Dairy prices through this year’s second half are on track to be the best since 2014’s records. The recovery, combined with assistance from the new Dairy Margin Coverage program, doesn’t mean a return to full prosperity. But the improvements should help stop the bleeding and perhaps begin healing balance sheets.

Second-half milk prices may average $19.10 per hundredweight, according to mid-August Chicago Mercantile Exchange futures forecasts, compared to $17.45 per hundredweight in the first six months of 2019. Production levels better aligned with demand, along with world markets that are stabilizing in spite of trade-policy headwinds, are the main factors propelling the improving commercial outlook.

Commercial-use dairy-product consumption grows

Total dairy-product consumption growth has outpaced production in recent months, encouraging stronger milk prices during the second half of 2019 – despite a decrease in exports from the previous year’s first-half surge. Increases in milk and even milk-solids production have slowed almost to a halt after several years of expansion. Improvements have already occurred in U.S. nonfat-dry-milk prices.

Meanwhile July’s cheese prices presage a better level for that important contributor to farm milk prices, which should be sustained through the end of the year. Also butter prices this year may exceed the 2017 record of $2.33 per pound.

Consumption of fresh dairy products, namely fluid milk and yogurt, continued to slide during 2019’s second quarter, American-type cheese stocks tightened as domestic commercial use grew during the quarter despite reduced production. Use of all other cheese advanced even more strongly, as did production.

Total domestic use of all dairy products on a component weighted-average milk equivalent basis increased by more than 4 percent during the period. It was a time during which milk-solids production was essentially flat.

U.S. dairy trade decreases

U.S. exports of all major products except cheese decreased sharply from a year earlier during second-quarter 2019. Exports of butter and anhydrous milk fat declined as increased domestic consumption of milkfat in a broad variety of products continued to draw cream away from production and exports of those products. Exports of dry-skim-ingredient products reverted to their general levels of 2015-2017, following strong but temporary surges during the first half of 2018.

The growth in cheese exports is welcome following the previous year’s disruptive tariff actions, which began after May 2018. On balance the percentage of U.S. milk-solids production devoted to exports in second-quarter 2018 decreased by more than 3 percent of total U.S. production from a year ago, from 17.4 percent to 14.3 percent.

The normalization of trade with Mexico after this past spring’s agreement to remove retaliatory tariffs against U.S. cheese should buoy exports to U.S. dairy’s biggest trading partner. But China remains a wound to dairy trade, one that could be aggravated by new rounds of tariffs as the United States and China have threatened. Measured on a milk-solids basis, U.S. dairy exports to China during second-half 2018 decreased by 40 percent from the first half, before the various tariff disputes with China began. U.S.-China exports during first-half 2019 were 55 percent less than those a year earlier, by the same measure.

Dairy imports were equal to 3.8 percent of U.S. milk solids production during second-quarter 2019, an increase from 3.1 percent a year earlier. Of those imported solids, 21 percent were imported as cheese, 27 percent were milk-protein concentrate and casein, and 12 percent were butter and anhydrous milkfat – a fairly typical mix in recent years.

Milk-cow numbers stabilize

Monthly dairy-cow numbers in the United States had been decreasing to less than year-earlier levels by steadily larger amounts during second-half 2018. But the year-over-year decline has stabilized this year at between 80,000 and 100,000 fewer cows. The herd reduction has been necessary to accommodate turbulence in dairy exports and offset increases in milk solids production per cow, which have persistently outpaced growth in total domestic dairy consumption. Total milk production during the second quarter was virtually flat from a year ago, while total milk-solids production increased by less than .5 percent. All those developments indicate stronger milk and dairy-product prices in coming months.

Cheddar cheese forecast to do well

Flat milk production and strong growth in domestic consumption of Italian-type cheese appears to have diverted milk away from American-type cheese production – and toward producing other types of cheeses during the second quarter. That combination augurs well for Cheddar-cheese prices during second-half 2019.

Dairy-product inventories vary

Stocks of butter are following typical seasonal patterns, peaking generally in June. Stocks of American-type cheese and nonfat-dry milk are in line with long-term trends for days of commercial use on hand. Holdings of other than American-type cheese reached a record 616 million pounds this past April, despite strong domestic demand growth and increased exports.

Dairy-product, Federal Order Class prices increase

Following several years of globally oversupplied dried-skim milk, U.S. Department of Agriculture-Agricultural Marketing Service survey prices for nonfat-dry milk have finally increased sustainably to more than $1 per pound during the past few months. That’s the first time in more than four years. The Agricultural Marketing Service survey price for Cheddar cheese for July was the best the monthly cheese price had been since the end of 2014. Both price movements reflected some light appearing at the end of a long tunnel of excess production. During that time even record butter prices hadn’t increased farm milk prices to financially sustainable levels.

U.S. milk production that has struggled to find a market during that period has been channeled heavily into Cheddar cheese produced in 500-pound barrels. The Agricultural Marketing Service began reporting in June the separate monthly prices compiled from the National Dairy Product Sales Report for block and barrel Cheddar cheese. That was even though only the combined Cheddar-cheese price is used in the federal milk marketing order product-price formulas. The move effectively recognizes dairy’s concern about recent-year deviations from the traditional 3-cent price differential between Cheddar cheese produced in the two forms. The difference has averaged 11.6 cents on the CME spot market and 10.7 cents in the Agricultural Marketing Service survey price this year through early August.

Beginning in May the federal order Class I mover price has been set by a new formula mandated in the 2018 farm bill. In the four months since the change, that has resulted in an average $0.55-per-hundredweight better Class I price at 3.5 percent fat than under the old “higher-of” mover.

Feed prices updated, improved

The U.S. Department of Agriculture has improved the Dairy Margin Coverage program, the successor to the previous Margin Protection Program for Dairy. The new program more accurately reflects the actual cost of the hay that producers feed to their cattle. Specifically the USDA has incorporated better-valued dairy-quality alfalfa into the alfalfa-hay price data used to calculate the monthly Dairy Margin Coverage milk-price-feed-cost margin.

The new formula hay price is the simple average of

  • the average price received by farmers throughout the United States for all grades of alfalfa, and
  • the average price received for premium and supreme-grade alfalfa hay in the five-largest milk-producing states.

Previously the Margin Protection Program formula used only the lesser U.S. average price for all grades of alfalfa. The change increased the calculated Dairy Margin Coverage feed cost by an average of $0.20 per hundredweight of milk for the first six months of this year.

The increased calculated cost in turn reduces the Dairy Margin Coverage margin by the same amount, thereby increasing payments for coverage at the greater margin levels available under the program. The average Dairy Margin Coverage monthly payments for program coverage at the maximum $9.50-per-hundredweight level is $1.04 per hundredweight for the first six months of 2019, prior to the reduction made as part of federal sequestration and payment of premiums.

As of mid-August USDA’s price forecasts largely agreed with the dairy-futures markets that producer milk prices for all of 2019 would be about $2 per hundredweight better than in 2018. The USDA’s Dairy Margin Coverage Decision Tool projected the Dairy Margin Coverage margin would average about $9.20 per hundredweight for all of 2019. Also it projected it would not rise to more than the maximum $9.50-per-hundredweight program-coverage level until August. Average payments for that level of coverage were projected at about $0.50 per hundredweight for the year, net of sequestration, for as much as 5 million pounds of a producer’s production history. After factoring in the cost of premiums, the final net gain for farmers would be about $0.35 per hundredweight. Producers can register to participate in the program this year through Sept. 20.

The Dairy Margin Coverage program provides producers with a cushion to support the production of about their first 200 cows. But for most producers that’s not adequate on its own to remedy the drain on farmer resources seen since 2014. An improved price is fundamental to industry health.

Fortunately most dairy economic signals are in favor of price improvement in the second half of this year, aiding significantly in sector-wide recovery. While continued gains will be necessary to put dairy on a solid path to recovery, 2019 appears to be a more positive year for farmers.

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Peter Vitaliano is with the National Milk Producers Federation, a farm-commodity organization representing most of the dairy-marketing cooperatives serving the United States. Visit www.nmpf.org for more information.

Dairy Management Inc. and state, regional and international organizations work together to drive demand for dairy products on behalf of America's dairy farmers, through the programs of the American Dairy Association, the National Dairy Council and the U.S. Dairy Export Council.