Milk Prices Collapsing

Lee Mielke
Mielke Productions

The COVID pandemic continues to send shockwaves throughout the dairy industry and dairy product prices are plunging to multi-year lows, pulling farm milk prices with them. Farmers throughout the country have dumped thousands of gallons of milk because processors cannot afford to convert it to products that will not be consumed or affordably stored.

The Agriculture Department announced the April Federal order Class III benchmark milk price at $13.07 per hundredweight (cwt.), down $3.18 from March, $2.89 below April 2019, and the lowest Class III price since May 2016, another victim of the COVID pandemic that has invaded our world.

The four month Class III average stands at $15.84, up from $14.71 at this time a year ago and $14.02 in 2018, but that average and farm profit margins will slip more as Class III futures settlements May 1 portended a May price bottom at $11.23, a level not seen in 11 years; June, $12.19; and July at $13.61, with a peak at only $15.79 in November.

The Class IV price is $11.40, down $3.47 from March, $4.32 below a year ago, and the lowest Class IV price since September 2009. Its average for the year stands at $14.78, down from $15.69 a year ago and compares to $13.13 in 2018.

A letter from 23 U.S. dairy cooperatives last week requested USDA call an emergency hearing to amend Federal Milk Market Orders and establish a minimum Class I milk price mover of $15.68 per cwt. for June, July and August.

Two days later, the answer was no. The USDA stated it “would not be able to complete a rulemaking proceeding that allows all industry stakeholders the opportunity to adequately participate and implement the proposal timely.”

The proposal drew comment from many in the industry, many of which opposed the plan. The Minnesota Milk Producers Association argued; “While we all want higher milk prices, arbitrarily bumping prices to a made-up number could cause more harm than good,” and warned; “While raising the Class I price would help those in Class I (fluid milk) areas, those farms without most of their milk in Class I would be left behind. While a mandated change in Class I milk price could affect government-related risk management programs, it could also limit hedging on the CME, which would adversely affect market liquidity.”

Bob Gray, editor of the Northeast Dairy Farmers Cooperatives newsletter, wrote; “A disservice was done to dairy farmers by rejecting this hearing out of hand. You hold the hearing, weigh the facts and make a decision based on the arguments presented. That is the proper way to proceed under the circumstances we find ourselves in today.”

Oil prices plunged to the lowest level ever April 20, another victim of the COVID pandemic, and lawmakers in Washington continue to pass billion dollar spending bills to keep their constituents afloat.

One such bill was announced April 17 by Agriculture Secretary Sonny Perdue, a $19 billion relief program that includes $16 billion in direct support for farmers and $3 billion in USDA food purchases.

The information is preliminary and could change as more details emerge but the Dairy and Food Market Analyst says; “If USDA is right in its cost estimates, we believe there is enough money to bridge dairy farmers through this restaurant-closure crisis,” but adds, there appears to be no aid for processors.

The DFMA reports that dairy farmers will receive payments totaling $2.9 billion, or an average of about $85,000 per farm or $5.20 per hundredweight for all milk that will be produced in second quarter 2020. There will be two tranches of payments, the first in May or June, and payments will be capped at a maximum of $125,000 per individual.

The DFMA’s Matt Gould believes farms with more than about 500 cows will receive the maximum payout and the remaining 90% of producers will receive less than the $125,000 limit.

USDA will purchase about $3 billion of dairy, meat and produce for foodbanks and initially spend $100 million per month on each of those three categories.

The package does not reopen the Dairy Margin Coverage Program and there was no mention of milk supply restrictions or payments to producers to reduce milk output, nor was there any reimbursement to producers for dumped milk.

Dairy purchases would likely include butter, cheese and fluid milk but Gould cautions that the purchases will not make up for the shortfall in restaurant demand. He estimated in the April 20 Dairy Radio Now broadcast that those losses, when added to those from schools and other institutions, approximate 20%. He warned that “As long as restaurants are closed, these government purchases will help, but not resolve the oversupply problem. Milk will continue to be dumped until restaurants reopen and/or producers cut back milk supplies.”

National Milk president and CEO Jim Mulhern praised the package, warning that “Federal dairy assistance is critically needed as the nation’s dairy farmers face an unprecedented collapse of markets resulting from the shutdown of much of the economy.” He said the plan should give important relief to some producers.

“Dairy’s fortunes have been especially grim,” he said, “given the perishability of our product, its daily harvest and the fact that the virtual shutdown of the food service market has wiped out more than one-third of our product demand. After five years of poor prices, many producers faced financial difficulties even before the coronavirus crisis. Without more aid, this crisis could be their demise.”

International Dairy Foods Association president Michael Dykes called the package “an important first step that begins to bring much-needed relief to the industry” and a “good-faith effort to ensure the dairy supply chain remains intact.”

Meanwhile, the U.S. Small Business Administration resumed accepting loan applications for the Paycheck Protection Program April 27 from approved lenders on behalf of any eligible borrower.

National Milk says “Dairy farmers are eligible to apply for the PPP, along with a separate initiative, Economic Injury Disaster Loans, for which the application window is also imminent.” But, both initiatives are first-come, first-served, and funds are expected to be depleted quickly after Congress replenished them.

The federation called for elimination of the proposed $125,000 cap on federal disaster assistance for dairy, citing a new economic analysis that projects a 58% decline this year in net cash income for U.S. dairy farms due to COVID aftereffects.

Most cash dairy prices saw some strength going into May. The Cheddar blocks closed May 1 at $1.2050 per pound, up 13.5 cents on the week but 47 cents below a year ago. The barrels finished at $1.19, 14 cents higher, but 47.25 cents below a year ago.

Midwest cheese producers continue to find milk at discounted prices and output has increased at some of the plants that recently cut back. Food service demand is more positive but sales are not where they were last year but are trending higher according to multiple producers. Cheese storage remains a concern.

Western cheese sales were unchanged to a bit higher. Retail demand remains stronger than normal and food service requests continue to revive but are still lower than usual as increased takeout orders is helping restaurants keep cheese orders coming. Cheese output is active but inventories are ramping up as sales are still below output. Most manufacturers have enough cheese storage but are concerned they may run out if the quarantine persists for a longer time.

Cash butter got to $1.1975 April 30 but closed May 1 at $1.1875, up 4.25 cents on the week, ending seven weeks of loss, but $1.0850 below a year ago.

Butter plants are actively churning and cream remains widely available. That said, a number of contacts do not expect the easily accessible cream stores to remain as they are. Cream prices are trending higher and plant managers say domestic retail business is busy as customers take advantage the low prices.

Plentiful cream is keeping western butter output heavy. Demand from retail has slowed from the panic buying a few weeks ago. Some contacts report a slight increase in restaurant purchases due to drive-thru and takeout meals but butter usage is typically very light for takeout items. Educational institutions and much of their food service activities are shut down though some schools are providing meals, but again, butter usage is light and not close to normal volumes. Some parts are planning to reopen restaurants in the next month but it may take time for the food service segment to get back up to normal levels, says DMN.

Grade A nonfat dry milk closed May 1 at 79.25 cents per pound, 1.75 cents lower on the week and 26 cents below a year ago.

Whey saw a May 1 finish at 39.50 cents per pound, up a penny on the week and 4.75 cents above a year ago.

Reports warn that the U.S. food supply chain is breaking as primarily meat packing plants are being idled due to employee COVID sickness. The president issued an Executive Order to keep such facilities operating yet protect their employees.

FC Stone’s April 28 Early Morning Update stated; “It looks like the average animal processing plant, excluding poultry, has more than twice as many production line and handling employees as the average dairy plant.”

“The averages probably hide a very skewed distribution of plant sizes though,” says FC Stone. “Tyson’s Waterloo, Iowa, hog plant is their largest and has 2,800 employees while their Logansport Indiana plant has 2,200 employees. The JBS cattle plant in Greeley, Colo., has 6,000 employees. Not all of these would be production line material handling, but a large percentage would be.”

FC Stone adds that “The new cheese plant in St. Johns, Mich., will be one of the biggest in the country but will only have about 290 employees at the plant. In 2011, the Hilmar Dalhart, Texas, cheese plant had about 250 employees operating a very large plant.”

“We’re not saying dairy plants are immune or we won’t see some shutdowns due to an outbreak, but the slaughter plants look a lot more vulnerable than the dairy plants,” FC Stone concludes.

Looking ahead, dairy farm profitability is poised to fall to levels not seen since the disastrous year of 2009. A lower All Milk price was not offset by lower feed costs so the March milk feed price ratio fell for the fourth month in a row and is at the lowest level since July 2019.

The USDA’s latest Ag Prices report put the ratio at 2.23, down from 2.34 in February but compares to 2.14 in March 2019.

The index is based on the current milk price in relationship to feed prices for a dairy ration consisting of 51% corn, 8% soybeans and 41% alfalfa hay. In other words, one pound of milk purchased 2.23 pounds of dairy feed containing that blend in March.

The All-Milk price averaged $18 per cwt., down 90 cents from February but was 40 cents above March 2019. California’s All Milk price slipped to $17.60, down $1 from February but 30 cents above a year ago. Wisconsin’s, at $18.10, was also down $1 from February but is 80 cents above a year ago.

The national average corn price averaged $3.68 per bushel, down a dime per bushel from February but 7 cents per bushel above March 2019. Soybeans averaged $8.46 per bushel, down 13 cents from February and 6 cents per bushel above a year ago. Alfalfa hay averaged $175 per ton, up $4 per ton from February but $11 per ton below a year ago.

Looking at the cow side of the ledger; the March cull price for beef and dairy combined averaged $67.50 per cwt., up $1.70 from February, $4.70 above March 2019, but is $4.10 below the 2011 base average of $71.60 per cwt. ❖