Milk prices fell at the end of the year, and Bob Cropp, University of Wisconsin-Madison dairy economist, warns that lower prices can be expected going into 2021.
“In November, the Class III price set a record high for the month at $23.34,” he says. “The Class III price for December will fall by more than $7 to below $16. But still, the Class III price will average about $18.25 in 2020, compared to $16.96 in 2021.”
Relatively strong milk production, the end of the Farm to Family Food Box cheese purchases and some further restrictions on restaurant and bars have brought down cheese prices.
“Cheese prices normally do decline after purchases for the holiday season come to an end. But prices this year fell much more than normal,” Cropp says.
On the CME, 40-pound cheddar blocks were $2.78 per pound at the end of October. Prices started falling in early November — and then rather sharply by the middle of November, reaching just $1.66 at the end of that month. Prices moved up and down a little in December, averaging $1.62 per pound.
Stronger butter prices
On the CME, butter prices have strengthened. “Butter was $1.36 per pound at the end of November and averaged $1.48 for the month of December,” Cropp says. Higher butter and nonfat dry milk prices will push the Class IV price higher, from $13.30 in November to about $13.50 for December. Class IV will average about $13.45 in 2020, compared to $16.30 in 2019.
According to Cropp, a lot of unknowns could impact milk prices in 2021. “Will there be government purchases of cheese and other dairy products, like the Farm to Families Food Box program we saw this year that pushed cheese prices and the Class III price much higher?” he questions.
“The vaccine for COVID-19 is now coming available,” he notes. “It will take some time before all who want the vaccine will get the vaccine. But by the second half of the year, the virus should be under much better control, allowing for restaurants and bars to more fully open, schools and colleges to return to in-classroom instruction, and sporting events, conferences, etc., returning to more normal, all of which should improve sales of dairy product for the second half of the year.”
The level of milk production and dairy exports will be important factors determining milk prices, Cropp says.
“There will be increased cheese production capability next year with the nation’s largest cheese plant in Michigan just starting up. Increased cheese production will put downward pressure on milk prices,” he adds.
Milk production continues to run well above year-ago levels. According to USDA, November milk production was 3% higher than the previous year. This follows the previous two months with increases of 2.3% each.
“This is far too much milk for the market to handle without lower milk prices,” Cropp says. Dairy herd expansion that started in July continues, with another 12,000 cows added from October to November. There were 62,000 more cows in November than a year ago, an increase of 0.7%.
On top of this, increases in milk per cow are extraordinarily strong, with November up 2.3%. November increases in milk production for the top five producing states were: California, 2.6%; Wisconsin, 2.7%; Idaho, 2%; New York, 2.1%; and Texas. 9.8%.
Dairy exports explode
Dairy exports were very positive in 2020. The volume of October exports was up 14% from the year before, a record for the month of October and the 14th straight month of year-over-year gains, according to USDA. The increase was led by whey product exports to China, up 328% from a year ago, and a 20% increase in nonfat dry milk-skim milk powder exports to Southeast Asia. October compared to a year ago showed nonfat dry milk-skim milk powder exports up 8.6%, whey products up 64%, and cheese down 12.8%.
“If the pace of exports holds, 2020 will be a record year in exports,” Cropp says.
Cropp predicts milk prices could be much less volatile in 2021. “But without some continuation of a Farm to Families Food Box program for the first half of next year and/or some base-type program implemented by dairy cooperatives to slow milk production, we could see the Class III price below $16 for the first quarter of 2021,” he says.
Class III prices could move into the $16s by the second quarter and the $17s for the last half of the year as things return more to normal. Class III futures currently show a pricing pattern like this. But unless the current rate of increase in milk production slows, these price predictions could be on the high side. And it will take time for things to return to normal.
USDA’s latest price forecast has Class III averaging just $15.60 in 2021 and Class IV averaging $13.60.