In this column, Progressive Dairy summarizes issues in the news and attempts to describe how they might affect dairy farmers. Look for more extensive background and details at Progressive Dairy.
ALL-MILK AND MAILBOX PRICES
What happened?
The USDA released December and 2020 annual “mailbox” milk price summaries, providing yet another illustration of how the COVID-19 pandemic disrupted milk marketing last year. When compared to the USDA’s all-milk prices, the price differences also reflect challenges to dairy risk management.
What’s next?
As calls for dairy policy reform grow louder, revamping the Dairy Margin Coverage (DMC) program formula is one of several issues receiving attention. The challenge with using the mailbox milk price in risk management programs is multifaceted, warns John Newton, former chief economist with the American Farm Bureau Federation who has now moved to become chief economist for U.S. Senate Ag Committee Republicans.
First, the release of mailbox milk prices lags the release of the all-milk price by several months. Second, depooled milk would need to be taken into consideration to prevent double-dipping. Finally, “moral hazards” may result from the lack of incentive to protect against higher costs imposed on dairy farmers, instead using the government to cover some milk check deductions.
Bottom line
Comparing the all-milk price and mailbox price isn’t exactly apples to apples. In short, the all-milk price is the gross milk price farmers receive and includes quality, quantity and other premiums. The mailbox price is defined as the net price received by producers for milk, including all payments received for milk sold, and deducting costs associated with marketing the milk.
The average all-milk and mailbox prices also do not necessarily reflect the same geographic areas. While the USDA National Ag Statistics Service (NASS) reports monthly average all-milk prices for the 24 major dairy states, the mailbox prices are reported by the USDA’s Agricultural Marketing Service (AMS) and covers selected FMMO marketing areas. In Table 1, Progressive Dairy attempts to align the state-level NASS all-milk prices and the AMS FMMO marketing area mailbox prices as closely as possible.
Historically, these two national average milk prices closely followed one another. With COVID-19 market disruptions, negative producer price differentials (PPDs) and depooling, the difference between all-milk and mailbox prices was record-large in 2020. Based on the USDA data, the U.S. average difference between mailbox and all-milk prices grew to $1.36 per hundredweight (cwt) in 2020, a substantial increase from 2019 and 2018. In October and November 2020, the USDA all-milk price was more than $2 per cwt higher than the national average mailbox milk price.
Also, remember these are averages for large volumes of milk across large geographical areas. Individual producers within each region may be affected far more dramatically.
The difference in the all-milk price and the mailbox price represents an additional challenge: USDA risk management programs are based on the all-milk price. With the mailbox price below the all-milk price, producers are unable to protect against falling net prices impacted by such things as negative PPDs.
NEGATIVE PPDs
What happened?
FMMO administrators have announced uniform prices and PPDs on March milk marketings. Uniform prices improved somewhat, while PPDs continued their slow climb out of historically negative depths of 2020.
Negative PPDs were also the topic of a webinar April 13, hosted by the Minnesota Milk Producers Association and Wisconsin-based Dairy Business Association and featuring dairy economist Marin Bozic. (Visit the Progressive Dairy website and read “March negative PPDs continue to climb out of 2020 depths.”)
What’s next?
Two major drivers of negative PPDs, the relationship between Class III and Class IV milk prices and depooling, look like they will continue.
Although the March Class III-Class IV price gap of $1.97 per cwt was the smallest since May 2020, that canyon remains wide by historical standards. Near-term, the FMMO Class III-Class IV price gap averaged $2.27 per cwt in the first quarter of 2021. As of the close of trading on April 13, Chicago Mercantile Exchange (CME) futures prices indicated the gap grows to $2.87 per cwt in the second quarter, closes to $1.99 per cwt in the third quarter and tightens further to 90 cents per cwt in the fourth quarter of the year. That would yield a Class III-Class IV milk price gap of $2.01 per cwt for the year, creating incentives for depooling the higher-value Class III milk.
Bottom line
March PPDs improved 30 to 64 cents from February but remained negative in six of seven applicable FMMOs – although not nearly as dramatic as those seen during most of the second half of 2020.
Total Class III milk pooled across all FMMOs in March 2021 was about 1.55 billion pounds, down from 4.21 billion pounds a year earlier. Class III utilization was about 14% in March 2021, under the 31% pre-COVID 19 total for March 2020 and far below the average of about 41% for all of 2019.
OTHER UPDATES
Updates on news items covered in recent “What Happened? What’s Next?” columns:
- World Dairy Expo: World Dairy Expo (WDE) and Dane County officials confirmed the 54th edition of the event will be held at the county-owned Alliant Energy Center, Sept. 28 – Oct. 2, 2021, in Madison, Wisconsin. Watch Progressive Dairy for details.
- Exports: U.S. agricultural exporters overcame some of the impediments that plagued them in recent months, helping create a resurgence of foreign sales in February (the latest USDA data available). U.S. suppliers still face shipping delays and other challenges.
On a milk solids equivalent basis, February 2021 dairy product exports jumped 15% compared to the same month a year ago, driven primarily by sales of milk powders to Mexico and Southeast Asia and whey products to China. At $565.5 million, the value of February exports was up about 7% from the same month a year earlier and up about $100 million from February 2019.
Large shipments to Pakistan (2,075 head) and Vietnam (2,193 head) and smaller sales volumes to a growing list of diverse geographic markets boosted February’s exports of dairy replacement heifers. The USDA estimated 4,741 head were exported during the month, the highest total in 13 months.
At 210,193 metric tons (MT), February 2021 alfalfa hay exports were the second-highest monthly total since August 2020.
