What Does 2021 Look Like?

The prior post reviewed how the year 2020 compared to 2018 and 2019.  This post will review how the year 2021 may look based on current futures prices compared to 2018, 2019, and 2020.  Futures prices can change quickly, but this post will review how the current futures for 2021 compare to the three prior years.  All Federal Milk Marking Order (FMMO) pricing data used in this post is now complete for 2020.

The futures information below will cover the same areas as in the prior post, covering the four commodities used to price producer milk, cheese, butter, Nonfat Dry Milk (NDM), and dry whey.  It will also examine 2021 futures pricing for Class III and Class IV milk.

One of the big issues in 2020 was the huge spread between Class III and Class IV milk prices.  The new pricing formulas for Class I skim milk have made the price of Class IV skim milk extremely important because the price of Class IV milk is now always in the Class I milk price formula.  It was previously in the Class I formula only when the Class IV skim milk price was higher than the Class III skim milk price. The spread between Class III and Class IV milk prices in 2019 was one of the five factors discussed in November 22, 2020 post to this blog for causing negative PPDs.

The four commodities used to price producer milk will be reviewed first.

Chart I below shows the futures prices for cheese in 2021. While January's price is low, overall, the 2021 pricing is positive.  On the average, the cheese price is $1.85 per pound, slightly below 2020 but higher than 2018 and 2019.  This will make the Class III milk price and the price of milk protein relatively high.  For details on the relationship between the cheese price and the Class III milk/milk protein prices, see this post.

Chart I - Futures Cheese Prices

Chart II shows the futures prices of butter in 2021.  Prices for butter were extremely high in 2018 and 2019.  In 2020, with higher butter inventories, the price dropped significantly.  In 2021, some price improvement is expected and will bring the average price slightly above 2020, but still well below the 2018 and 2019 prices.  The price of butter is the basis for pricing butterfat for the Federal Orders.

Chart II - Futures Butter Prices

NDM is primarily an export product and is subject to international supply and demand, currency exchange rates, and other international events.  The 2021 price of NDM is expected to be well above the prices in the prior three years (Chart III below). 

NDM is the basis for pricing Class IV skim milk. The Class IV skim price is in turn used for pricing Class I and Class II skim milk and the combination of the three Classes, I, II, and IV, has a significant impact on the average or Uniform price of producer milk.  Because both domestic and international factors influence the price of NDM, there will be changes and volatility, but for now the increases in the NDM price is very good news for producer milk prices.

Chart III - Futures NDM Prices

Chart IV shows the futures prices for dry whey.  The price of dry whey is also very dependent on international forces and can change quickly and can be volatile.  Dry whey prices are the basis for pricing "Other Solids" in the Class and Component pricing formulas.   The 2021 monthly pricing of dry whey varies within a very tight range between $.43 and $.44 per pound.

Chart IV - Futures Dry Whey Prices

Overall, the futures prices of the above four commodities are positive.  In the charts below, the impact of these commodity prices is shown for Class III and Class IV milk.  The prices of Class III and Class IV milk are also the basis for pricing Class I and Class II milk.  

Because the Class III milk price is primarily dependent on the price of cheese, the Chart I cheese prices above and the Chart V Class III prices below show a very similar pattern.  See this prior post to review the relationship between the cheese price and the Class III price.  The 2021 futures market is showing an average price of $17.94 per cwt. for Class III milk. This is a good price, higher than 2018 and 2019 and only slightly lower than the 2020 price for Class III milk.

Chart V - Futures Class III Milk Prices

Chart VI shows the futures prices of Class IV milk.  Because the Class IV skim milk price is based entirely on the price of NDM, Charts II above and Chart VI below have a very similar pattern.  The average 2021 price of $15.64 per cwt. of Class IV milk is well above the 2020 price.  The 2020 price of $13.49 per cwt. is well below the futures prices for 2021.  The low 2020 price had a severe financial impact of producer milk prices.  The reason for this severe financial impact will be covered in Chart VII and VIII below.

Chart VI - Futures Class IV Milk Prices

Chart VII shows the comparative 2021 prices of Class III and Class IV milk prices.  When the new Class I formula was developed, it changed Class I pricing from being based on the higher of Class III or IV milk to being based on the average price of Class III and IV milk plus $.74 per cwt.  During 2020, when Class III prices were high and Class IV prices were low, this caused an unusually negative impact on the Producer Price Differential (PPD) and kept producer milk prices lower than before the change in the Class I formula.

Chart VII - Futures Class III and Class IV Milk Prices

When the spread between the Class III and Class IV milk prices is greater than $1.48 per cwt, the impact of the new formula will price Class I milk lower than the previous Class I formula.  See this prior post for an analysis of the Class I formula change. This situation will continue to have a negative impact on the PPD through July 2021 and will only have a positive impact on the Class I price beginning in August 2021.

Chart VIII - Spread Between Class III and Class IV Milk Prices

What does all this mean for producer milk prices in 2021?

Based on the current futures prices, 2021 should be a good year for producer milk prices and will have an increasing positive impact as the year progresses. The price for milk protein will be consistently good and butterfat prices will be increasingly good.  A producer that concentrates on component levels in his milk will have a very good year financially.

During 2020, the low price of NDM and Class IV skim milk contributed to large and consistent negative PPDs.  If prices remain as they are currently traded on the futures market, the slight decreases in the Class III price and the significant increases in the Class IV milk will lessen the negative PPDs and help create positive PPDs toward the end of 2021.

The futures prices above were based on data from early 2021.  Futures prices can change rapidly and NDM and dry whey prices can change very quickly based on both domestic and international events.