12-month dairy outlook anticipates slightly profitable returns in 2020. COVID-19 continues to depress demand, but government programs, such as the Food Assistance and Food Box programs, have kept demand and prices up. While government programs will provide tailwinds to producer profitability, the level of profitability will depend on the use of risk mitigation tools.
Northwest Situation The market continues to adjust to the impacts of COVID-19, and we can now quantify its impact. Key shocks in the dairy market continue to be oversupply of milk and a major shift from restaurants to a more consumer based demand. However, the consumer market has not made up for the loss of demand in the restaurant industry. The National Restaurant Association survey shows that 1 in every 6 restaurants has effectively closed permanently since March, and only 40% of restaurant owners believe they will still be in business in six months without additional government support. While cheese demand is keeping up with supply, likely due to the USDA spending on the Food Box Program, cream and butter demand has not returned to pre-COVID-19 levels.
Northwest production increased 2% year over year in August; Idaho reported a 4% boost, one of the few states to increase milk production over last year. Washington reported a 1% decrease in milk production, while Oregon showed no change from the prior year. Nationwide, August production was down 1% year over year. National milk production continues to increase with total production up 1.6%.
Producers with price risk management strategies in place pre-COVID-19 are faring better than those who do not use DRP or hedging positions. In addition, the PPP loans and CFAP Phase 1 government assistance have helped many producers minimize losses.
Coronavirus Food Assistance Program (CFAP 2) CFAP 2 has been approved and qualifying operations can apply prior to Dec. 11, 2020. To qualify, dairy operations must be producing and commercially marketing milk at the time of application; however, operations that dissolved or have dissolved on or before Sept. 1, 2020, are eligible for a prorated payment.
Payment calculations are equal to the sum of $1.20 per cwt for actual milk production for April through August plus estimated production for September through December. A limit of $250,000 per individual, multiplied by the number of actively engaged members, still applies. The program is separate from CFAP 1 and any funds received are independent of CFAP 2.
The USDA also approved round 3 of purchases through the food box program, which effectuates box delivery to food banks and other nonprofits. This has helped prop up demand for liquid milk and block cheese. Block cheese demand spiked shortly after the extension of the program was announced.
National Situation Despite a decline in cow numbers in Q1, the USDA revised their previous July estimates up 8,000, and U.S. cow numbers are now back to levels seen at the start of the year. Production is also up, but at a lesser rate of 24 pounds per cow per month.
Margins are flattening due to increasing feed costs and weakening milk prices. After Class III reached over $20 in July, prices steadily declined and are now beginning to stabilize between $16.50 and $17.50 per cwt. Retail demand for block cheese has overshadowed processed cheese demand with the block/barrel spread reaching 99 cents. Block cheddar prices are back over $2 per pound. Class IV prices are likely to maintain negative producer price differentials due to compromised demand from foodservice outlets, which have seen decreased demand from their customers for cream and butter.
Feed – Corn Outlook for corn production is reduced, forecast to be down 378 million bushels from August to September at 14.9 billion bushels. Supply fell further than demand; as a result, the corn price rose 40 cents in one month to $3.50 per bushel.
Cold Storage Report The Cold Storage Report released Sept. 22, 2020, by the USDA’s NASS indicates cheese stocks were up 1% from a year ago. Butter stocks were up 22% from a year ago to 371.7 million pounds, the highest they have been since 1993, again indicating depressed demand from restaurants and foodservice vendors. This suggests Class IV processors will continue to have unprofitable returns.
