April 28 2020 08:14 AM

Erosion of milk prices continues as pressures from imbalanced supply and demand are compounded by abrupt shifts in product delivery methods.

The information below has been supplied by dairy marketers and other industry organizations. It has not been edited, verified or endorsed by Hoard’s Dairyman.

Mounting Losses

Dairy producers have been dealt critical blows to their businesses as a result of today's market environment. Normal seasonal oversupply was met with lower milk prices, dramatic shifts in the type of food demands from the consumer, and an economy unlike any seen before. Just a few months ago the Dairy Outlook was projecting milk prices around $20/cwt for most of 2020 based on the Class III and Class IV futures at the time. That optimism as been dealt a heavy dose of reality. Current Class III and Class IV futures project a PA All Milk price in the $14/cwt range for May and June, and the second half of 2020 will potentially average $17/cwt if markets stabilize. Pennsylvania's monthly production averages about 840 million pounds of milk, making the current potential monthly income losses for all PA dairy producers at $25.2 million dollars. Applying this to the rest of 2020, it would be almost $227 million dollars less income than was predicted a few months ago, and with an estimated 5,700 dairies in the state, that would be nearly a $40,000 loss per farm, not adjusting for size and production capacity.

Changing Course

Because of the pandemic, the utilization of dairy products has changed dramatically from food service to food at home. Figure 1 shows that, starting already in 2010, Americans spent more on food away from home than for food at home. Now the demand for dairy products from restaurants, hotels and school districts has decreased dramatically. The supply chain cannot quickly reallocate milk and dairy products from food service into retail case products, thus supply interruptions were experienced. Unfortunately, this retail increase did not account for all the food service loss in the dairy sector, thus a net decrease in dairy demand pushed markets and futures further down.

Figure 1: Food-away from-home expenditures surpassed food-at-home expenditures in 2010

Elitzak and Okrent, USDA ERS. 2018.

Government Responds to Support Industry

The recent USDA Aid Program estimate about $2.9 billion dollars to support dairy producers. This is in addition to any production that may have been enrolled in risk management programs which protected the price during the negative volatility over the past couple of months. This aid would be capped at $125,000 per farm, and details are still being released to determine the impact for an individual farm. Given this level of coverage and the expected losses already discussed, most Pennsylvania farms (under 300 cows) should have all their production qualify for this program. This can be refined as more details become available.

Income Over Feed Cost, Margin, and All Milk Price Trends

Table 1: 12 month Pennsylvania and U.S. All Milk Income, Feed Cost, Income over Feed Cost ($/milk cow/day)

¹Based on corn, alfalfa hay, and soybean meal equivalents to produce 75 lbs. of milk (Bailey & Ishler, 2007) ²The 3 year average actual IOFC breakeven in Pennsylvania from 2015-2017 was $9.00 ± $1.67 ($/milk cow/day) (Beck, Ishler, Goodling, 2018).

Table 2: 12 month Pennsylvania and U.S. All Milk Price, Feed Cost, Milk Margin ($/cwt for lactating cows)

¹Based on corn, alfalfa hay, and soybean meal equivalents to produce 75 lbs. of milk (Bailey & Ishler, 2007) ²The 3 year average actual Milk Margin breakeven in Pennsylvania from 2015-2017 was $12.33 ± $2.29 ($/cwt) (Beck, Ishler, Goodling, 2018).

Figure 3: Twelve month Pennsylvania Milk Income and Income Over Feed Cost ($/milk cow/day)

²The 3 year average actual IOFC breakeven in Pennsylvania from 2015-2017 was $9.00 ± $1.67 ($/milk cow/day) (Beck, Ishler, Goodling, 2018).

Figure 2: Twenty-four month Actual and Predicted* Class III, Class IV, and Pennsylvania All Milk Price ($/cwt)

*Predicted values based on Class III and Class IV futures regression (Goodling, 2020).

Table 3: Twenty-four month Actual and Predicted* Class III, Class IV, and Pennsylvania All Milk Price ($/cwt)

* Italicized predicted values based on Class III and Class IV futures regression (Beck, Ishler, and Goodling 2018; Gould, 2019).

To look at feed costs and estimated income over feed costs at varying production levels by zip code, check out the Penn State Extension Dairy Team's DairyCents or DairyCents Pro apps today.

Data sources for price data

  • All Milk Price: Pennsylvania and U.S. All Milk Price (USDA National Ag Statistics Service, 2020)
  • Current Class III and Class IV Price (USDA Ag Marketing Services, 2020)
  • Predicted Class III, Class IV Price (CME Group, 2020)
  • Alfalfa Hay: Pennsylvania and U.S. monthly Alfalfa Hay Price (USDA National Ag Statistics Service, 2020)
  • Corn Grain: Pennsylvania and U.S. monthly Corn Grain Price (USDA National Ag Statistics Service, 2020)
  • Soybean Meal: Feed Price List (Ishler, 2020) and average of Decatur, Illinois Rail and Truck Soybean Meal, High Protein prices, National Feedstuffs (USDA Ag Marketing Services, 2020)

References

Bailey, K. and V. Ishler. “ Dairy Risk-Management Education: Tracking Milk Prices and Feed Costs ”. Penn State Extension. Accessed 9/20/2017.

Beck, T.J., Ishler, V.A., & Goodling, R. C. 2018. “Dairy Enterprise Crops to Cow to Cash Project,” the Pennsylvania State University. Unpublished raw data.

CME Group. " Class III Milk Futures Settlements ". Accessed 4/22/2020.

CME Group. " Class IV Milk Futures Settlements ". Accessed 4/22/2020.

Dairy Records Management Systems. “DairyMetrics Online Data Report system”. Accessed 9/14/2017.

Elitzak, H. and A. Okrent, 2018. " New U.S. Food Expenditure Estimates Find Food-Away-From-Home Spending Is Higher Than Previous Estimates " USDA Economic Research Service. Accessed 4/22/2020.

Howard Elitzak and Abigail Okrent

Ishler, V. “ DairyCents Mobile App ”. Penn State Extension. #App-1010.

Ishler, V. “ DairyCents Pro Mobile App ”. Penn State Extension. #App-1009. Ishler, V. “Feed Price List”. Personal Communication. Accessed 3/16/2020.

Microsoft 2016. “ Forecast.ets function ”, Office Help Website.

USDA Ag Marketing Services, 2020. Milk Marketing Order Statistics. Accessed 4/17/2020.

USDA Ag Marketing Services, 2020. “ National Feedstuffs: Soybean Meal, High Protein ”. Summary of USDA AMS Grain Reports. Accessed 4/17/2020.

USDA National Ag Statistics Service, 2020. Agricultural Prices, Quick Stats version 2.0. Accessed 4/17/2020.

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Penn State College of Agricultural Sciences research and extension programs are funded in part by Pennsylvania counties, the Commonwealth of Pennsylvania, and the U.S. Department of Agriculture.

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