Dairymen Holding Off on Expansion
Published: Friday, August 28, 2020
The following is from Dairy Management Inc.
Milk prices have seen record fluctuations in recent months, driven by the unusual events associated with the COVID-19 pandemic, with more volatility expected given market uncertainties. April witnessed the largest one-month drop in the USDA-reported U.S. average all-milk price; June saw the biggest-ever one-month increase. New records were also set in both May and June for total U.S. dairy-export volume, expressed as a percentage of total U.S. milk solids production.
Total U.S. milk production per cow was essentially flat from a year earlier during the second quarter, while total dairy cow numbers, although up modestly from a year ago, do not yet show signs of resuming the explosive expansion that occurred during the first quarter of the year. This could help limit further price declines, even as downward pressure on demand from a sluggish economy, and the struggles of schools and restaurants to fully reopen, clouds the price outlook.
U.S. milk production was down by half a percent from a year earlier in May but was back up half a percent in June, as improving demand during early summer eased the need to limit production. Total cow numbers remain above a year ago but only in the 20,000 range, with no sign yet that the national dairy cow herd is resuming the rapid growth with which it began the year.
American-type cheese continued to outpace production of other cheese types during the second quarter, while butter and dry skim milk production significantly outpaced both. Expanded exports drove the dry skim production increase, which was almost entirely in the form of export-oriented skim milk powder, but improved domestic use absorbed the butter increase.
Cold storage stocks of both American-type and other cheese, and butter, dropped in June from the record-high levels since at least 2000 they attained in April and May, respectively. June ending-stocks of all three products were also down significantly from their April levels as measured by days of total commercial use in stock. These reductions reflect, among other factors, the significant government purchases and partial recovery in food service purchases that took place during these months.
June witnessed the largest one-month increases since January 2000 (when the current federal order pricing formulas were implemented) for the following constituents of those formulas: the monthly NDPSR cheese price; the monthly protein component price; the Class III skim milk price, and the Class III price. July showed the third-highest month-to-month increases in the first three of these and the fourth-highest increase in the Class III price. Together, these represent an unprecedented two-month price move in all four of these Class III-related federal order prices.
An all-but-inevitable consequence of this has been the unusually large negative Producer Price Differentials (PPDs) in the component pricing federal orders for both June and July. The phenomenon, which is infrequent, is expected to be short-lived, given price trends in July and August that are bringing federal order class prices back to more normal relationships.
Compared with these price movements, retail prices of the major dairy products have been relatively stable in recent months.
The Dairy Margin Coverage (DMC) program margin for June was $9.99 per hundredweight, $4.61 per hundredweight higher than the margin for May, just a month earlier. This was by far the largest one-month increase in the margin since the inception of its predecessor, the Margin Protection Program, in 2014. The previous largest margin increase in a single month was $1.84 per hundredweight in July 2016.
The record jump in the June margin came just two months after the April margin set the record for the largest drop in a single month. The record June increase was due almost entirely to a $4.50 per hundredweight increase in the U.S. average all-milk price from May. This was itself an all-time record one-month increase in the milk price, with the next highest at $2.60 per hundredweight, in April 2004. The June feed cost formula was down by just eleven cents a hundredweight from May a month earlier.
The July all-milk price will be one of the highest recorded since 2014 and will potentially rival those booked in the final months of 2019. Thereafter, however, the monthly all-milk price is expected to recede by several dollars per hundredweight to around $18 per hundredweight by the end of the year.
These price expectations reflect the currently swelling second wave of the coronavirus, and its consequent setback to the gradual recovery of food service demand for dairy products in recent months, plus its clouding of expectations for resumption of school use of milk and dairy products this fall.
Uncertainty is also surrounding the outlook for expanded milk production following the strong recovery in milk prices this summer. The dairy situation and outlook continues to be dominated by pandemic-related events and will continue to be so for many months to come.
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