Current Progressive Dairy digital edition
Advertisement

Dairy economists offer sobering outlook

Progressive Dairy Editor Dave Natzke Published on 23 March 2020

With the backdrop of COVID-19, dairy economists Mark Stephenson and Bob Cropp offered a sobering – if not dire – outlook for U.S. dairy farmers, urging them to consider voluntarily cow culling to control milk supplies and head off further price declines.

Stephenson, director of dairy policy analysis, and Cropp, dairy economics professor emeritus at the University of Wisconsin – Madison, discussed the dairy situation and outlook in their monthly podcast, following release of the USDA’s latest Milk Production report on March 19.

advertisement

advertisement

Stephenson said major movements in the dairy marketplace were unlike anything he’s ever seen before. “All the things that were pulling prices higher at the end of 2019 have been reversed,” he said.

“We‘ve had almost five years of low milk prices, and now, we aren’t looking at a recovery year; we’re looking at perhaps the worst year in the last five years,” he warned.

”The world is turned upside down,” Cropp added. “Back in December and January, we were forecasting a really good year for dairy. Everybody was, with the milk price expected to be way above 2019. We’re in uncharted territory. I’ve never seen anything like it.”

Production growth disturbing

In addition to the impact of the new coronavirus on demand and consumption, both Cropp and Stephenson said the latest USDA Milk Production report revealed disturbing trends, including continued growth in cow numbers and stronger-than-expected milk production.

Read: Leap day factors into milk production jump.

advertisement

“Milk production has been on the stronger side than we expected. The data we have now, and the upward revision in the previous month’s data, points to a strong spring flush – and softer milk prices,” Stephenson said.

“That’s not good news for prices in the immediate months ahead,” Cropp said.

On its own, milk production growth would have lowered milk price recovery in 2020. Adding the impact of the coronavirus on domestic consumption and exports will do even more financial harm, they said. And while strong short-term retail sales are buffering dairy losses in the food service industry, that may not be sustainable.

Read: Schools are closed, but dairy still getting high marks.

“We can’t match complete volume out of retail that we would have under a more normal situation,” Stephenson said.

Cropp estimated the school milk program alone utilizes about 8% of all fluid milk sales. With schools closed, that milk will have to move into dairy products.

advertisement

“With everything closing down – schools, restaurants, conferences – it’s going to hurt butter and cheese sales,” he said. In addition, large-scale dairy product buyers are more likely to fill needs hand to mouth in case prices continue to move even lower.

Stephenson estimated there’s currently at least 2% more milk than markets can handle, warning that a 1%-2% milk supply surplus can result in a major collapse in prices. He’s heard some producers are looking at boosting production further to offset lost cash flow.

“if you’re trying to hang on to cows to produce a little more milk to keep the cash flowing in, you’re probably working against yourself,” he said. “Your short-term solution is not to produce all the milk you can to make a little bit additional cash flow on the business.

“Let’s voluntarily reduce production a little bit to see if we can help shore prices up,” Stephenson said, suggesting culling 2%-3% of all cows could help restore some price bottoms.

Stephenson cited 2008-09 and the deep reduction in prices that forced herd depopulations.

“I think we have to get back there, and we better do it very quickly,” he said. “We’re going to be facing some pretty tough choices.”

Recovery will be slow

Stephenson warned the impact of the coronavirus on milk markets will be long term.

“We have to think longer run here,” he said. “My concern is that the coronavirus is so rapidly evolving that we talk about it being a one- to two-week isolation, and we’re going to beat this thing. We will, but we have to be realistic. This will not be one to two weeks or one to two months. It will be at least four, five, six months or maybe more than that.

“It’s not the direct impact on dairy from [the] coronavirus, it’s what [the] coronavirus is doing to economies around the globe,” Stephenson said.

Cropp offered several “ifs” – an end to the coronavirus spread, a slowdown in milk production, improved economies worldwide, the reopening of schools and strong 2020 holiday sales at year end to boost cheese and butter prices – that could provide some milk price rally in the second half of 2020. However, he warned the rally would not be dramatic or fast.

DMC outlook

Due to a strong milk price outlook, there was little expectation the Dairy Margin Coverage (DMC) program would provide 2020 indemnity payments when the enrollment period was open late last year. That’s changed.

The DMC Decision Tool estimates margin ranges and payment probabilities based on current milk and feed futures prices. As of the close of trading on March 20, the DMC margin was still forecast to top $10 per hundredweight (cwt) in February. (The February margin is announced on March 31.) However, monthly margins are now forecast to fall to near $9 in March and then below $9 in April through August, bottoming out close to $8 per cwt in June. As a result, DMC margins have more than an 80% probability of falling below the top insurable level of $9.50 per cwt between April-June 2020.

“The program is working like it is supposed to,” Stephenson said. “There’s risk in the business, and if your business is at risk and you aren’t creditworthy and can’t get through the prices we’re likely to see, you need to make sure you have a safety net.”

Among a list of actions the National Milk Producers Federation (NMPF) is asking the USDA to take is the possible reopening of the 2020 enrollment period for 2020.

Webinars planned on March 25

Two upcoming free webinars, both scheduled for Wednesday, March 25, will provide additional insights into the current dairy situation and outlook.

  • Zach Myers, from Pennsylvania Center for Dairy Excellence, will host a monthly “Protecting Your Profits” conference call/webinar, beginning at noon (Eastern time). In addition to looking at current conditions, Myers will be joined by Christine Brodeur from Dairy Farmers of America (DFA), who will provide information on the Dairy Revenue Protection (Dairy-RP) program.

  • At noon (Central time), Marin Bozic, University of Minnesota dairy economist, will also discuss the current dairy situation. The webinar is hosted by the I-29 Moo University and the Minnesota Milk Producers. While registration is free, online pre-registration is required.  end mark
Dave Natzke
  • Dave Natzke

  • Editor
  • Progressive Dairy
  • Email Dave Natzke

LATEST BLOG

LATEST NEWS