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Worst may be over for dairy sector

Toa55/iStock/Thinkstock. dairy cows being milked milking parlor milkers holstien
Sharp price drop in April has been followed by strong recovery in cash market prices.

The worst of the coronavirus-induced plunge in the dairy economy may be over, according to the June “Dairy Market Report” from Dairy Management Inc. (DMI) and the National Milk Producers Federation (NMPF).

“The sharp drop in dairy product prices in April, prompted by the pandemic, has been followed by a strong recovery in cash market prices in May that’s continuing into June,” the report noted.

In fact, the report relayed that cash cheese prices rebounded dramatically from $1.00/lb. in the first half of April to record levels in fewer than eight weeks. Cash butter prices, to a lesser extent, have also rebounded from April lows.

The market turnaround, according to the report, was the result of actions and developments that have reduced the milk supply and strengthened dairy product demand, the report explained.

“Dairy cooperatives widely implemented temporary base-excess price plans, while dairy farmers changed their feeding and milking practices and culled some additional cows.”

Additionally, government purchases of dairy products expanded substantially as Congress provided billions of dollars in emergency relief to the U.S. Department of Agriculture.

More recently, the groups said foodservice establishments resumed significant dairy purchases to replenish empty stocks in anticipation of reopening. Retail sales of key dairy products have also been above year-earlier levels throughout the pandemic, as consumers largely returned to the basics of grocery shopping and home cooking.

The report suggested that dairy-farmer income will be further boosted by federal direct payments of $6.20/cwt. for first-quarter milk production.

All of these developments together have improved the financial outlook for the nation’s dairy farmers markedly from how it first appeared during the March collapse driven by the COVID-19 pandemic, the report said.

Milk production declines

The pandemic’s impact caused U.S. dairy farmers to take actions that universally halted, at least temporarily, one of the most energetic dairy herd and milk production expansions in at least two decades, according to the report. “That’s one of several key factors currently strengthening the milk price outlook for the second half this year.”

The latest USDA “Milk Production” report also showed the pull-back in production.

Milk production in the 24 major milk states during May totaled 18.0 billion lb., down 1.0% from May 2019. Revised production for April, at 17.8 billion lb., was up 1.3% from April 2019. The April revision represented a decrease of 47 million lb., or 0.3%, from last month's preliminary production estimate.

Production per cow in the 24 major states averaged 2,031 lb. for May, 32 lb. below May 2019. The number of milk cows on farms in the 24 major states was 8.84 million head, 50,000 head more than May 2019 but 12,000 head less than April 2020.

Total milk production in the U.S. during May totaled 18.8 billion lb., down 1.1% from May 2019. Production per cow in the U.S. averaged 2,011 lb. for May, 31 lb. below May 2019. The number of milk cows on farms in the U.S. was 9.37 million head, 37,000 head more than May 2019 but 11,000 head less than April 2020.

Looking ahead

In the industry report, DMI and NMPF noted that April and May will be the two worst months of 2020 for dairy farmers as the dairy futures-based outlook has significantly improved since the end of April.

“At that time, the outlook was for a very slow and painful recovery for margins throughout the remainder of 2020, with June being as bad as May and DMC [Dairy Margin Coverage] margins remaining below $9.50/cwt. through the end of the year, but by the end of May, the outlook indicated the margin would be up not far below that level in June and then remain above $10/cwt. for July through December,” DMI and NMPF reported.

By mid-June, dairy futures markets indicated that milk prices would remain well above $18.00/cwt. every month during the entire second half of 2020 and would average about $18.60/cwt. during that period, which was the average price for all of 2019, the report said.

“If the total estimated Coronavirus Food Assistance Program direct payment amounts are thought of as supplements to milk prices during the two months of expected very low prices and margins -- April and May -- together with average DMC payments, those augmented prices would also average about the same $18.60/cwt. for those two months,” the report added.

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