In mid-April on the CME, 40-pound cheddar blocks were $1 per pound. But the price rallied, with blocks setting a record in June at $2.81 per pound. They continued to increase, setting another record at $3 per pound on July 13, says Bob Cropp, University of Wisconsin-Madison dairy economist.

“But $3 per pound lasted just one day, with prices falling ever since,” Cropp says. “Blocks were $2.23 per pound the end of July, and averaged $2.64 for the month. Cheddar barrels were also a low of $1 per pound in April, reached $2.42 in June and $2.46 in July, but fell to $2.23 the end of July, averaging $2.40 for the month. These price changes resulted in the Class III price to increase from $12.14 in May to $21.04 in June and $24.54 in July.”

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Unfortunately, milk prices are now headed lower, with the August Class III price around $19.45 and possibly heading to the $16s for the reminder of the year, Cropp predicts. “Both 40-pound cheddar blocks and cheddar barrels have weakened considerably,” he says. “The 40-pound cheddar blocks got as low as $1.58 per pound and are now $1.71. Cheddar barrels are now $1.37. Unless prices strengthen some, Class III could fall below $16. Current Class III September futures are $15.41.”

What has changed since June and July to result in lower cheese prices?

“On the supply side, milk production declined 0.5% in May and was up just 0.8% in June as dairy cooperatives implemented base excess plans on their producers,” Cropp says. But dairy producers have responded to the higher milk prices in May and June. July milk production was 1.5% higher than a year ago. After cow numbers declined for four months, July cow numbers increased by 2,000 head and were 0.4% higher than a year ago. Milk per cow improved to 1.1% higher than a year ago.

COVID-19 impact continues

Several things happened on the demand side. “The bright spot is home consumption of dairy products has and continues to run well above year-ago levels,” Cropp notes. “Restaurants partially reopened, and there was a need to buy cheese and replenish their stocks.”

In July, a surge in the coronavirus resulted in restaurants being instructed to cut back on openings. “It also looks like food service will be negatively impacted, as many schools and colleges open this fall with virtual learning, high school and college fall sports being canceled, professional sports to have no fans in the stands, and conferences and other major events being canceled,” Cropp says. “These moves hurt beverage milk, cheese and butter sales.”

Under the Farmers to Families Food Box Program that operated from May 15 to June 30, the government bought a lot of cheese. The second round of the program operated from July 1 to Aug. 31, but the amount of cheese purchased was reduced.

Dairy exports rise

Demand was also boosted by higher dairy exports in May and June. Nonfat dry milk-skim milk powder and cheese were below world market prices in May and early June. World customers took advantage of these lower prices and increased purchases.

“May dairy product exports were the most in two years, with record exports of nonfat dry milk-skim milk powder and improved exports of cheese and whey products,” Cropp says. “June exports were up 28% by volume from a year ago. Cheese exports were a record for any given month. Nonfat dry milk-skim milk powder exports were up 77%, butterfat exports were 15% higher, and total whey products were 8% higher, with dry whey 41% higher as China purchases more whey products as they restock their swine herd following last year’s African swine fever outbreak.

“But July exports may have been lower, particularly for cheese, as June and July prices were well above world prices.”

There remains a lot of uncertainty as to where milk prices are headed for the remainder of the year and for next year, Cropp says. Until the coronavirus comes much more under control and things return to more normal, the demand for dairy products will be depressed.

“Dairy exports could continue to do fairly well, as U.S. prices have now become more competitive with world prices,” Cropp says. “Also, world milk production in other major exporters continues to increase at a relatively slow rate, which could give the U.S. opportunities for more exports. But with the worldwide spread of the coronavirus, there is a concern that worldwide recession could dampen demand.”

The level of U.S. milk production will be very important. USDA is forecasting 2021 milk production to increase 1.9%, adjusted for the leap year in 2020, as a result of just 0.1% more milk cows and 1.8% more milk per cow. If this materializes, it will take favorable dairy exports to support higher milk prices.

Class III futures are now at $15.41 for September and in the $16s for the remainder of the year. “But prices could strengthen some with milk production seasonally lower in August and September,” Cropp says. “As in the past, the demand for cheese and butter is expected to increase during the holiday season. There is also a third round of the Farmers to Families Food Box that runs from Sept. 1 to Oct. 31, but at lower purchases than that of the first two rounds.”

Negative PPDs

Dairy producers have not seen the same strength in their milk price as the increase in the June and July Class III prices; this is due to relatively high negative producer price differentials (PPDs) in the seven federal order markets that have multiple component pricing.

“While cheese prices have decreased, bringing down the Class III price, the spread between the advanced Class III and Class IV prices for August is over $10,” Cropp explains. “Since the mover of Class I is the average of the advanced Class III and Class IV prices, the August Class I price will be below the August Class III price, resulting in a negative PPD.

“As Class III declines further and the spread between Class III and IV narrows, negative PPDs will decline and may become positive again later this year.”