The 2020 outlook for milk prices is a welcome change from the past few years of depressed milk prices. The dairy industry already has seen modest improvements in 2019.
The only dark cloud is that the U.S. economy has likely reached its peak and could potentially slide toward recession, says Mark Stephenson, an agricultural economist and director of the Center for Dairy Profitability at the University of Wisconsin-Madison.
“The year ahead could bring more than an additional $1-per-hundredweight price improvement compared to 2019,” he said. "We’re building off a reasonable milk price this year.”
Milk production in the United States and around the world has slowed. There has been negative production growth in recent months compared to 2018.
“That’s been true across the world – the European Union had significant droughts in 2019 and 2018,” Stephenson said. “New Zealand has had good weather for pasture-based systems but milk prices haven’t been good enough to sustain big growth in production.”
New Zealand citizens also have increasingly expressed concerns about animal density on their island nation, he said.
“New Zealand is a very environmentally conscious country and it’s difficult (for the dairy industry) to maintain the pace of growth it has for the past couple decades,” he said.
While milk production has slowed, demand in the United States has remained relatively steady.
“It’s the greatest it has been since the 1960s and we’ve had population growth,” Stephenson said. “That’s the good news.”
Consumption has grown enough to reduce inventories of butter, cheese and whey powder. Consumers enjoy the flavor and functionality of dairy products, he said. And dairy products fit many contemporary lifestyle demands with a few exceptions. Per capita demand for fluid milk, for example, has declined. Demand for yogurt also has declined, but it had enjoyed a period of significant growth.
While demand for fluid milk has declined, there has been a significant increase in sales of “fairlife,” an ultra-filtered lactose-free milk. There also has been growth in the whole-milk market.
“But 2 percent, 1 percent and skim milk have been in a tailspin,” Stephenson said.
Conversely demand for cheese remains strong.
“Sometimes I wonder how far we can ride this horse,” Stephenson said with a smile.
Cheese has been a growth category since the 1970s, he said. Large volumes of commodity cheese are still being sold, but the greatest growth has been in specialty cheese.
“Consumers have been awakened to all the different tastes and experiences,” he said.
Now that milk prices have improved some dairy farmers may consider increasing production. But many more will be more circumspect, Stephenson said. Increasing milk production has long led to oversupply and falling prices. Lenders will be more likely to warn farmers against assuming additional debt equity. And more lenders will require farmers to have a letter from a dairy cooperative or processor confirming it will buy the milk.
Then there's the recent filing for bankruptcy protection by Dean Foods. It will likely have minimal effect in Wisconsin, Stephenson said, because there’s just one Dean Foods processing plant in the state. But some Wisconsin milk is shipped to the company’s plants in Illinois. That said, Wisconsin residents are protected by the Agricultural Producer Security Fund, administered by the Wisconsin Department of Agriculture, Trade and Consumer Protection. The department regulates milk contractors who buy milk in Wisconsin; they must provide producers and producer agents reasonable assurance that contractors are able to pay for producer milk they purchase.
Trade agreements discussed
The White House and the U.S. House of Representatives reached a deal in late-December on the United States-Mexico-Canada Agreement. The U.S. Dairy Export Council and the National Milk Producers Federation released a joint statement urging the U.S. Senate to vote quickly on legislation implementing the trade agreement.
The new agreement will expand trade opportunities with Mexico and Canada, adding an estimated $548 million to dairy-farm revenues in its first six years after implementation, said Jim Mulhern, president and CEO of the National Milk Producers Federation.
Tom Vilsack, president and CEO of the U.S. Dairy Export Council, said Washington has worked to make the agreement a better deal for America’s dairy farmers and exporters.
Finalizing the agreement, he said, “will bolster international confidence in the United States as a serious negotiating partner and build momentum for other trade agreements in key markets abroad. Without this crucial trade agreement ‘Made in America’ dairy and agriculture products could be left behind in the new year.”
Having the new agreement completed would be good for the United States. But it already had free trade with Mexico and Canada in the North American Free Trade Agreement before retaliatory tariffs were set, Stephenson said.
“This gets us back to where we were before the retaliation,” he said.
The U.S. Dairy Export Council and the National Milk Producers Federation stated that the new agreement would make changes to Canada’s trade policies, reform Canada’s dairy-pricing system and provide access to the Canadian market for U.S. farmers and manufacturers.
Then there are the trade negotiations with China; a trade agreement with China remains uncertain. U.S. dairy exports to China are about half what they were before tariffs were implemented, Vilsack said in October at World Dairy Expo in Madison, Wisconsin.
China has historically bought about half of the world’s production of whey products. The United States produces about half that total, Stephenson said. Even if a trade agreement was reached China’s purchases wouldn’t be significant at the start. That’s because about 45 percent of its swine herd has been decimated by African swine fever – and no longer will be consuming whey products.