How did 2020 Compare to 2018 & 2019?

This post will show how 2020 YTD is compared to 2018 and 2019 for the dairy industry.  Although not all data is in for 2020, there is enough available data to show how 2020 was different than the prior two years.  There were differences in volatility for some parameters and minimal changes for other statistics.  Most productivity factors continued to show improvements while one was stagnant.  The parameters reviewed will cover pricing, productivity, and growth in production.  Much of the data is based on 12-month averages to minimize the impact of seasonal changes.

PRICING

There are four commodities that are used to price producer milk.  They are cheese (blocks and barrels), butter, Nonfat Dry Milk (NDM), and dry whey.  Charts I though V show the Agricultural Marketing Service (AMS) weekly prices of these commodities.

Cheese prices have been the most volatile of any commodity in 2020 and they were heavily influenced by COVID -19.  The price of cheese as used by the Chicago Mercantile Exchange and AMS is based on the price of cheddar cheese between 3 and 30 days of age.  In the early stages of COVID-19, when a lot of dining changed from restaurants to grocery stores, the market was unprepared for such a shift and and there was a lot of outages and uncertainty.  As a result, cheese prices dropped drastically.  With the low prices there were significant buys for both domestic use and exports.  Buyers reduced the supply of available cheese and prices skyrocketed to record highs.  That same scenario was repeated in the third quarter.  The COVID-19 stimulus programs like CFAP also contributed to the volatility. 

As the impact of COVID-19 has lessened and cheese producers have adjusted to the new demands, cheese prices now appear to be approaching more normal levels.  

Block and Barrel prices followed very similar patterns (Chart I and II).  Cheese prices heavily influence the Class III skim milk price and the milk protein price.

   Chart I - AMS Weekly Block Cheese Prices

Chart II - AMS Weekly Barrel Cheese Prices

Butter prices began falling in mid 2019 with a greater supply of butter available.  Butter inventories have grown by 28 percent in the last year.  While butter is a domestic growth category, much of the growth is filled by the growth of imported Irish butter.  Butter followed the pattern of drastic price declines at the initial stages of COVID-19 but recovered quickly and then went into a continuance of the declining price which started in 2019 (Chart III).

Chart III - AMS Weekly Survey of Butter Price

NDM is primarily an export product and is priced on global conditions.  The international NDM prices fell a little earlier than the domestic prices for cheese and they have recovered more slowly.   They have not reached the highs achieved in 2019 (Chart IV). The 2021 futures prices are not showing significant changes from the current prices.  NDM is the basis for pricing Class IV and Class II skim milk and it is also the partial basis for pricing of Class I skim milk.  With the new Class I pricing formulas, the price of NDM has become very influential on the Uniform price and the Producer Price Differential. 

Chart IV - AMS Weekly Survey of NDM Prices

Dry whey prices do not appear to be influenced by COVID-19 (Chart V).  Dry Whey is primarily an export item and pricing is based on international markets.  The price of dry whey is used to price "Other Solids" in the Class and Component pricing formulas.

Chart V - AMS Weekly Survey of Dry Whey Prices

PRODUCTIVITY

Milk Productivity has not been influenced by COVID-19 in 2020.  The trend of producing more milk per cow has continued and the percent of butterfat and milk protein have continued to show gains.

Milk per cow has been increasing consistently over the last three years, increasing from 62.9 pounds/day at the beginning of 2018 to 64.7 pounds/day in November 2020 (Chart VI).  

Chart VI - Milk Pounds per Cow per Day

The percent of butterfat in milk has shown continuing improvement over the last three years.  It is increasing by .027 percent butterfat per year and over the last three years has grown from 3.83 percent to 3.91 percent (Chart VII).  This represents an increasing rate of butterfat production of .7 percent per year. There was no COVID-19 impact on the gains in butterfat production. 

Chart VII - Percent Butterfat in Milk

The price of milk protein hit a new record in 2020, but the gains in milk protein productivity have not been strong.  Milk protein percent has gone up and down over the last three years and is showing only an increasing rate of .2 percent per year over the last three years (Chart VIII).  This is an economic opportunity.

Chart VIII - Percent Protein in Milk

Included in this section is Somatic Cell Count (SCC).  A lower SCC does increase cheese yields and therefore does increase productivity in processing.  This is a long-term trend which just keeps getting better and better.  The year 2020 was a strong year for further decreasing SCC (Chart VIII).

Chart IX - SCC for the Four FMMOs with Incentive Payments for Lower SCC  

MILK PRODUCTION

Milk production must keep in sync with domestic consumption trends and exports.  As covered in a prior post, fluid milk (Class I) consumption is down, Yogurt is down (Class II),  Cheese is up (Class III), and butter and NDM is up (Class IV).  In total the growth factor in domestic consumption and exports as measured by butterfat is about a 1.5 percent annually.

Milk production is increasing by about one percent annually (Chart X). The year 2020 was a strong year for increasing milk production.

Chart X - Milk Production

Beginning in the middle of 2020, the number of cows began increasing again.  They had dropped by three percent in 2018 and 2019, but they are again increasing.  This is signaling a possible period of overproduction which causes price declines.

Chart VI - Number of Dairy Cows in the U.S.

PUTTING IT ALL TOGETHER

The year 2020 was certainly a strange year primarily because of COVID-19.  The year of 2021 should be a more typical year.  Dairy commodity pricing and particularly cheese pricing should return to a less volatile state.

We do have the possibility of milk overproduction as cow numbers are increasing, milk per cow is increasing, component levels are increasing, and SCC is dropping.  The addition of more cows that are more productive will increase milk availability beyond that needed.  When that happens, there is usually a decrease in milk pricing.

When 2020 in completed, an update will be posted to this blog.  Hopefully 2021 will minimize the COVID-19 influence as vaccines are administered. 

HAPPY HOLIDAYS to the many readers of this blog.  The year 2021 is almost here.

 

  

 

The Impact of De-pooling and the Impact of Changing Consumption Trends on the Producer Price Differential

Producer Price Differentials (PPDs) are complicated and confusing. They also have a major impact on milk payments to producers. The prior two posts covered the negative PPDs in California and the five reasons for negative PPDs.  One of the difficulties in understanding fluctuations and negative PPDs is that there are five factors at work all moving in different directions at different times.  Based on comments from the post on the five reasons for negative PPDs, the explanations for two were difficult to understand and will be further explained in this post.  They are the following:

• A significant amount of Class III is being de-pooled.  That increases the amount of a negative PPD and lowers a positive PPD.   When Class IV is de-pooled, it lowers a positive PPD.

• As less fluid milk is consumed, there is a smaller percentage of Class I milk in the mix.  Because Class I pricing is formulated to be the highest paid milk, when there is a smaller percentage, the "Uniform" or average price will be lower.

Class I milk cannot be de-pooled and Class II milk is small enough to be inconsequential.  Therefore, the de-pooling examples deal only with de-pooling of Class III and Class IV milk.

The Class III milk price paid to a producer is based on the value of milk protein, butterfat, and Other Solids in the delivered milk.  That is the basis for the initial payment to producers in a Class and Component Federal Order.  At the end of a month when the receipts are complete, a weighted average of the four Classes at their specific pricing formulas is calculated.  This is known as the Uniform price.  The PPD is the difference between the Uniform price and the initial payment based on components.

To better explain the reasons for the two events listed above that can lower a negative PPD, examples have been prepared below.  In these examples, only one variable is changed at a time.  All other variables are held constant to better understand the impact of each event.  In the examples below Class III milk is de-pooled when it is high, and Class IV is de-pooled when it is high.  Milk is de-pooled to avoid paying a negative PPD.

DE-POOLING WHEN CLASS III PRICE IS HIGHER THAN THE UNIFORM PRICE

Table I below shows the base case. In this example The Class III price is lower than the Uniform price causing a negative PPD.  This happens when the Class IV milk is significantly lower than the Class III.

Table I - Negative PPD for base case

Table II shows what happens as all the Class III milk in this example is de-pooled.  The negative PPD doubles, going from -$.31 to -$.60 per cwt.  While the Class III milk that was de-pooled has avoided the negative PPD, the balance is made up by those that are still in the pool.

Table II - Impact of de-pooling Class III milk

LONG-TERM IMPACT OF PPD WITH CHANGING CONSUMER CONSUMPTION

Table III shows the long-term impact of changing domestic consumption.  Fluid milk, Class I, is declining by about 2 percent annually.  Cheese consumption, Class III milk, is increasing by about two percent annually.  This table shows the impact of these changing consumer patterns on PPDs over five years.  Class I milk has gone from making up 24 percent (Table I) to making up just 21 percent (Table III).  During these five years, the Class III milk has increased from 48 percent to 52 percent of the total milk.  With less of the high-priced Class I milk, the negative PPD has increased from -$.30 to -$.35.  In this example, nothing has changed except for the mix of the four milk Classes.

This is perhaps a small factor, but as the consumption trends of less fluid milk continue, that will continue to lower the Uniform price of milk and thereby make negative PPDs larger and positive PPDs smaller.

Table III - impact of changes in Domestic Consumption

DE-POOLING WHEN CLASS IV PRICE IS HIGHER THAN THE UNIFORM PRICE

Occasionally, the Class IV milk price may be higher than the Class III milk price.  In this case, some Class IV milk would likely be de-pooled to avoid the paying a negative PPD.  In this example, it is assumed than all of the Class IV milk is de-pooled. Table IV shows the base case with no de-pooling and Table V shows the impact of de-pooling.

Table IV - Class IV milk is priced above Class III milk

De-pooling the higher priced Class IV milk has reduced the Uniform price and thereby has reduced the positive PPD from $2.09 per cwt. to $1.89/ cwt.

Table V - Impact of de-pooling Class IV milk

SUMMARY

Everything about the PPD is both complicated and confusing, but it is also very impactful on producer pricing. The chances of a high positive PPD are slim under the existing conditions.  The short-term issue is the significantly lower price of Class IV milk compared to Class III milk.  This is not likely to change in the short-term.  

The driver of a long-term mix with less Class I fluid milk and more Class III milk for cheese will also have a negative impact on PPDs.  This is also not likely to change in the short-term and will become more impactful in the long-term.