Dairy Recovery Set to Continue Into Next Year

After several years of painfully low dairy prices and high feed costs, it’s clear that we are in the middle of a dairy price recovery.

Both USDA and experts in academia believe milk prices will continue to rise into 2020.  While no one is predicting runaway sky-high prices, most are predicting a slow and steady rise in 2020 dairy prices, barring no strange anomalies.

The USDA’s latest forecast shows Class III prices rising to near $18 per cwt in the fourth quarter though some industry experts in academia believe we could see $19 per cwt.

The all-milk price for the fourth quarter is expected to be near $19.60. The all-milk price for the entire year is forecast at $18.40, a big improvement over last year’s $16.26.

Mixed production numbers

The USDA Milk Production Report in September showed production in the top 24 states up 1.6% over the same month last year. Output per cow was up 33 pounds to 1,913 pounds. Milk cow numbers for the top 24 states fell to 8.80 million head, 11,000 less than September of last year.

In the Northeast, New York milk production was up 1.7% with more cows and an increase in per-cow production. Vermont was up 0.5% with fewer cows but an increase in output per cow. Pennsylvania production was down 3.8% with some growth in per-cow output, but it also showed a continued decline in cow numbers.

The report showed California was near its average in milk production for September, up 1.6%. Wisconsin, though, was up only 0.6%.

USDA increased total U.S. milk production based on expected gains in output. Dairy stocks appear to be adequate and domestic demand remains robust.

USDA has raised its estimate of both cow numbers and output per cow for the fourth quarter. The agency expects 2019 milk production near 218.2 billion pounds. The 2020 milk production forecast is 221.6 billion pounds, an increase of about 1.6%.

Higher cheese, steady butter

Chicago Mercantile Exchange (CME) block cheese prices, which help drive Federal Order Class farm milk prices, started a slow, steady rise in February at $1.40 per pound and climbed to over $2 recently.

Blocks and barrel cheese have been on a steady upward trajectory for most of the year. One must look back to 2014 to see CME cheese trading at these levels. Some experts think cheese prices might go higher as we approach the holiday season and Super Bowl retail promotions.  The effect of higher cheese prices is evident in Class III prices, which have risen from $13.96 in January to $18.31 in September.

Butter prices in the U.S. have remained steady, between $2.10 and $2.30 per pound throughout the year. Butter may see a small surge in demand as the holiday season approaches and eggnog production fully kicks in.

The demand for butter and butterfat products in the U.S. is strong. Per-capita butter sales are at their highest level in nearly 50 years, according to USDA.

Like butter, nonfat dry milk prices have remained steady for much of the year, trading between $0.95 and $1.05 per pound. In recent weeks nonfat dry milk has risen to over $1.05 per pound.

Dry whey prices in the U.S. have declined from around $0.50 per pound late last year to $0.35 in mid-October primarily due to ongoing trade disputes and reduced sales to China as the result of an African swine fever outbreak. China was a major purchaser of U.S. whey derivatives used in piglet feed rations.

State of trade

In recent weeks, the Trump administration reached tentative agreements with both Japan and China that would at least moderate some of the trade tensions between the countries and could lead to significantly greater export sales for U.S. dairy and agriculture.

Neither deal has been finalized or signed, but on the surface these deals look promising.

Reports indicate that Japan will agree to purchase $7 billion worth of U.S. ag products under the new deal. Some industry experts feel that this only puts the U.S. back to where it was before President Donald Trump pulled out of the former Trans-Pacific Partnership, or TPP. Japan is a major cheese importer as their domestic dairy industry is not keeping up with domestic demand. Therefore, it remains an excellent export opportunity for the U.S.

Shortly after the tentative deal with Japan, Trump’s trade team announced a possible end to the trade war with China that would drastically reduce tariffs that have taken a toll on both countries. The new agreement reportedly has China agreeing to purchase $40 billion to $50 billion worth of ag products from the U.S. In return, the Trump administration will agree to not hike tariffs on an additional $250 billion worth of Chinese products.

This is a lot of U.S. product compared to pre-trade war sales, where the most agricultural goods China ever bought from the U.S. was $24 billion in 2017. China imports nearly $130 billion of agricultural goods from several countries around the world.

These tentative deals are steps in the right direction.

Closer to home, the U.S. Trade Commission reports that the U.S.-Mexico-Canada Agreement will add $68 billion to the U.S. economy and create up to 180,000 new jobs. Mexico and Canada are waiting for Congress to approve the agreement, but it is currently stalled in the House. Canada and Mexico represent around 40% of all U.S. dairy exports.

DMC success

More than 22,000 dairy producers enrolled in the new Dairy Margin Coverage program have seen combined payouts over $300 million this year.

Rising milk prices combined with lower feed costs have pushed the DMC margin over the $9.50 maximum coverage level for this year, resulting in no more payouts.

The program will be continued and signups for year 2020 have already started.  The deadline to enroll for 2020 is Dec. 23. Producers can learn more online or visit their local Farm Service Agency.

Looking ahead

For 2020, USDA expects improved global demand to stimulate U.S. exports of nonfat dry milk and skim milk powder as these become more price competitive in the global marketplace.

The butter price forecast is lowered to $2.20 as USDA expects continued steady prices. The momentum of higher cheese prices is expected to continue into 2020. The higher cheese price elevates the 2020 Class III estimate to $17.20 per cwt.

USDA’s dry whey estimate is unchanged. However, whey prices could go much higher if China purchases more to feed its recovering swine population. This would push Class III prices higher.

The 2020 Class IV price is reduced slightly to $16.10 per cwt. An expected, a lower butter price more than offsets the expected higher nonfat dry milk price.

The 2020 annual all-milk price forecast is unchanged at $18.85 per cwt.