Bob Cropp, University of Wisconsin-Madison Extension dairy economist, says it is somewhat surprising in this roller-coaster price year to see considerable strength in October milk prices.
“The Class III price was $24.54 back in July but fell to $16.43 by September,” Cropp notes. “It looks like Class III for October will increase to about $21.40, reaching or surpassing the previous record for the month of October, set in 2014 at $21.35.”
Higher cheese prices
Cheese and dry whey prices have increased, pushing Class III prices higher. On the CME, 40-pound cheddar blocks have been above $2 per pound since early September, and as of Oct. 20, blocks were $2.74. Cheddar barrels also hit $2 per pound on Oct. 6, and by Oct. 20 were $2.30. Dry whey had been holding around 33 cents per pound, but on Oct. 20 it hit 38 cents, adding more than 30 cents to the Class III price, Cropp says.
Factors contributing to higher cheese prices include cheese production, retail sales, government purchases and exports.
“The latest dairy product production report for August shows American cheese production 1.3% lower than a year ago, with total cheese production 2.1% lower,” Cropp says. “As consumers continue to eat more meals at home, retail cheese sales have been relatively strong. The government is purchasing cheese under the third round of the Farm to Families Food Box program, which ends on Oct. 31.”
With U.S. cheese prices above world prices, Cropp says it is surprising that August cheese exports were 17% higher than a year ago. Dry whey exports were 54% higher than a year ago, with almost all of the increase contributed to China as it attempts to build back its swine herd.
Butter prices have been rather weak all year, Cropp notes. “A year ago, butter was over $2 per pound. Butter has been below $2 per pound all year, being as low as $1.15 in April and only as high as $1.90 in June. It is now $1.49,” he says.
But nonfat dry milk prices have improved with very strong exports. August exports were 35% higher than a year ago. Nonfat dry milk was $1.03 per pound in early September and is now $1.13.
“This will push the Class IV price from $12.75 in September to about $13.55 in October, but still leaving more than a $7 spread between Class III and Class IV prices,” Cropp says.
Class III dairy futures remain strong for the remainder of the year, with November at $21.44 and December at $19.38.
“Whether Class III will hold at this level is not certain, but it looks like Class III for the year will average over $18 compared to the 2019 average of $16.96,” Cropp says.
Uncertainty surrounds milk prices in 2021.
“The level of milk production, domestic sales and exports are crucial. But also important will be how soon the COVID-19 virus slows down,” Cropp explains. “Until it does, restaurants will not be fully open, and many schools and colleges will be virtual learning rather than in person instruction. Major sports will not have audiences in the stands, and major events and conferences will not be held, or if they are, they may be virtual.”
The COVID-19 virus is hurting not only the U.S. economy but also the world economy, which impacts domestic sales and exports.
Milk production continues to run at a relatively high level, putting downward pressure on milk prices. USDA’s report on September milk production showed it was 2.3% higher than a year ago — the result of 0.4% more cows and a 2% increase in milk production per cow.
According to USDA, milk cow numbers have been increasing since July, with July up 7,000 head, August up 4,000 head and September up 5,000 head. Of the 24 reporting states, 16 had more milk. All five leading dairy states, which produce more than half of the nation’s milk, had higher production.
USDA is forecasting 2021 milk production to be 1.4% higher than this year, with just a 5,000-head increase in the average herd size and a 1.4% increase in milk per cow.
“At this level of milk production, it will take good domestic sales and exports to provide good milk prices,” Cropp says.
He thinks as of now, it is reasonable to assume 2021 milk prices could be lower and less volatile.
“Class III could be in the $16s during the first half of the year, reach the $17s in the second half and average in the high $16s or low $17s for the year,” Cropp says.
According to Cropp, if the COVID-19 pandemic is under control, there could be a good rally in milk prices for the second half of the year. “But this is far from certain. Dairy farmers should seriously consider signing up for the Dairy Margin Coverage program for 2021,” he says. Sign-up for the program ends Dec. 11.