Annual Market Outlooks

2021 Milk Price Outlook: Throw the Crystal Ball Out the Window

Fri, 18 Dec 2020 21:45:43 GMT

In a marketplace where the hand of the government can cause markets to rise and fall with the slopes of the Sierra Nevada mountains, it’s nearly impossible to predict what lies ahead. Nobody understands that quite like dairy farmers following a year like 2020 where each announcement of coronavirus aid would send dairy markets surging to a new high only to have them fall when each wave of aid ran out.

Each year we do our best to provide dairy producers with a fundamentals-based market outlook they can count on to be a guide for the year ahead. However, multiple analysts told us that for 2021 hedging your bets on a price forecast made at this point in time would be foolish. So instead, we’ll outline some factors that will undoubtedly influence your income over the next 12 months.

COVID-19 Supply and Demand

“COVID is going to live with us for a while on a number of different fronts in dairy,” says Mike North of Ever.Ag. “From a supply and demand perspective, foodservice is kind of the dark cloud in the conversation for dairy. A lot of fat, cream, and butter –those things that we really enjoy about that sit-down meal—that’s all been missing [from the demand picture].”

While North admits we’ve made up for those losses in other areas like retail, Nate Donnay of StoneX group says there’s some concern that retail demand will not continue to keep the supply and demand balance afloat.

“We’ve got the retail dairy sales numbers for November and they’re showing a slowdown,” he says. “We went from 9% growth in October to 8% growth in November, and the gains in volume terms are lower than the gains in dollar terms. So, retail movement to dairy on a milk solids basis is up less than 8%.”

Donnay notes that it can become a bad situation when retail sales and food service sales are slowing down. Add on top of that the current projection that government purchases will be drastically lower than they were in 2020 and things begin to look even darker.

Government Cheese

The government has a long history of purchasing dairy products to distribute to food banks and to food insecure populations throughout the country. That has never been truer than it was in 2020 and with a new Administration moving into the White House, there is a high level of uncertainty that purchases like we’ve seen recently will continue.

“The big thing that COVID did to the dairy market was bring government involvement into our marketplace in a way we’ve never seen it before,” North explains. “As you go back through the year, what you’re going to find is massive movement in price, every time the government renewed the food box program.”

North is referring to the Farmers to Families Food Box program that USDA debuted as part of the Coronavirus Food Assistance Program in May.

The first round of the program which purchased billions of dollars of cheese sent Class III prices rocketing higher through May into June, North says. Then as that first round came to a close, prices softened.

“Then [the government] renewed it again and prices took back off and then again, prices softened and we repeated that [cycle] multiple times,” he says. “As we go into 2021, right now we’re asking the question again. We’re wondering, ‘are we getting another one?’”

Within the stimulus bill that is up for a vote on Friday, December 18, there’s $26 billion to be appropriated for food aid. Of that, $500 million set aside for commodity purchases and $200 million on top of that for the cost of distributing those commodities.

Donnay estimates $125-250 million would go to purchasing dairy products.

“I’m pretty sure we’re going to have something like that, in whatever stimulus bill, eventually gets passed,” he adds.

North notes that within the proposed bill there are some nontraditional approaches to appropriate the funds including a dairy donation program of up to $500 million. Through that program processors would partner with nonprofit food distribution organizations. They would purchase dairy products, donate them to the nonprofit and receive a refund from the government. However, Donnay says the reimbursement calculations are complicated and could cause the program to fail.

“The reimbursement calculation looks funky, it’s based on milk equivalents and class milk prices and I don’t know how it’s going to work,” he says. “If the reimbursement rate is high enough to at least cover the cost, this program could clear a decent [volume] of dairy products and give the market some support, but at this point there isn’t enough detail to know a whole lot.”

Additionally, within the bill is $9.9 billion in discretionary funds USDA could use to purchase dairy products like they did for the food box program, or to provide farmers direct payments. However, Donnay points out that the bill requires USDA to do a study on the impacts of COVID in agriculture and which segments of the industry still need help.

“So theoretically, the funding in this is going to be a little bit more targeted than just throwing money out all over the place,” he says. Because the USDA has to sit down and do a study on this, it might push the decisions around how this discretionary money is spent into the Biden administration which probably lowers the odds of another round of the food box program at least a little bit.”

Over the past few days milk prices have been up 30-50 cents just to fall 30-50 cents. The marketplace is trying to wrap its brain around all of this as the markets have shown over the past week, North says.

“Nobody really knows how to take this,” he says. “We thought we were starting to see a little bit of a clear picture up to about a week ago when this language all rolled out. And in that picture, it looked pretty clear that we had a lot of downward pressure. So my advice to producers is to make sure that you are still being intentional in the marketplace yourself, because as we saw through 2020, and as we may see more of in 2021, the moment the government spending stops, the market falls flat on its face because it has to.”

While “artificial” demand is welcomed in the short run, it’s not real in the long term and the market is quick to pick up on that and responds very quickly, North explains.

“The fundamentals suggest a very heavy picture, but they’re overcome by any government involvement because it brings almost a false demand that wouldn’t ordinarily be there, and it supersedes any understanding you would have of a normal environment,” he says. “I think any forecast right now, short of including absolute information about what the government is going to do in the space, isn’t worth the paper it’s written on. At this stage in the game, we really don’t know much.”

Milk Production Continues to Increase

In its November milk production report release on December 17, USDA noted milk production has increased 3% over 2019. That’s the highest year-over-year increase since 2014. Price has encouraged dairyman to produce more milk and we see it in the numbers from November. In November, 12,000 cows were added to the herd and October was adjusted 5,000 head higher, for a net increase of 17,000 head to the U.S. dairy herd. Obviously, a surge in supply while demand either stays the same or tightens as noted previously, would put a significant level of downward pressure on prices.

Exports Hang in There

Despite the coronavirus pandemic, world demand for U.S. dairy products remains robust, and China—the world’s leading importer of dairy products—has been the frontrunner in the demand spike.

“U.S. dairy exports posted formidable volumes in October, buoyed by exceptionally strong demand from Asian markets, including China,” says Monica Ganley, analyst for the Daily Dairy Report and principal of Quarterra, Buenos Aires.

In October, the most current trade data available, U.S. exporters shipped 469.5 million pounds of dairy products into global markets, up 13.2% from the year before. After adjusting for leap day, that puts 2020 exports through October up 12.2% compared to the same 10 months last year.

“In volume terms, 2020 year-to-date exports were the strongest ever, and a weak U.S. dollar should continue to support exports in coming months,” Ganley says.

The U.S. Dairy Export Council expects exports will finish 2020 just 1% lower than the record set in 2019.

“China truly flexed its buying power in October, with dairy product shipments to the country 2.6 times greater than during the same month last year,” Ganley says. About two-thirds of China’s U.S. dairy purchases were whey products.

“Strong demand from China was the principal factor that drove U.S. whey exports to a record-high of 120.2 million pounds in October,” Ganley notes. “U.S. dried whey exports, in particular, benefitted from China’s growing appetite, with exports to that country surging to 53 million pounds, the largest volume since December 2011.”

The Haves and The Have Nots

Negative Producer Price Differentials (PPD’s) created substantial differences in monthly farm income in 2020. Farmers who might have never given much attention to the PPD deduction line in their milk check statement were suddenly forced to understand and accept this detail of the Federal Milk Marketing Order (FMMO).

“Negative PPDs occur when the component value of milk (value of butterfat, protein and other solids) in the FMMO pool exceeds the classified value of milk (value of milk as utilized) in the pool,” explains John Newton, chief economist at the American Farm Bureau Federation. “In 2020, the component value of milk approached all-time highs due to the impact of the cheese price on the protein price. Then, because the higher-of was eliminated in the 2018 Farm Bill, the Class I price of milk did not entirely benefit from higher cheese prices. As a result, PPDs dropped to historic negatives and a significant volume of milk was de-pooled (making the PPD more negative).”

Fortunately, Robin Schmahl of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin, says the negative PPD’s as we have experienced were likely an aberration this year and should “go away or be minimal next year as butter and cheese prices more closely align with each other.”

Wrangle Your Risk

“You definitely don’t sit back, because [government price support] can end in a moment and when it’s over, it’s over in a big way,” North warns. “You have to still be vigilant and as you look at strategy, I think the key descriptor to any strategy in this market right now needs to be flexibility.”

Similarly, Schmahl warns the current optimism we are seeing with Class III milk prices as futures contracts are in the $17.00-$18.00 range need to be viewed with caution.

“The recent estimates released by the USDA on the World Agricultural Supply and Demand report should cause one to be concerned and look for opportunities in the market to protect income while at the same time remaine flexible.”

He warns producers that often this type of income protection cannot be accomplished through forward contracting through the milk plant unless they allow you to do options.

“There were many this year that made the mistake of panic forward contracting through the milk plant in April, only to get run over and then deduct the negative PPD’s from those contracted prices and they had no ability to get out of those contracts,” he says.

North says protecting downside risk while leaving the upside open is the key heading into next year. He suggests producers rely on tools like the Dairy Revenue Protection program to minimize risk in the months ahead.

Dairy Outlook: Here We Go Again

Fri, 20 Nov 2020 03:01:17 GMT

If you’re a dairy producer reading commentary from economists forecasting milk prices into 2018, you’ve probably added a little more rum to your holiday egg nog. Of course, if you’re in the dairy business, a common reaction might be “here we go again.”

Looking into 2018, there’s a common reoccurring theme: too much milk and not enough room for it. In a nutshell, that’s what’s driving the milk price dive. “Milk production is too strong and there is too much dairy product in inventory, especially milk proteins,” says Mark Stephenson, a dairy economist at the University of Wisconsin.

Production and inventories aren’t just an issue here in the States – they are global problems. While butter may be in short supply in France and other parts of the European Union, there’s more powder and other products in storage than we literally know what to do with. And as production continues to grow, albeit at a slower rate, those inventories won’t clear out until prices entice a sell off.

Most economists look at 2018 as a tale of two halves. Milk prices are projected to bottom out in the first half in the high $13’s to mid $14’s. But prices are expected to rise in the second half of the year as production and inventories reach a more equitable balance. Bob Cropp, Stephenson’s counterpart at the University of Wisconsin, says prices could reach over $16 per cwt in 2018, for an average around $15.20.

Even as producers look toward a gloomy early 2018 forecast, there are a few silver linings that could help keep prices from totally reaching historic lows:

China. While U.S. exports to other regions of the world are off compared to 2017, China keeps on buying. “China’s imports in 2018 of dairy products will continue to grow, albeit at a slower pace of 8% year-over-year,” says Dan Basse, president of Ag Resource Company based in Chicago, Ill.
U.S. economy. While the ag economy, and dairy in particular, continues to struggle, the general U.S. economy is strong and gaining steam. This is good for dairy, says Nick Buyse, risk management consultant with INTL FCStone. “US annual economic growth is approaching 3.5% in 2017 with no signs of that rate slowing in 2018,” says Buyse. “In boom economic years, on-farm income also booms. This may mean stronger commodity prices – including milk prices – than are expected in 2018.

Just as U.S. dairy producers have come to expect price fluctuations, price uncertainty is also a common theme. Since production, capacity and demand together create a tenuous equilibrium, a change in one area creates reactions in another. The largest potential wrench in the system going into 2018 continues to be exports.

As the health of the U.S. export market goes, so goes U.S. milk prices. Export health rides on a few factors:

Our customers. Mexico, Southeast Asia and Canada are our top three customers. Any change in buying patterns of these three has a significant impact on sales of U.S. products. “Clearly the gigantic question on the table is Mexico,” says Andrew Novakovic, an economist at Cornell University. “In this regard it’s not so much a question of whether Mexico will be buying dairy products but rather who will they be buying them from.” Already this year U.S. market share in milk powder sold to Mexico has gone down as our southern neighbors look to diversify their dairy supply partners.
NAFTA. It’s understood by anyone in agriculture that exports are important, which makes the negotiations around the North American Free Trade Agreement (NAFTA) all that more critical. Whether that agreement lasts or not, the relationship between the U.S. and two of our top three trading partners is important to maintain healthy export markets. While President Trump continues to threaten to back out of the agreement, remember that doing so may not have immediate ramifications. First, there’s a 12-month cooling off period that will allow all sides to continue negotiations. Also, any decision to back out of NAFTA will need to come with Congressional approval.
Our competitors. The EU and New Zealand continue to be the largest competitors to the U.S. on the global market. Both countries are facing similar production, capacity and demand issues that U.S. producers face. “I’m keeping a watchful eye on EU milk production, policy on supporting dairy producers should prices become untenable and how it handles intervention stocks,” says Sara Dorland, a market analyst with the Daily Dairy Report. Weather issues continue to plague pastures in New Zealand, impacting production.

Even with low milk prices, thankfully feed costs should remain relatively low as well. Basse says that feed prices, at least corn and soybean meal, should remain flat at least into summer. He expects corn prices to range from $3.30 to $3.75/bu into spring. Soybean meal will range from $305 to $350/ton into mid-year, he says. The kicker is non-feed costs, and especially labor expenses, that continue to grow and compete with feed costs for the greatest impact on costs of production. Expect those costs to continue to rise.

So looking into 2018, producers will need to tread water in the first half of the year and anticipate at least some price relief going into the second half. As usual, any changes to production or global markets could change everything, so be ready to make risk management changes as markets react to changing dynamics.

Trusteed IRAs: why they are popular, who should consider them, what benefits they offer

Fri, 23 Sep 2022 20:01:45 GMT

Q: I’ve heard a lot about trusteed IRAs. How do they differ from traditional IRAs?

A: Simply put, trusteed IRAs offer potential tax benefits of traditional or Roth IRAs with the protection and control of a trust. They provide tax advantages that stretch into the future and offer the ability to control how, when and in what amounts assets are distributed. Trusteed IRAs have become more popular given some of the inherent limits of traditional IRAs and the growing prevalence of self-directed retirement accounts combined with the decline of pension plans. They also are more cost-effective than setting up a trust and are generally more compliant with tax laws.

Q: Who should consider a trusteed IRA?

A: There are several reasons why someone should consider a trusteed IRA, the most consequential of which is if an owner has an interest in controlling assets and realizing tax benefits beyond their lifetime. This can mean an owner is concerned with the financial discipline or sophistication of heirs.

Other reasons include if an owner remarries and wants to provide for a current spouse as well as children from a previous relationship and/or is concerned about IRA management in the event of incapacitation.

Q: I’m in the middle of estate planning. How can a trusteed IRA help with the process?

A: They can help process if only to preserve the potential tax-advantaged accumulation of IRA benefits to pass on to heirs. Under traditional or custodial IRAs, a beneficiary is required to withdraw at least the Required Minimum Distribution (RMD) each year. However, a beneficiary may withdraw additional amounts, for any reason, at any time—and incur possible fees or tax penalties.

Additionally, owners can restrict payouts to a beneficiary to the RMD, enabling it to operate as a spendthrift trust. At the owner’s death, the trusteed IRA would be automatically split into separate accounts for individual beneficiaries, with distribution terms defined for each account.

Another benefit is that estate plans don’t need to be rewritten or updated; trusteed IRAs can be added independent of an estate plan to protect IRA assets which legally pass outside of wills.

Q: Is a trusteed IRA better suited to farmers or owners of farm assets?

A: Not expressly, but a trusteed IRA can play an important role in legacy planning and preservation of farm assets over multiple generations. Given the growing generation gap among farming families, trusteed IRAs could be a way help preserve farm family values over generations from beyond the grave. Moreover, as farm economics continues to change, farmers may find value in the highly customizable nature of trusteed IRAs. In the event of a divorce in the family, for example, assets can be made to not leave the family’s bloodlines.

Q: Are there any downsides to trusteed IRAs?

A: Given that a trusteed IRA requires a corporate trustee, it’s harder to change ownership and family members cannot be named as trustees. Not all financial institutions offer trusteed IRAs so they may not be widely available to interested clients. Additionally, while they offer greater customization and more control, trusteed IRAs carry some limits. To have the highest level of customization and control, a trust would need to be created.

Please send questions, comments or requests to address a topic or issue to Rees Mason at rees.mason@ml.com.