Dairy Outlook: Government purchases are expected to help milk prices.
The Class III price has been declining since May, when it was $18.96. The August Class III price will end up near $16. Lower cheese and dry whey prices brought the Class III price down, according to Bob Cropp, University of Wisconsin-Madison dairy economist.
Cheddar barrels and 40-pound block cheese were on the decline since mid-July. By early August, barrels had dropped to $1.30 per pound and 40-pound blocks to $1.63 per pound. Dry whey, which was as high as 70 cents per pound in May, was just 47 cents per pound in early August.
“Prices in recent trades have been moving up and down, but are now higher than early August,” Cropp says. “On Aug. 20, barrels were $1.50 per pound, blocks $1.73 and dry whey 52 cents. The lower dry whey price since May takes about $1 off the Class III price.”
As life has returned to more normal, with people eating out, fans returning to sporting events, and conferences and other public events being held in person, the sale of butter and cheese has improved.
“Compared to a year ago, second-quarter American cheese sales were 10.8% higher, and other cheese was 5.4% higher,” Cropp says. “But fluid milk is running below a year ago, as people eat out more rather than at-home meals.”
In June, fluid milk sales were 6.7% below a year ago.
“There is a concern that with increased cases of COVID-19 reinstating the wearing of masks again that consumers may back off some on eating out and attending public events,” Cropp notes. “That could hurt butter and cheese sales. But schools are scheduled for in-person learning this fall, which will be positive for fluid milk and dairy product sales.”
Dairy exports strengthen
According to USDA, exports for June compared to a year ago were up 7% for nonfat dry milk-skim milk powder, 16% for whey products and 67% for butter, but cheese exports were 13% lower. Cheese exports through June were still 2% higher.
“The volume of exports through June was 13% higher, and exports could end the year at a record high. U.S. butter, cheese and nonfat dry milk-skim milk powder prices remain substantially lower than foreign export prices,” Cropp says. Also, milk production in Europe and New Zealand, two major exporters, may be no more than 1% higher than a year ago. Port congestion has and may continue to limit exports.
Cropp believes milk prices will get some support from government purchases. USDA has announced the purchase of cheese and fluid milk products for delivery the last three months of this year.
“This will be in addition to USDA’s normal purchases of dairy products for school lunches and other food programs,” he says. “Also, it has been announced that the SNAP program [Supplemental Nutrition Assistance Program] will be increased by 25%, which could increase fluid milk and cheese sales.”
How milk prices finish out the year and going into next year will depend upon the sale of dairy products, level of exports and level of milk production.
“The growth in milk production needs to slow to support higher milk prices. USDA estimates July milk production to be 2% higher than a year ago, Cropp says. “This is a lot of milk considering August milk production a year ago was up 1.9%.”
After increasing each month since July 2020, cow numbers have declined for two consecutive months, with June down 6,000 head and July down 3,000 head.
Adverse weather takes toll
Adverse weather has slowed milk per cow. Compared to July a year ago, milk per cow was up just 0.7%. Weather impacted California, Idaho and New Mexico, where each state experienced 0.7% less milk per cow.
California had the same number of cows, resulting in 0.7% less milk; Idaho had 9,000 more cows, resulting in just 0.8% more milk; and New Mexico had 5,000 fewer cows, resulting in 2.3% less milk.
Milk production for other top states was: Wisconsin up 4.6%, New York up 2.8% and Texas up 7.2%. Wisconsin had 21,000 more cows, and milk per cow was up 2.9%. New York added 4,000 cows and Texas, 35,000 cows.
With lower milk prices and higher feed costs, milk production is likely to slow for the remainder of the year and going into next year. On Aug. 3, the USDA Drought Monitor showed drought affecting 47% of the cow inventory.
“Drought was affecting 64% of the alfalfa hay acreage and 37% of corn production,” Cropp says. “With tighter feed supplies, feed prices are going to be higher this fall and winter, which will likely impact milk per cow and cow numbers, as more lower-producing cows are culled from the herd.”
As of now, Cropp says it seems reasonable that Class III could be in the $17s by September and for the rest of the year, with low $18s not ruled out for November and December.
Class III futures currently only reach a high of $17.50 in November. USDA lowered its price forecast from July and has Class III averaging just $16.55 for the year, compared to $18.16 last year.
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