Current Progressive Dairy digital edition

COVID-19 creates historical market volatility (and it’s not over yet)

Progressive Dairy Editor Dave Natzke Published on 27 May 2020

The recent run-up in dairy product prices has helped spur optimism for milk futures prices for the remainder of 2020. It also provides a temporary plateau from which to view one of the most volatile periods in dairy pricing history.

Several dairy economists and market analysts recently provided reviews of U.S. dairy markets since the impact of COVID-19. Their remarks are similar in that they describe extreme volatility that might not yet be over. And they recommend dairy producers look at risk management tools to ride it out.



Since falling to near $1 per pound in mid-April, Chicago Mercantile Exchange (CME) block cheddar cash prices topped $1.96 per pound on May 26, with cheddar barrels not far behind at $1.91 per pound. CME butter at $1.15 per pound on April 15, was near $1.60 per pound.

As of the close of trading on May 26, CME Class III and Class IV milk futures prices for July contracts each rose $3.25 per hundredweight (cwt) from May 1. And not only have futures prices improved, but prices paid for spot loads of milk were bringing $1 to $2 over class prices, as compared to reports of dumped milk and discounts of $7 or greater under class prices during the most market destructive days of COVID-19.

Plourd: Volatile period not likely over

In a “Pandemic dairy markets: Where are we now” podcast, May 21, Phil Plourd, president of Blimling and Associates, noted that dairy market volatility between January and May has likely been the greatest in history, rivaling the volatility of the S&P 500 index over the same period.

The market swing exhibited a “massive collapse followed by an unbelievably big recovery,” said Plourd.

Demand factors leading to price recovery included the retail market maintaining strong sales across virtually all dairy product categories at the same time dairy suppliers began refilling the food service pipeline, large government purchases of dairy products for food assistance programs and large bookings of products for export when prices were low.


Supply-side factors played a role as well, as milk supply limits imposed by cooperatives and other handlers slowed year-over-year growth in milk production to 1.4% in April after a 2.8% jump in March.

“Supply-side mitigation efforts that dairy producers have undertaken has been mostly voluntarily and has not involved a lot of culling of cows,” Plourd said, noting less aggressive feeding, changes in milking frequency and feeding milk back to animals.

Even though milk prices for the second quarter of 2020 will be “pretty horrific,” the dairy product and milk price rally, along with direct producer payments and government dairy product purchases, has rejuvenated the dairy farmer profit outlook, Plourd said. That might help spur milk production growth, which Blimling and Associates staff members anticipates will average about 1.5% higher for all of 2020.

Plourd said that the current “price explosion moment” is justified by short-term factors, but that is not likely to endure long term due to several factors.

On the supply side, corn remains cheap. Tracking long-term corn and milk price relationships, current corn prices correspond to a $16.05 per cwt milk price. Historically, an average corn price in the range of $3-$4 per bushel seldom yields an average milk price above $17 per cwt.

The historical relationship between crude oil prices and milk prices reflect similar market trends.


“This doesn’t say we can’t have a month or two or three of 17-dollar or 18-dollar milk or even higher priced milk in the current corn price environment, but it does suggest it is rare and doesn’t tend to endure,” he said.

Weighing on the markets, inventories of dairy products in cold storage continue to build. Retail sales are helping chew through some of those stocks, but food service growth remains slow.

In addition, holes in the general economy are serious: U.S. equity markets remain unsteady, unemployment is up and payrolls are down, and housing starts are weak. If unemployment levels prevail, food service and hospitality businesses will be slow to recover, he said. In addition, there’s economic uncertainty as generous federal assistance programs eventually end.

Plourd concludes the volatile period isn’t likely over. Prices could move higher if the impact of the coronavirus fades faster than anticipated, stimulus spending and cheap gasoline speed an economic recovery, and dairy milk supplies tighten. On the other hand, downside risks include a resurgence in the coronavirus, weak dairy product demand along with no slowdown in supply.

Cropp, Stephenson: A brighter but uncertain outlook

Like Plourd, University of Wisconsin – Madison’s Bob Cropp, dairy economics professor emeritus, and Mark Stephenson, director of dairy policy analysis, agree government dairy product purchases, export strength and slower milk production have all contributed to moving the outlook for milk prices from “dismal to brighter.”

Discussing dairy markets in their monthly situation and outlook podcast, Cropp said tightening supplies of fresh cheese at a time the food service industry begins to reopen from the COVID-19 pandemic might be a factor in price increase. The initial escalation of product prices made buyers sitting on the sideline willing to jump back into the market and make purchases for future needs before prices rise further, Stephenson added.

“We’ve had a little increase in the demand side and a little decrease on the supply side, but it’s hard to believe the increase in these product prices,” Cropp said. “The big question is whether they can hold at that level. That’s an uncertainty.”

Clouding the future, dairy product cold storage inventories continue to build. Stephenson also said health experts warn another “wave” of the coronavirus is possible, and the impact on unemployment and the general economy mean recovery in the jobs market could take until the end of 2021.

With that uncertainty ahead, Cropp and Stephenson urged dairy producers to look at risk management tools to lock in some of the recent price recovery.

Ledman: Seek stability in an unstable time

Speaking with members of the Professional Dairy Producers of Wisconsin (PDPW) during The Dairy Signal podcast on May 21, Mary Ledman, global dairy strategist with Rabobank, said the COVID-19 pandemic has had differing levels of impact on the world’s dairy industries, depending on season and location. However, few dairy farmers have been hit as hard as those in the U.S., she said.

The timing of the COVID-19 crisis in the U.S. was especially cruel because it hit after multiple years of low milk prices had finally given way to hope of higher prices, indicating a “catch-up” period of improved margins.

“The U.S milk producer has felt a much greater price impact, quicker, and to a much deeper level than what any other dairy farmer around the world has felt. Our prices, going from 17-dollar [per cwt] Class III prices to under 12 dollars – nobody else has felt that type of stress on milk prices.”

Ledman questioned whether the current escalating prices are fully warranted by market fundamentals. She has no doubt, however, that reopening food service channels, which had eaten through existing dairy product inventories, came to the market to fill their needs.

“You can never argue against market sentiment,” Ledman said. “People are going to the market … they’re buying … because they have demand for product. We first saw the surge at retail; now we’re experiencing the surge at food service.

The initial jump in food service buying is likely to be followed by a subdued period of “quiet” buying as the industry struggles on a path of slow recovery. Food service outlets were operating at 15% in the last week of April and early May, and are now operating at about 30%-50%. Ledman doesn’t see food service operating at 100% in 2020, even at 75% by the third quarter is optimistic.

One-third of all US. dairy products are consumed through food service, for cheese, it’s closer to 50%, Ledman said. The share of U.S. dairy products consumed through food service channels is substantially higher than most other countries, including the European Union. So while food service has been the growth engine for U.S. dairy sales, COVID-19 disruptions to the food service industry exposed U.S. companies to the greatest negative impact.

One dairy export market to focus on moving forward, regardless of geography, is milk powders, Ledman said.

Oil prices are highly correlated to the price of whole milk powder prices, Ledman explained. When oil prices fall, the purchasing power of milk powder importers typically decreases. Initially, dairy prices declined so sharply that it still triggered dairy exports. With increasing milk powder prices that demand will be more subdued.

A secondary barrier is logistics. With shipping from China to the U.S. and elsewhere locked down, fewer ships moving products from China to other countries are available to haul products, including dairy, on the return trip. Those logistical challenges may not be corrected until the fourth quarter of 2020.

In light of the potential of market fluctuations and volatility driven by factors that may push prices lower, Ledman urged producers to look at risk management tools and evaluate every aspect of their businesses.

“We’ve gone through this period of volatility, and there’s more volatility ahead – more, not less,” Ledman said. “Do whatever you can do to put stability into your business. Pick out the weakest link, whether it’s access to a slaughtering plant or your milk market; each producer should look at it individually. Look at where the volatility is within your system and what you can do to reduce it.”  end mark

Dave Natzke
  • Dave Natzke

  • Editor
  • Progressive Dairy
  • Email Dave Natzke