Drivers for the dairy industry include rising feed costs, lower global demand and record high milk prices.
12-Month Profitability Outlook
Northwest FCS’ 12-month dairy outlook suggests profitable returns. The USDA all milk forecasted price reached a record high at $25.75 per cwt, up 39% from 2021 prices. Record milk prices will offset headwinds from increasing feed and operational costs. Declines in global dairy production will create tailwinds for sustained elevated milk prices and keep U.S. dairy exports competitive.
Northwest Situation
Strong Class III and Class IV contract prices have supported favorable milk prices for producers. Class IV and Class III milk reached record prices in April and May. May’s Federal Milk Marketing Order (FMMO) Class III prices surged to $25.21 per cwt, a 33.2% increase year over year. Since September 2021, Class III milk prices have steadily increased with an average monthly gain of $1.03 per cwt. Steady upward milk price trends have been driven by a declining domestic herd and inflation, which has hit a 40-year high. April’s FMMO Class IV prices also posted a record payout of $25.31 per cwt, a 62% price increase from 2021. Northwest producers on average received $27 per cwt for their milk in April 2022. While Class III futures prices have settled at $22-23 per cwt in June, if these prices hold, they would still be over $2 per cwt more than the five-year average.
Increased feed expenses have created headwinds for producer profits. Despite record milk prices, escalating feed costs have left Northwest dairies concerned about hay availability and dairy margins. Hay prices are 51% higher than a year ago driven by low hay inventories, which are 28.3% lower than the five-year average. An abnormally cool and wet spring has delayed first cuttings in the Northwest, keeping hay prices elevated at all-time highs. Dairy quality hay availability will vary greatly by region and largely driven by weather conditions. For Idaho dairies, net feed expenses rose an average of $1.01 per cwt of milk produced from 2020 to 2021.
Feed costs aren’t the only expenses increasing. Dairy margins are being further squeezed by rising operating costs. Fuel costs have more than doubled since 2021, and dairies paid an average of $5.72 per gallon for diesel in mid-June. Between December 2020 and December 2021, the average milk price per cwt for Idaho dairies to breakeven rose from $15.91 to $17.56, a 10.3% increase. Anecdotal reports for 2022 indicate that the breakeven milk price per cwt ranges from $18 to $20 for dairies in the Northwest.
Northwest Milk Prices (monthly, in U.S. dollars)
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Dairy producers are in a quandary. High milk prices would normally encourage dairy producers to focus on expansion, however, increasing operating costs have caused producers to focus on managing expenses and halted proposed expansions. Yet, dairy producers are optimistic. Milk prices have been bullish and strong U.S. exports will likely keep dairy prices high. Dairies of all sizes in the Northwest should be profitable this year. Producers should carefully consider risk management programs (like dairy revenue protection, dairy margin coverage, and/or hedging instruments) to serve as a cushion if milk prices decline.
National Situation
The 2022 annual milk production forecast decreased by 300 million pounds in June driven by lower milk per cow than initially projected. Price forecasts for butter, nonfat dry milk (NDM) and cheese increased from the previous month based on recent price strength in the futures markets and strengthening dairy demand. The June whey price forecast remains stable from May’s price of $0.6297 per pound. Higher forecasted cheese prices reinforce higher Class III prices placing cheese processors in a difficult position. Record butter prices lifted Class IV prices above Class III prices giving butter manufacturers a competitive advantage to compete for limited milk supplies. Cheese processors will likely limit excess inventories.
The all milk price forecast was lowered to $23.55 per cwt for 2023, down $2.20 per cwt from 2022 but still over $5 higher than the 2021 all milk price. Higher national milk prices are being driven by a smaller national herd, increasing operating expenses and poor pasture conditions. Unlike typical years where milk production per cow increases during spring flush (March-April), the effects were minimal this year with milk production lagging 60 pounds per cow lower than in 2021. Less milk per cow coupled with a 98,000 head loss year over year supports further upward milk price pressure.
Historic and Forecast Milk Prices (annual, in U.S. dollars)
Retailers have shifted the burden of higher milk prices onto consumers with total dairy prices rising 11.8% year over year. Fluid milk prices rose to a national average of $3.33 per gallon on June 13, 16.9% higher than a year ago. Despite consumer demand for dairy products remaining strong, inflation is impacting consumer confidence with consumer sentiment plummeting to a record low in May. As dairy product prices keep rising and consumer’s grocery dollars are stretched thin, retailers have already seen greater price consciousness. Some consumers are switching to cheaper, generic brands or less expensive types of milk, organic whole milk sales (which has a $1.62 premium over conventional whole milk) fell 1.4% year to date. Consumers will likely further cut back by buying smaller quantities as dairy prices and the overall cost of goods continues to rise.
Export demand has continued to be strong with U.S. wholesale prices remaining competitive on the global export market. April dairy exports reached 1.21 billion pounds, a 79-million-pound increase from April 2021. Lactose exports set a record in April with 95.8 million pounds moving offshore. U.S. exports are benefiting from rising global dairy prices supported by a decline in the global dairy herd. Exports will likely decline slightly into 2023 with projected total U.S. dairy exports falling 0.5% from 2021 sales.
International Situation
Global milk production is constrained as the major dairy exporting countries (U.S., EU, New Zealand and Australia) remain below pre-pandemic production levels. Increasing operational expenses are slowing expansion efforts and creating headwinds for global dairy growth. Consumers’ aversion to rising food costs, Chinese lockdowns, slowing global economic growth and continued supply chain challenges will likely reduce overall global dairy demand. Despite these challenges, lower global production will support strong export demand.
A combination of environmental policy constraints, global supply chain issues and inflated expenses have led to a contraction in European milk production. The European dairy herd peaked in 2015, and dairy numbers have steadily declined since then, with 1.4 million fewer cows today. Lower milk production in six of Europe’s seven largest production regions has increased relative demand for existing milk placing upward pressure on dairy prices. In response, European milk prices average 25% higher year over year. Dairy manufacturers are carefully upholding contract obligations in fear that if they let go of current volumes, they may not be able to acquire dairy products in the future. Despite promising milk prices and demand, European dairy producers are unlikely to expand their operations.
Australian milk production for the 2021-22 season (July 2021-June 2022) fell 3.5% year over year. Smaller herds, increases in feed costs and rising packaging expenses were cited as the primary drivers of lower milk production. Australian milk production for 2022-23 is forecast to remain flat as increased margin risks will likely offset higher milk prices causing producers to maintain current herd levels. In New Zealand, poor pasture conditions from dry weather have greatly diminished dairy feed supplies and some dairies are drying off cows early to compensate. New Zealand’s national milk production fell by 5% year over year and will likely decline further this year as poor pasture conditions from less-than-ideal weather are expected to remain for the rest of the year.
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