Forecasting the future of the U.S. dairy industry has always been a difficult task due in part to the inelastic nature of the demand for dairy products. Today’s COVID-19 environment further hinders forecasting accuracy.

Current projections of dairy prices will likely miss the mark as the effects of COVID-19 play out differently than expected. As dairy producers think about the market for their milk in the coming months and the need to mitigate price risk, recent forecasts of future dairy markets should be considered.

Projections in the low $16 range
The Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri recently updated projections for many agricultural markets including dairy. In this June 2020 forecast update, U.S. All-Milk prices are projected to average $16.34 per hundredweight (cwt.) in 2020 and $16.27 per cwt. in 2021. These prices are based on U.S. milk production at an estimated at 221.3 billion pounds in 2020 and 222.6 billion pounds in 2021.

These projected milk prices may seem too low relative to today’s market prices that feature block cheese prices in excess of $2.50 per pound, but diving a little deeper into this forecast provides an explanation. Key macroeconomic assumptions for this forecast include a 7.3% decline in U.S. gross domestic product (GDP) and a 5.5% decline in global GDP for 2020. Although U.S. GDP grows by 5.1% in 2021 in the report, the level of GDP next year remains well below expectations made in advance of COVID-19. The pace of recovery in economies around the world, and especially in the U.S., will be a critical driver for future milk prices.

USDA also provides estimates of future milk prices each month. In its June report, the agency forecasts U.S. All-Milk price at $16.65 per cwt. for 2020 and $16.20 per cwt. for 2021. USDA also calls for continued expansion in U.S. milk production reaching 225.3 billion pounds in 2021.

Downside risk exists
While in all likelihood these forecasts will fail to perfectly predict the future, that does not suggest the information provided should be ignored. They both point to remaining downside risk in milk prices in this period of COVID-19.

Dairy markets are offering opportunities to protect margins at levels higher than these low-price projections, and it is important to evaluate how much price risk could be eliminated for the coming year. Milk prices certainly could be stronger into 2021 than these projections indicate, but they highlight the volatility still possible in dairy markets as we continue to deal with COVID-19.

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(c) Hoard's Dairyman Intel 2020
July 6, 2020
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