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USDA OUTLOOK: USDA’s lower Class III milk price forecast is partially based on a relatively strong increase in milk production of 1.7%, continued decline in fluid milk sales, and weaker growth in butter and cheese sales.

Ag economist bullish on milk despite USDA forecast

Dairy Outlook: For 2020, University of Wisconsin's Bob Cropp predicts $1 higher Class III price than USDA.

University of Wisconsin-Madison dairy economist Bob Cropp believes milk prices will remain strong in 2020 despite USDA forecasting an average Class III price of $16.95 — about the same as 2019. Cropp believes the Class III milk price in 2020 will average about $18.

“The January Class III price was $17.05, more than $3 lower than the $20.45 Class III back in November,” Cropp says. “With weaker cheese prices, it looks like the February Class III will drop below $17. But if the spring flush is not strong, I could still see cheese prices recovering by late spring, with continued improvement through the fourth quarter. The Class III price could still be in the mid-$17s by second quarter, the higher $17s by the third quarter and reaching $18s in the fourth quarter. But a lot of uncertainty exists, and a lot can happen between now and year’s end.”

Last year, milk prices improved considerably over 2018. Class III averaged $16.96 in 2019, compared to just $14.61 in 2018.

Coronavirus impact

Uncertainty of the impact of the coronavirus outbreak in China on dairy trade and the world economy has caused Class III dairy futures to drop. In January, Class III futures were in the strong $17s for the first half of the year, reaching the $18s the second half, Cropp notes.

“But now, Class III is below $17 until June, and only reaches about $17.60 for a high August through November before falling back in December,” he says. “But I am still of the opinion that milk prices have a high probability of doing better than this.”

USDA’s lower price forecast is partially based on a relatively strong increase in milk production of 1.7%, continued decline in fluid milk sales, and weaker growth in butter and cheese sales. USDA has the average number of milk cows for 2020 just 3,000 head higher than 2019.

“This seems reasonable, considering that on Jan. 1, dairy replacements were 1% lower than a year ago, with replacements per 100 cows the lowest since January 2014,” Cropp says. “The number of replacements expected to calve during the next 12 months was also 1% lower. Dairy cattle slaughter has been running about 2% higher than a year ago.”

Cropp says with the financial impact of 4½ years of low milk prices, we can also expect a relatively high number of dairy farmers to exit the dairy business this year.

“So, the increase in milk production is the result of more milk per cow,” he explains. “The increase in milk per cow, leap year-adjusted, is 1.4%. This is a relatively high increase in milk per cow after a 1.1% increase last year. Rather mild winter weather has helped milk per cow. But lower-quality forages being fed until a new crop is harvested this spring and early summer is impacting milk per cow. An increase in milk per cow of 1% to 1.2% seems more likely.”

Domestic milk and dairy product sales may do better if the economy remains strong. Dairy exports improved for the last half of 2019, led by strong exports of nonfat dry milk/skim milk powder. Even cheese exports averaged higher for the year, he says.

Trade deals

Some positives for 2020 exports are an expected relatively small increase in world milk production and new trade agreements. A trade agreement with Japan has been finalized where the country will phase out tariffs over 15 years.

“Japan is a big importer of cheese, and we can expect an increase in cheese exports in 2020,” Cropp says. “The Phase 1 China agreement has been finalized, with expected increased exports in 2020. The U.S.-Mexico-Canada Agreement has been signed by Mexico and the U.S. and is waiting for Canada’s approval.”

Milk production in the months ahead will be a major factor in determining where milk prices will end up, Cropp says.

“If there is a strong seasonal flush in milk production, that would put downward pressure on milk prices. As of now, I don’t anticipate a strong flush,” he says.

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