Economists predict higher milk prices in 2020
Dairy Outlook: USDA credits strong domestic demand and increased dairy exports.
University of Wisconsin-Madison dairy economists Bob Cropp and Mark Stephenson say they are looking for good times ahead for dairy farmers.
“2020 is likely to be somewhat better than 2019,” Stephenson says.
Cropp is even more optimistic. “Things look a lot rosier for 2020 than we have seen in the last four to four and a half years,” he says. Cropp expects milk prices to average $2.20 per cwt higher in 2019 than in 2018, and he expects prices to be another $1 to $1.20 per cwt higher in 2020. Stephenson agrees.
The reasons are built on some of the pain dairy farmers have suffered over the past few years. Few farms have rebuilt their balance sheets, so most are still suffering financial stress, which means there will be few dairy expansions, Stephenson says.
Feed quality and quantity are also suspect. Stephenson surveyed Extension dairy specialists across Wisconsin in the last few weeks, and none reported forage to be overly abundant or of high quality. Most alfalfa and corn silage are adequate at best, according to reports. Similar conditions exist in the Northeast, Cropp notes.
Higher prices boost output
According to USDA, higher milk prices helped boost milk output. USDA reported October milk production at 18.1 billion pounds, up 1.3% from a year ago. That matches the year-over-year increase reported in September, but it was significantly higher than the mix of small gains and losses in the rest of 2019. Milk output topped year-ago levels in the seven largest dairy states.
The gains were driven by impressive improvements in milk production per cow. Milk yields increased in all but five states. All of the other major dairy states reported much higher milk production per cow than the year before, and the national average milk yield jumped 1.7%. The weather in November was less accommodating, particularly in the Midwest and Northeast, where cows shivered in an early cold snap. It is unlikely that milk yields will climb by such a wide margin in November.
Strong domestic demand for dairy products and continued growth in dairy exports are lifting prices. Cheese and nonfat dry milk exports surged in September, and all indications are strength in dairy exports will continue. There also appears to be some good news on the trade agreement front, with passage of a Japanese agreement and hopeful signs of lessened tensions with China, Stephenson says.
In 2020, Cropp expects $17-per-cwt Class III prices in the first half of the year and $18 in the second half.
The elephant in the room, however, is the Dean Foods bankruptcy. Stephenson notes that Dean controls at least a third of fluid milk sales, and nearly 10% of total milk sales. “The Dean bankruptcy is going to be a big thing,” he says, adding that most farmers will not feel the effects, however.
Cropp agrees. “I don’t think there is a danger that farmers won’t get paid for their milk,” he says.
Major dairy states typically have agricultural security bonding that protects farmers’ milk checks.
“The worst-case scenario is if some of the Dean plants get closed because they are not well located or are old plants,” Stephenson says. There will still be a market for the milk that supplies those plants, but farmers could see increased hauling costs to get that milk processed at new locations, he says.
More cows, higher demand
According to USDA, the national dairy herd is no longer contracting. This was the more bearish part of the report, as it indicates higher potential milk production in the months to come. USDA revised its estimate of the September milk cow herd upward, now showing a 5,000-head increase in the size of the dairy herd from August to September.
Dairy producers added another 5,000 cows in October, bringing the national total to 9.327 million head. That’s 40,000 fewer than in October 2018, but the year-over-year shortfall is narrowing. Despite still-high slaughter volumes, USDA estimates that dairy producers added 10,000 cows in just two months.
Following months of milk production deficits across the globe, the world can absorb the increase, according to USDA. Dairy product inventories have tightened, and it will take more than a few months of higher milk output to overcome all the painful pruning the industry has undertaken over the past two years. Meanwhile, demand continues to strengthen.