urge to capture some of these higher milk prices has officially put us into big increases right now,” he said. “Actually, I’m wondering if we got our foot caught on the gas pedal a little to hard. We’ll see what time reveals.”
In a normal year, milk-production change includes about a 1% to 2% increase to account for domestic demand and increased export sales. In April, milk production dropped from a 2.7% increase to a 0.5% decrease in production.
“That’s a pretty big drop,” he said. “That was our supply controls really taking charge.”
Since then, he said, the increase in production has jumped to larger than average.
“This is where I have to question whether we can sustain this kind of increase going forward,” he said. “We still have a precarious demand market, in my opinion.”
After a dip in animal numbers when the pandemic hit, cow numbers are once again beginning to grow across the country. Stephenson said the case is similar with all the major exporters of milk worldwide.
“There’s going to be a lot of milk on world markets trying to find a home,” he said. “We still have price optimism though.”
Stephenson said Class III futures for November had been climbing from $17 to more than $21 as of mid-October based on optimism about grocery-store sales, restaurant re-openings and export opportunities.
“A lot of this is going to depend on how the COVID-19 vaccine and better testing and contact tracing evolves,” he said. “And there are real concerns about a U.S. and world recession out there.”