There were many reasons for those low milk prices – excess U.S. and world milk production, trade wars, etc. – but we seem to be getting back to better prices at the close of 2019, and I’m forecasting that average prices in 2020 will be even better. So what does next year and beyond look like?
We are going to start 2020 with milk prices in retreat from the November 2019 peak prices. This is expected, as Thanksgiving through the Super Bowl is the big demand season for dairy products, and buyers have what they need to see them through the seasonal demand surge. And although inventories of many products have been drawn down from last year’s levels, there appears to be enough product available to start the new year.
The year ahead
Nobody is panicking that product isn’t available, so dairy buyers are taking a wait-and-see approach. There’s no need to buy early because prices may go lower as we head into the spring flush. That will be the next big piece of information to watch. Are producers trying to make a lot of milk to shore up their damaged balance sheets with better prices, or will the flush be small and milk supplies possibly tight?
Personally, I’m thinking that milk supplies may feel tight by April or May. Poor-quality forages and limited quantities are available to Upper Midwest producers. We aren’t seeing a lot of expansions. And I suspect that we will continue to see higher-than-normal exits as folks continue to make the decision to get out of milk production if feed supplies are short and while asset values are still holding up.
We also need to look overseas. Relatively higher growth in milk production from countries like New Zealand and Ireland was a story for the last decade, but I don’t think that can be sustained for much longer. The limited land base in these pasture systems will not allow growth at the same rate without changing to a more intensive approach to feeding.
Australia is another major exporter, but they have been in declining production for a decade now as drier weather patterns and lower profits have restricted output. Dry weather has also been a factor in much of Europe for the past two years. That, combined with low milk prices, has further curtailed the growth they experienced after quotas came off the EU countries in 2015.
I think the world may feel tight on dairy product inventories in 2020. That’s why I’m optimistic that we will see milk price support as we move into the spring flush, and we will probably find more opportunities for export sales. If we can settle our trade dispute with China, and other countries are looking for product, I expect that U.S. butter prices will rebound as Europe finds a better home for some of its sales, skim milk powder prices will remain strong, and perhaps we will even see additional export sales of cheese.
All of this leads to my price forecast of an average 2020 milk price that would be an improvement of more than $1 on the 2019 prices, and those were more than a $2.30 improvement on 2018.
Is there a ‘but?’
Dairy farmers have gone through five years that have been as difficult as the last half of the 1980s were. The higher milk prices are a welcomed relief, but the entire supply chain needs to be healthy, and dairy processors are showing signs of problems too.
Federal Milk Marketing Orders (FMMOs) price more than 75% of the milk in the country, and each month they determine the minimum price processors must pay to producers. The current method used for price discovery is called “Product Price Formulas.” Plants are surveyed for the sales price of certain dairy products, and the FMMOs use those values to impute what the milk must have been worth. The basic idea of the formula is something like:
Component Value = (Product Price - Make Allowance) x Yield Factor
So, for example, the November butterfat price in your FMMO-regulated milk check was:
$2.3195 = ($2.0869 - $0.1715) x 1.211
You can see that $2.3195 in your November milk check, and the $2.0869 was the weighted average sales price of butter seen in the weekly National Dairy Products Sales Report for the month of November. The $0.1715 is the “make allowance” and represents the cost of transforming milk into a pound of butter. And the 1.211 is the “yield factor” which represents the amount of butter you can make from a pound of butterfat. (U.S. butter is only about 80% butterfat, so you can make more than a pound of butter.)
The make allowance and the yield factors are not updated every month like the product prices are. In fact, they are only updated when the industry feels like they no longer represent costs or yields in modern plants. It has been more than a decade since these values have been updated, and processors are suggesting that these factors need to be reconsidered.
In order to be reconsidered, the USDA would have to receive a request for a hearing. If the hearing is granted, much evidence would be offered in a federal court as to the current costs and yields in plants by processors, cooperatives and many other folks. If the USDA felt there was justification for a change, they would offer a recommended decision and take additional comments before writing a final decision. The final decision would then be voted on only by producers or their cooperatives. The vote would determine whether an amended FMMO would be implemented or terminated.
Check out the math
The reason this is important is because of the math in the product price formulas. If the make allowance goes up, the butterfat value in a milk check goes down (and vice versa), and no dairy producer wants the milk check to be smaller. Since dairy producers are the ones who get to vote on FMMO amendments, I often hear folks saying that if processors need more money, they can just raise their product prices. But remember, if that happens, the product price formulas will just raise the price of milk they have to pay, and they are caught in a cost/price squeeze that is hard to escape.
If the milk price is too high because the product price formulas are not reflecting current costs or yields, there is still a relief valve available to processors. Manufacturing plants are not required to be regulated – only fluid milk plants are. So a yogurt, ice cream, cheese or butter powder plant can choose to opt out of a federal order pool and pay whatever price is necessary to get milk into the plant, and it can be lower than the federal order minimum.
Plant de-pooling has become more common as pooling requirements have been relaxed and as Class I utilization becomes smaller in FMMOs. At some point, jumping in and out of a federal order pool may become evidence of “disorderly marketing” conditions, which is something federal orders are meant to fix.
Let’s hope for a better year of milk prices in 2020 and a better decade than the one we’ve just finished. We expect prices to rise and fall, but nobody is in a hurry to repeat the last five years. Let’s also remember that the entire supply chain needs to be healthy, and it is likely we will need to examine the make allowance and the costs of processing in the years ahead. 
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Mark Stephenson
- Director of Dairy Policy Analysis
- University of Wisconsin – Madison
- Email Mark Stephenson
