Milk production continues to increase as seen on the monthly milk production reports. Cows continued to be added last year with production per cow continuing to grow. The growth in milk output for 2020 is estimated to be 4.5 billion pounds over what was produced in 2019. The final number has not yet been established. As a comparison, milk production increased 800 million pounds in 2019 from the previous year. Thus, there will be a huge increase of milk supply in comparison. What is all the more interesting is that the large growth was seen during a year when a pandemic initially disrupted the industry due to the initial closing of many business and primarily the food service industry. The dairy industry had to adapt over a short period of time as consumer demand increased substantially through retail channels.
Another surprising aspect was the average Class III price for the year compared to 2019. The average Class III price last year was $18.16 while the average Class III price for 2019 was $16.96. One would have thought that substantially higher milk production would have had the opposite effect on milk price as more cheese would have resulted in lower price. That certainly was not the case as cheese price moved to a record high of $3.00 per pound in July. However, much of the strength was due to a tighter supply and significant increase in demand due to the implementation of the Farmers to Families Food Box program.
The All-milk price showed a different story as the average price in 2020 was $18.32 while the average price in 2019 was $18.60. One of the main reasons for last year being lower than the previous year was that butter was in a downtrend the last half of the year which resulted in low butterfat and Class IV prices.
Current Class III milk futures show the potential for a good price average at current levels with hope that increased buying for government programs will raise those prices. The concern is the level of cheese already in storage as we move through the early part of the year. Supply is not burdensome, but it has already increased earlier than usual due to higher than usual production. American cheese inventory increased during the month of November and December. This is unusual as it generally declines through November and then increases in December due to holiday demand being filled and aging programs being rebuilt. So, how often in the past do both November and December show inventory increases? Over the past forty years, there have only been two other years during which both November and December inventory increase. Those two years were 2009 and 2015. What took place in November and December is unusual and one that should get our attention.
It is possible that inventory could decline when it usually increases this year depending on how much demand will come from government food programs. If it is large enough, it could utilize what is produced keeping inventory from building or possibly result in a decline if demand is higher than production. That may be difficult unless milk production slows over the next few months, which is unlikely. But, anything can happen as the market reacts to supply and demand.
As usual, an argument can be made for higher prices as well as lower prices this year. The main goal need to be how to protect profitable prices while still remaining flexible to take advantage of higher prices if they materialize. If you want further information of how to do this, please contact us.
Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.
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