Market Forces Keep Dairy Outlook in State of Flux
Published: Friday, December 3, 2021
The following is from Dairy Management Inc.
Recent trends in production and herd sizes may be pointing toward a fundamental change taking place in the collective calculus of producing milk, a shift from repeated spurts of dairy herd and output expansion in the face of persistently low milk prices since 2014.
USDA data through September shows the fastest four-month drop in milk and milk solids production growth in two decades, a dramatic turnaround from spring months, when cow numbers and production were growing the fastest in more than a decade. This trend has continued in October. The unwinding of dairy cow expansion over the same period has equalled that of the great collapse of cow numbers at the height of the 2009 milk price debacle. Media reports of herd dispersals, particularly among the larger herds that have driven previous expansions, supports this thesis. High feed costs, other cost inflation and labor availability this year may also be playing a role in this turn of events.
Amid this backdrop, milk prices nationally this year have oscillated around the low $18 per hundredweight range and thus have not yet reflected any unusual developing supply tightness. Cheese production continues to claim much of the available milk increase, keeping a damper on Cheddar prices. But production of other key dairy products that affect milk prices has been shrinking and their prices rising, buoyed by rapid escalation in world prices.
Milk production and exportable supplies of dairy products have tightened considerably in Europe and Oceania in recent months, and import demand remains strong. Fourth-quarter data will be closely watched, with the sense that each month could shed a lot more light on this developing situation.
Milk Production
Revisions by USDA's National Agricultural Statistics Service to third quarter data show an even faster reduction in milk production and cow numbers than previous reports had indicated. U.S. national milk production was 4.7 percent higher than a year earlier in May but essentially flat over a year ago in September and down by half a percent in October.
This market-driven drop was almost as dramatic as the March-to-May reduction effected by the operation of stringent cooperative base plans in the onset months of the pandemic.
The cow-number trend is similar. In June, U.S. milk cow numbers were 148,000 higher than a year earlier, as large a one-year herd buildup as has occurred in at least two decades—but by September, the year-over-year numbers were up only 19,000 head and were down by 14,000 in October.
Annual growth in national average milk production per cow was 3 percent in May but slightly negative in September and October. And national milk solids production was 5.5 percent higher than a year ago in May but just .7 percent above 2020 in September. On a state basis, milk production growth was either negative or dropping, or both, in all but a few states in September.
The rapid easing in milk and milk solids production over the past two quarters has shown up in lower production than a year ago of most key dairy products, except cheese. Production growth of other than American—type cheese has dropped from 9.6 percent in April to 2.2 percent in September, but American—type cheese production annual growth has risen during the months of the third quarter, to 5.1 percent in September.
This year's milk and dairy product production growth trends are, in turn, reflected in dairy product inventory levels. Stocks of major dairy products, except cheese, continued to drop from a month earlier in September, both in actual volume and in days of total commercial use in stock.
Inventories of other than American-type cheese were up slightly in September but were below recent trends in stock level indicators. American-type cheese stocks, on the other hand, are becoming increasingly excessive by these same indicators.
Milk and feed Prices
The September margin for the Dairy Margin Coverage (DMC) program rose by $1.68 per hundredweight from a month earlier to $6.93 per hundredweight. The jump was driven by a mostly corn price-driven 98 cents per hundredweight drop in the feed cost formula and an 80 cents per hundredweight increase in the all-milk price, to $18.40 per hundredweight. The resulting $2.58 per hundredweight.
September DMC payment for $9.50 per hundredweight coverage will be the ninth consecutive such payment well in excess of $2 a hundredweight this year, with the nine-month average totaling $3.08 per hundredweight.
When USDA eventually tops up the payments for this year and last with the full dairy-quality alfalfa price figured into the feed cost calculation, the 2021 average payment for the first nine months will be $3.31 per hundredweight. USDA is expected to pair the announced regulation on the alfalfa price change with that for the separate Supplemental DMC program.
USDA reported that, as of Nov. 1, the 19,044 operations enrolled in this year's DMC program are expected to receive $1,080,286,151 in payments, for an average of $56,7266 per enrolled operation, based on previously announced margins. This represents payments for January through August and does not include the eventual top-up payments from the alfalfa price change.
Looking Ahead
As of mid-November the dairy futures were again strongly indicating there will be significant DMC payments to $9.50 per hundredweight coverage every month of 2021. But at the same time, the futures were also indicating that U.S. monthly average all-milk prices would stay next year mostly at or above $21 per hundredweight, which has not occurred since 2014.
Over just the past two months, USDA has raised its forecast of the 2022 calendar year U.S. average all-milk price by an unusually large $1.85 per hundredweight. Again, fourth quarter data will be closely watched for signs of further developments.
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