Dairy Market Snapshot
Milk producers are cautiously optimistic as milk futures suggest stable, slightly profitable returns in 2020. However, seasonal adjustments to milk prices are weighing on producer sentiment. From Dec. 1 to Dec. 27 spring Class III milk futures decreased from $19 per cwt to $17 per cwt. While a $2 per cwt drop in price is pessimistic, all 2020 Class III contracts are trading within a $0.60 range. Class IV futures contracts are more optimistic as futures climb from around $17 in January 2020 to a high of $18.25 per cwt in September 2020.
Nationally, milk production increased 0.9%. In Idaho, Oregon and Washington specifically, November production was up 2.2% year over year with an additional 21,000 head and a modest 2 pounds per head production growth over this time last year. Milk processors will provide headwinds to herd and production expansion in 2020.
Processors are more actively managing the balance of milk supply with regional processing capacity. When milk supply exceeds processing capacity, cooperatives and private processors must market milk at a discount. To recuperate and manage costs associated with marketing excess milk, processors are implementing production caps and stiffer penalties for over production. Producers over their allocation may transfer allocations, adjust feed rations or sell cows to stay within their allotment.
Dean Foods, the largest processor and direct-to-store distributor of fresh fluid milk in the U.S., filed for Chapter 11 bankruptcy in November 2019. A combination of both industry trends and company-specific events led Dean to seek Chapter 11 relief. Walmart opened their own private dairy manufacturing plant in Indiana, which displaced a significant amount of Dean’s sales volume. Consolidation of plants in early 2018 following the loss of fluid sales volume reduced Dean’s processing and marketing efficiencies. A steady decline in fluid milk consumption, 2% per year, compounded the loss in efficiency. Dean Foods is maintaining operations through bankruptcy filings, which signifies a sale of assets in 2020 is possible.
Though fluid milk sales fell dramatically over the past decade, other dairy product sales have more than made up for these losses. USDA data show per capita cheese sales continue to be strong. Per capita butter use is the highest since 1968.
Dairy Cow Slaughter
The first half of 2019 saw the highest dairy cow slaughter since the USDA report began in 1986. A total of 1.638 million head were slaughtered in the first half of 2019. However, higher per head production muted the impact of the higher slaughter rate.
Dairies are retiring older cows and quickly replacing them with heifers. Dairy heifers held for replacement on July 1 totaled 4.2 million, the smallest July 1 number since 2014. This should tighten dairy replacement markets across the U.S. Markets have seen price appreciation for fresh cows, springers and bred heifers, although primarily for high quality animals.
Regionally, supply management may necessitate liquidation of cows, temporarily suppressing Northwest cow values.
Cold Storage Report
The cold storage report released Dec. 22 by USDA’s NASS says Nov. 30 cheese stocks were down 1% from the previous month and down 2% from Nov. 30, 2018. Butter stocks were down 23% from last month, but up 17% from a year ago.
Higher U.S. milk prices this fall relative to world prices weighed on exports. January through October 2019 exports totaled 1.67 million metric tons, down 11% from the same period last year. Whey exports to China are down 53% for the year. Retaliatory tariffs by China and lower feed use in China due to African Swine Fever have likely contributed to the decline in whey product exports. In addition, October shipments to Southeast Asia, Japan and South Korea were the lowest of 2019. January through October 2019 dairy exports represented 14.4% of U.S. milk production, down from 16.3% during the same period in 2018.
Feed – Corn
As of Dec. 2, 89% of the corn acres had been harvested versus the average of 98%. The USDA is projecting the 2019 average corn yield will be 167 bushels per acre. This put total production at 13.66 million bushels, down 5.5% from last year. Total supply was down about the same percent due to large carryover stocks. Projected use is down significantly, limiting the price effect of lower production. The 2019-2020 corn price forecast remains at $3.85 per bushel.
Dairy Margin Coverage
USDA extended the deadline to enroll in DMC from Dec. 13 to Dec. 20. The DMC program, with higher coverage levels and lower premiums, offers protection when the margin between the all-milk price and the average feed cost falls below a certain dollar amount selected by the producer. As of Dec. 2, 2019, the USDA reported 82.3% of all operations with established production history are enrolled with $310 million in payments.
Farm Labor Bill
Labor shortage in agriculture is a problem across all sectors, especially dairy. The Farm Modernization Act, passed by the U.S. House of Representatives, bill allows immigrants working in agriculture to apply for legal status and would add year-round visas for foreign workers, making dairy eligible for the program.
The U.S. House of Representatives passed the USMCA trade agreement. The Senate will need to vote on the agreement and receive final approval from the President. Mexico is the number-one and Canada is the number-three export destination for American dairy products. This agreement strengthens our relationship with Mexico as the U.S. supplies 90% of all dairy products imported by Mexico. This agreement also helps with our relationship with Canada, removing the restrictive Class 7 milk classification.
The U.S. and China signed what is termed “phase one” of a trade agreement on Dec. 13, 2019. This preliminary agreement removes the threat of new tariff impositions and reduces already imposed tariffs. As part of the agreement, China is expected to purchase $50 billion of U.S. agricultural products. A full agreement is expected to be reached in 2020.
The U.S.-Japan Agreement was passed in October, removing tariffs and providing greater market access for U.S. dairy, beef and other agricultural products.