Holstein Association on the complexities of milk prices amid COVID

No sector of American ag has been protected from market volatility and challenges in 2020. In this Holstein Association USA report, we look at the complexities faced by U.S. dairy producers and what could be on the horizon for milk prices.

The year 2020 was met with hopeful expectations for a new decade and new opportunities. Instead, the entire world has face uncharted challenges with economic pressure and uncertainty reaching every industry.

For the nation’s dairy producers, markets have experienced extreme highs and extreme lows. Dr. Robert Cropp, with the University of Wisconsin-Madison notes, “I think volatility is here to stay, not to the extreme we’ve seen this year, I mean, where you get an $8 dollar change from one month to another... With the coronavirus, there is so much uncertainty, exactly how well the markets are going to do. Food service constitutes about half of the market for cheese and for butter. Retail has picked up a lot but not enough to offset that.”

Cropp anticipates that the year’s overall average milk price should remain encouraging for dairy producers.

“As we end out the year, it’s still uncertain where we’re going to end up. We do get a little spike, Thanksgiving and Christmas, people buying a little more cheese, a little more butter. Overall for the year, a lot better than we thought it was going to be back in May when we had a class three price of $12.14,” he states. “So, we’ll average probably somewhere between the $17-18 dollar range there, which is not too bad of a year.”

Milk prices are sensitive to any supply and demand changes. Farmers and cooperatives that helped manage supply in the early days of the pandemic played an important role in later price recovery, and increased demand from the global market was essential too.

“We are now producing the type of dairy products that the world market wants to expand our exports. We export now about 15 percent of our milk production,” he adds. “Actually the month of May, we had some record exports. We exported about 17 percent of our milk production. That has a big impact on our milk price.”

The type of dairy products consumers demand has changed in recent years, and as a result, so has milk pricing.

According to Cropp, “The highest component value and the larger share of the farmer’s milk check in the last few years has been butterfat and it used to be protein, but that’s a change. Butter consumption has gone up. Whole milk consumption has gone up. We’re eating more cheese that also takes up more butterfat. That’s been a worldwide situation, not just the U.S.”

Responding to these market signals, diary farmers have answered the call for higher component milk by focusing their breeding programs.

Because many question marks lie ahead for the coming months and year, Cropp suggests dairy farmers take a closer look at risk management tools, including the Dairy Margin Protection Program and Revenue Protection Program.

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