USDA’s World Agricultural Supply and Demand Estimates Outlook has the all-milk price at $17.65 per cwt, up from $16.60 in December.

But Cornell’s Chris Wolf, a professor of agricultural economics, thinks that’s wishful thinking.

“Everything else equal, I’m a little more bearish on that,” he said during the recent 2021 Northeast dairy outlook webinar put on by Farm Credit Northeast. “It’s going to be an interesting year.”

Higher ending stocks and production, and concerns over exports, seem to point to lower prices in 2021. But there are a lot of unknowns: Will the government make additional dairy purchases now that a new presidential administration is in office? How will high unemployment affect domestic consumption? And what will happen to exports?

Production and stocks higher

The Program on Dairy Markets and Policy, for which Wolf is a contributor, showed average daily milk production at about 600 million pounds for November, its most recent report, which is above average for the past three years. That’s way down from the 636 million daily pounds in March, but it is still 3% higher than at the same time in 2019.

Cow numbers, which dropped to 9.35 million head in June, rebounded to 9.4 million head in November, the highest number since 2017.

The World Agricultural Supply and Demand Estimates report is estimating U.S. milk production for 2021 at 226 billion pounds, up 1.7% from last year.

Milk per cow for November was 64.01 pounds, 2 pounds higher than in 2019.

Ending stocks of cheese and butter are up over the previous year. In fact, the 250 million pounds of butter currently in cold storage is the highest since 1993, Wolf said.

Cheese stocks for November were 760 million pounds, higher than the previous year, but trending lower than 2018. Dry whey stocks in November were 2.2 million pounds, lower than the previous two years. Nonfat dry milk ending stocks were at 8.5 million pounds, much lower than 2018’s 9.6 million pounds, but higher than November 2019 ending stocks of 7.5 million.

The all-milk price averaged $19.95 in the fourth quarter of 2020, Wolf said. But if you add payments from Dairy Margin Coverage and the Coronavirus Food Assistance Program (CFAP), the all-milk average shoots up to $21 per cwt. Keep in mind, though, that none of this accounts for negative producer price differentials and where a dairy farmer pools their milk.

Average farm-gate prices vary greatly among farmers, and by most accounts, most farmers got much less than $19.95 per cwt. Also, a big percentage of dairy farmers didn’t sign up for DMC last year.

Still, farmers continued producing milk.

"These high prices and government payments have not sent a signal to cut back on milk production,” Wolf says.

Mixed export signals

The value of dairy exports shot up again to well above $6 billion with nonfat dry milk and whey leading the pack, followed by cheese and, to a much lesser extent, butterfat.

Countries in Southeast Asia surpassed Mexico as the largest export market for U.S. nonfat dry milk in 2020. And whey exports to China rebounded sharply as the country has largely rebuilt its pork herd after a terrible African swine fever outbreak.

But Mexico is a concern, Wolf said. The country, which is the biggest dairy export market for the U.S., is struggling economically, largely because of COVID-19.

“I am also concerned about export market opportunities and bottlenecks," Wolf said. "Mexico's economy is not healthy at all right now. Asia seems to be doing much better, but sometimes China buys enough to meet their needs and then just turns off the tap."

Demand at home

More consumption at home would help offset any potential export losses, but if restaurants and food service remain closed or at less than 100% capacity, that’ll cut into any hopes of a recovery.

“Until COVID is under control, we cannot go back to food away from home, which drives a significant amount of dairy consumption," Wolf said. "With a great deal of effort and luck, maybe we get back to something resembling normalcy by the middle of the year. I do know that when this struck last March, I didn't think we would still be dealing with it at this level at the end of January 2021."

Add to that, lots of people are still out of a job. The unemployment rate was at 6.7% in November, but that’s likely gone up as recent unemployment benefits shot up this month.

“We’re eating at home, but we’re going to the supermarket less, at least right now,” Wolf said.

With new COVID-19 variants now circulating and the vaccination process slowing down — at least as of this writing — it’s likely that the pandemic will be around for several months, if not longer.

Government help and a prediction

The big wild card during the entire COVID-19 crisis was the government. There is no doubt that dairy farmers benefited from CFAP and the Farmers to Families Food Box Program.

Between CFAP 1 and 2, close to $3 billion was paid out to the dairy industry. Another round of CFAP is open through Feb. 26.

Of the $5 billion spent on the food box program, about 20% was spent on dairy purchases, Wolf said. That means a lot of milk, cheese and other dairy products that got an end market, even if people went out to eat a lot less and supermarket traffic declined.

But there is a new administration in charge, and there is no guarantee that any of these programs will be continued, even if the pandemic remains or gets worse.

Wolf said that the Biden administration may instead push for an expansion of Supplemental Nutrition Assistance Program benefits, which would still help dairy purchases but not likely to the extent of the food box.

Commodity prices are shooting through the roof as corn and soybean markets tighten. Wolf said that this could have the effect of driving down milk production if farmers decide to cull cattle and cut back to save on feed prices.

There is a big spread between Class III and IV prices right now, but Wolf predicts that supply and demand forces will merge those two closer together by the end of the year. Still, with all the uncertainty, he’s on the bearish side of the milk price fence.

“As for my own forecast, I cannot out-forecast the CME for Class III or IV prices," Wolf says. "While the futures markets are not particularly good at forecasting sudden changes due to supply or demand shocks, they are very efficient at forecasting in general. The question then becomes what the ‘basis’ will be, which depends on the pool value and many other factors. I think average U.S. $17 all-milk is a reasonable forecast unless feed prices stay at $5 a bushel corn or big government dairy purchases continue.”