It feels like highly pathogenic avian influenza (HPAI) is having a big impact on U.S. milk production and dairy prices, but the true effect still isn’t showing up in the actual supply and demand data. In our discussions with farmers in early June, it feels like the disease is everywhere and everyone has it or soon will. U.S. dairy prices have generally been trending up since early or mid-April with July Class III and Class IV milk futures now over $20 per hundredweight (cwt.).
The number of confirmed HPAI cases published by the USDA has continued to rise, and the virus is showing up in more states. So far, USDA has confirmed cases on 92 dairy farms across 12 states, with Minnesota, Iowa, and Wyoming being recently added. We know there are many cases that haven’t been confirmed by the USDA. It’s very hard to put a number on it, but the true number of infected farms might be five times higher than the official number.
Given the rally in the market and all of the anecdotal comments around the spread of the virus, the industry was expecting milk production for April to come in weak. I was forecasting April U.S. milk production down 0.9% from last year, and the fear was that production was going to be even lower than that. Instead, milk production for April came in higher than forecast, only down 0.4% from last year, and USDA revised production up for March.
The components in the milk (especially fat) were also very good for April. It is tempting to write off the report and argue that milk production is actually weaker than that, but the April Dairy Products report showed that we produced 1.8% more cheese than last year, 5.3% more butter, 7.3% more hard ice cream, 4.7% more sour cream, and 10.9% more yogurt. If anything, the April Dairy Product data would argue that milk production in April was even stronger than USDA reported.
Minimal supply impact
So, how do we square the spread of HPAI with the fact that milk production actually improved in April? First, there were only 26 farms with confirmed new infections in April. Even if the true number of infected farms is five times higher than that, then there might have been 130 farms infected. There are about 26,000 licensed dairy farms in the country, so 130 farms would be 0.5% of all farms.
An infected farm could lose 20% of their production for the month. If 0.5% of the farms are infected and lose 20% of their milk, it would reduce total U.S. milk production by 0.1% for the month. That assumes the infected farms are average sized. If we assume the virus is hitting mostly large farms (which is reasonable given the states impacted), then maybe the virus knocked 0.2% to 0.3% off milk production for April. Either way, it is a relatively small impact.
It is possible that the spread of the virus accelerated in May. The number of confirmed cases grew from 26 in April to 44 in May. However, mandatory testing of lactating cattle moving across state lines started on April 29, so there was probably more testing done in May, which led to more confirmed cases. It is hard to say whether the spread accelerated or if the rise was due to more testing. But what does appear clear is that we likely need to see something like 500 or more farms infected in a single month to have a significant impact on national level milk production.
If supply isn’t driving prices, then it must be demand. Domestic cheese disappearance was very weak back in January and February, down more than 3.5% year-over-year during both months. That rebounded to 1% growth in March and 0.6% growth in April. When you combine that with exports that hit a record high in March and were the second highest on record during April, I think there is a strong argument that much of the price strength we’ve seen in cheese has been demand driven.
HPAI may still have a big impact on milk production and consequently dairy prices, but so far, there isn’t much evidence that it is driving the current price strength in the market.
