Prospects for higher milk prices in 2020 were riding high in January and February, and then along came the coronavirus.
“The world has turned upside down. Back in January, we were forecasting a great year for dairy farmers. Milk prices were going to average way above 2019,” says Bob Cropp, University of Wisconsin-Madison dairy economist. Now with COVID-19, that’s no longer the case.
Cow numbers have risen, and an increase in milk per cow is not helping matters, Cropp says. “Cow numbers went up about 9,000 head from January and 21,000 from December,” he explains. “Production per cow is up 1.4%. That gives us 1.5% growth in milk production. Without exports, we can’t have that. There is quite a bit of expansion in the West, particularly in Texas and Colorado.
“Milk production has been on the stronger side than we anticipated,” says Mark Stephenson, director of dairy policy analysis at UW-Madison.
“That’s not good news for prices,” Cropp adds.
Enter COVID-19
With the coronavirus, cheese and butter markets went down and the powder market dropped. The futures market has the Class III milk price at $15 or $16 for the rest of the year, Cropp says. “We’re looking at a $15 Class III average price for the first quarter.”
“Powder prices have dropped like a brick,” Stephenson notes.
“Nobody anticipated this,” Cropp says. “There’s a bottleneck with our powder exports, and powder dropped below $1.”
According to USDA, there are two types of potential effects of the coronavirus on the U.S. dairy industry:
- supply chain disruptions
- lower global demand for dairy products resulting from weaker economic conditions
Since the coronavirus hit the U.S., “we’ve seen this shift from consumers getting their food through the food-service sector to retail,” Stephenson says. “Retail is scrambling, but we’re going to have more milk than our markets can handle. We can’t match the complete sale of dairy products out of retail.”
Hopefully milk production slows, Stephenson says. “We have seen dairy markets move from a knife’s edge. One percent to 2% more milk than a market wants can cause a major collapse in prices, and we probably have 2% more milk than these markets want.
“If dairy farmers could cull 2%, maybe 3%, of their cows, that could help.”
Farmers shouldn’t hang on to marginal cows, Stephenson says. “You’re probably working against yourself.”
Stephenson and Cropp are concerned that the coronavirus could stick around until this fall.
“This is probably going to last for five or six months,” Stephenson says. He notes that COVID-19 is not just impacting the U.S. economy, but also is affecting economies around the world.
“If we don’t get this under control, we’re going to be making some pretty tough choices,” Stephenson warns.
Dairy Margin Coverage Program
“While it looked like there was very little chance of getting Dairy Margin Coverage Program payments in 2020, it’s now looking like we will be getting payments maybe as early as March,” Cropp says.
“The program is working just like it’s supposed to,” Stephenson says. “Fifteen cents per cwt is cheap coverage. If Congress reopens the sign-up, those who haven’t already signed up for DMC should sign up. Reopening DMC enrollment for a second chance will be a way to get some money into the hands of dairy farmers.”
Stephenson advises farmers to talk to their lender sooner rather than later.
“If you are a dairy producer, if you know you are going to be short of funds this year, talk to the banker now. This is uncharted territory that we are in. I’ve never seen anything like this. Instead of looking at a recovery year, we may be looking at one of the worst years in the last five years,” Stephenson says.
He advises dairy farmers to be proactive and cut milk production by 2% or 3% now.
“Your short-term solution is not to produce all the milk that you can,” Stephenson says. “Try to reduce production a little.”