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.