Two months ago, dairy economists were forecasting a good year for dairy farmers, and farmers were responding to higher prices with more milk production.
Now, that additional milk is only going to add to the misery of markets turned upside down by the coronavirus pandemic.
Adjusted for the leap year, milk production in February was up 1.7% from a year earlier, USDA National Agricultural Statistics Service reported.
“That’s a lot of milk. Without exports, you can’t hold strong prices,” Bob Cropp, dairy economist with the University of Wisconsin, said in the latest “Dairy Situation and Outlook” podcast.
Dairy exports started out gangbusters in January, with total volume up 21% over a year earlier and milk powder volume up 41%. The U.S. exports half of its powder production, and now there are bottlenecks at ports, he said.
The futures market was forecasting powder prices at $1.25 a pound; now they’re about $1.
Powder had been pulling up the Class IV milk price, and the Class III price was trying to catch up, Mark Stephenson, a fellow economist at the university, said.
“Now we’ve got quite the opposite. Powder prices have dropped like a brick … and those are putting a real drag on the markets,” he said.
The May futures contract for Class IV milk has dropped $5 per hundredweight since mid-January, he said on Friday.
The futures market had been forecasting Class III and Class IV milk prices for 2020 in the $18 per hundredweight range. Those prices are now below $16 for Class III and below $15 for Class IV.
“It’s terrible,” Cropp said.
In addition to recovery in the powder market and healthy exports at the end of 2019 and into January, other factors supporting markets were lower milk production, lower stocks of American-style cheese and good domestic demand.
Higher milk production, more cows and the spring flush ahead are going to put downward pressure on milk prices, the economists said.
Now with schools closing that milk for students will have to go to cheese manufacturing. And restaurants are closing, conferences are being canceled and people aren’t traveling, Cropp said.
“People are still going to eat … but with all that going on, it’s going to hurt butter and cheese sales, no question about it. So we’ve got a softer demand,” he said.
With product prices dropping and a ready supply of milk, processors aren’t going to purchase a lot of milk, he said.
Sales are also shifting from foodservice to retail, and Stephenson doesn’t think those sales will match the volume of dairy product sales of a more normal situation, he said.
“We’re going to have more milk than we can handle without having prices really depressed,” he said.
The coronavirus situation is rapidly evolving and markets will feel its effects for months. It’s having a big impact on the world economy, and it will take time to bounce back, the economists said.
Instead of a long-needed recovery year for dairy farmers, 2020 might be the worst year in the last five years, Stephenson said.
“This is devastating,” he said.