Volatility in the dairy market continues as cheese prices remain unstable.

Bob Cropp, University of Wisconsin-Madison dairy economist, breaks down 40-pound block cheddar’s roller-coaster price ride:

Cheddar barrels were also $1 per pound in April but then rallied, reaching an average of $2.33 per pound in June and $2.40 in July. The price then fell to a low of $1.31 in August, averaging $1.49 for the month. The barrel price averaged $1.62 per pound during September.

Milk price impact

“These changes in cheese prices result in the Class III price going from a low of $12.14 in May to $21.04 in June to $24.54 in July to $19.77 in August, and it looks like September will be around $16.25,” Cropp says.

The rally in the Class III price was driven by a slowdown in milk production, partial reopening of restaurants, opening of schools with some having in-class instruction, and purchases of cheese by the government under the Farm to Families Food Box program, with the first round of purchases from May 15 to June 30 and the second round from July 1 to Aug. 30.

Dairy exports were also a factor. “World importers took advantage of U.S. cheese prices well below world prices in April and May, and increased their purchases,” Cropp says. “Cheese exports were 8% higher than a year ago in May and set a record high in June at 29% higher. But as U.S. cheese prices rallied and moved well above world prices, cheese exports slowed down in July but were still 5% higher than a year ago.”

Butter prices on the CME since January also have fluctuated. Butter averaged $1.88 per pound in January, averaged just $1.20 in April, reached an average of $1.82 in June, and has been trending downward since averaging $1.50 in August and $1.50 in mid-September, he says.

Similarly, nonfat dry milk averaged $1.26 per pound in January, hit a low of 84 cents in April, improved to $1.01 in June and went back down to 93 cents in August. Prices are showing some strength, averaging $1.04 in mid-September.

Nonfat dry milk prices have been aided by strong exports. “Nonfat dry milk prices remain competitive on the world market, whereas butter and cheese are well above world prices,” Cropp says. “Nonfat dry milk-skim milk powder exports compared to a year earlier were 24% higher in May, 77% higher in June and 52% higher in July.”

The question is, where are milk prices headed for the remainder of the year?

“The COVID-19 virus continues to dampen demand,” Cropp says. “Some schools and universities that started in-the-classroom instruction have had to revert back to all virtual learning. Restaurants have also been asked to scale back and practice social distancing. These actions curtail food service sales of dairy products.”

Cheese purchases under the third round of the Farm to Families Food Box program are running from Sept. 1 to Oct. 31. But exports of cheese and butter are likely to slow since prices remain above world prices.

“It is anticipated that there will be some surge in butter and cheese sales during the upcoming holiday period,” Cropp notes.

The 40-pound cheddar block price will be under pressure with the exceptionally wide spread between blocks and barrels. The spread in mid-September was 76 cents per pound. The level of milk production will be a key factor. With the strength in cheese prices, the October Class III price could approach $19 before falling perhaps to the $17s in November and high $16s in December.

More milk

But milk production is putting downward pressure on milk prices.

“Compared to a year ago, July production was up 20% and August was up 1.8%. That is a lot of milk,” Cropp explains. “Milk cow numbers declined in April, May and June, but increased 10,000 head in July, with no change in August. Milk per cow remains relatively strong, being 1.4% higher than a year ago.”

With COVID-19, there is much uncertainty forecasting milk prices very far into next year. USDA is forecasting milk production to increase 1.5% next year from just a few more cows but a relatively strong increase in milk per cow at 1.5%.

The increase in milk per cow seems to be on the high side after following a projected 1.4% increase this year. That is a lot of milk that will require some increase in domestic demand and strong exports for good milk prices.

Cropp says we still don’t know the pandemic’s impact on the U.S. economy, as well as the global economy, and how exports will be affected. “The impact of COVID-19 is very uncertain as to how schools and universities will operate. Will restaurants be allowed to open up more?” he asks. “Will the government continue dairy product purchases next year?”

O’Leary is the editor of Wisconsin Agriculturist, a sister publication.