Somewhat surprising we will see considerable strength in
October milk prices. Class III was $24.54 back in July but had fallen to $16.43
by September. It looks like Class III for October will increase to about $21.40
reaching or surpassing the previous record for the month of October set in 2014
at $21.35. Cheese prices have increased as well as dry whey prices pushing
Class III prices higher. On the CME 40-pound cheddar blocks have been above $2
per pound since early September and as of today it is $2.74. Cheddar barrels
also hit $2 per pound on October 6th and is now $2.30. Dry whey had been
holding around $0.33 per pound but is now $0.3875 adding more than $0.30 to the
Class III price.
Factors contributing to higher cheese prices include cheese production, retail
sales, government purchases and exports. The latest dairy product production
report was for August showing American cheese production 1.3% lower than a year
ago with total cheese production 2.1% lower. As consumers continue to eat more
meals at home retail cheese sales have been relatively strong. The government
is purchasing cheese under the third round of the Farm to Families Food Box
program which ends on October 31st. With cheese prices above world prices it
was surprising that August cheese exports were 17% higher than a year ago. Dry
whey exports were 54% high than a year ago with almost all the increase
contributed to China as they attempt to build back their swine herd.
Butter prices have been rather weak all year. A year ago at this time butter
was over $2 per pound. Butter has been below $2 per pound all year being as low
as $1.15 in April and only as high as $1.90 in June. It is now $1.4975. But
nonfat dry milk prices have improved with very strong exports. August exports
were 35% higher than a year ago. Nonfat dry milk was $1.03 per pound early
September and is now $1.1275. This will push the Class IV price from $12.75 in
September to about $13.55 in October but still leaving more than a $7 spread
between Class III and Class IV prices.
Class III dairy futures remain strong for the remainder of the year with
November at $21.44 and December at $19.38. Whether Class III will hold at this
level is not certain, but it looks like Class III for the year will average
over $18 compared to the 2019 average of $16.96. As we look into next year
there remains a lot of uncertainty about milk prices. The level of milk
production, domestic sales and exports are crucial. But so important will be
how soon the COVID-19 virus slows down. Until it does restaurants will not be
fully open, schools and colleges will be virtual learning rather than in person
instruction. Major sports will not have audiences in the stands and major
events and conferences will not be held or if they are, they maybe virtual. The
COVID-19 virus is hurting not only the U.S. economy but the world economy which
impacts domestic sales and exports.
Milk production continues to run at a relatively high level putting downward
pressure on milk prices. USDA’s report on September milk production showed milk
production 2.3% higher than a year ago, the result of 0.4% more cows and 2.0%
increase in milk production per cow. Milk cow numbers have been increasing
since July with July up 7,000 head, August 4,000 and September 5,000. Of the 24
reporting states 16 had more milk. All the five leading dairy states that
produce over half of the nation’s milk production had higher milk production.
Compared to last year production was up 3.2% in California, 0.7% in Wisconsin,
2.9% in Idaho, 1.4% in New York and 6.5% in Texas. Of all the states South
Dakota had the largest increase at 12.3%. Other strong increases were Indiana
at 9.0%, Colorado at 7.8%, and Kansas at 6.8%. There were decreases in milk
production of 2.2% in Arizona, 3.7% in Florida, 5.5% in Vermont and 0.9% in New
Mexico. USDA is forecasting 2021 milk production to be 1.4% higher than this
year with just a 5,000 head increase in the average herd size and a 1.4%
increase in milk per cow. At this level of milk production, it will take good
domestic sales and exports to provide good milk prices.
As of now it seems reasonable to assume 2021 milk prices could be less
volatile. Class III could be in the $16’s first half of the year, reach the
$17’s in the second a half and averaging in the high $16’s or low $17’s for the
year. If the COVID-19 is under control, there could be a good rally in milk
prices for the second half of the year. But, this far from certain. Dairy
farmers should seriously consider signing up for the Dairy Margin Coverage
program for 2021.