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Dairy Outlook: October 2020

Dairy Outlook: October 2020
By David L. Swartz and Robert C. Goodling et.al
 
Margins Turn Red as Milk Prices Fall and Feed Prices Rise
 
August All Milk Price fell over a dollar from the temporary high in July. Projections based on Class III and Class IV futures suggest a brief resurgence of the All Milk Price followed by a period of stagnant movement as Class III drops and Class IV slowly gains as both Class III and Class IV approach the $17 range into 2021 (Figure 1). A different story is forming when it comes to feed markets. August prices for Pennsylvania saw an abrupt end to the five month downward trend in overall feed price, while nationally feed costs continued to dip a few cents more (Table 1 and Table 2). Historically, Pennsylvania's feed costs are higher than the national average, but seeing a difference in trends may suggest a more difficult road ahead for state producers. Realize Tables 1 and 2 predict a slightly lower feed cost for September and October. This is based on the historical pattern of the prices, and is not reflective of the futures market for corn and soybeans. Given the rise in those commodity prices through the last two months, anticipate an even higher feed cost to finish off the last third of 2020. An important note to remember are these feed costs are based on key ingredients and their monthly market price. It is vital that producers understand what their own feed costs are and what it costs them to raise their own feed.
 
Figure 1: Twenty-four month Actual and Predicted* Class III, Class IV, and Pennsylvania All Milk Price ($/cwt)
 
 
*Predicted values based on Class III and Class IV futures regression (Goodling, 2020).
 
Disappearance Edges Supply
 
Since the start of the pandemic, there have been waves of supply and demand concerns throughout the dairy sector. These sudden shifts led to temporarily empty store shelves, followed by intermittent waves of excess milk on the market, but for now seem to have stabilized. But, did producers gain any ground with consumers? Figure 2 depicts the ongoing evaluation of milk use and commercial disappearance for the U.S. For the past four months total disappearance has marginally outpaced U.S. production. It is worth noting what commercial exports (all products on a milk equivalent-fat basis) have been doing. They reached a 2020 high in June, and have steadily declined through August. The year to date average is 803 million pounds monthly for 2020, and if that average holds, exports are on track to be greater than 2019, but not as strong as 2018. A potential boost to exports was the memorandum of understanding between USDA's Agricultural Marketing Service, USDA's Foreign Agricultural Service, and FDA signed at the beginning of October. This agreement is poised to expedite the approval and information processes needed to meet today's international market demands.
 
Figure 2: Monthly U.S. Milk Production Commercial Disappearance
 
 
USDA Economic Research Service and USDA National Agricultural Statistics Service, 2020.
 
Class I Utilization Varies by Region
 
Last month the annual milk production, fluid milk, and total dairy product per capita was compared. To try and evaluate what impact the pandemic is having on Class I utilization, three Federal Orders and the National average were evaluated on a year over year basis (Figure 3). Not surprising there is a seasonal effect on Class I utilization from January through December. This is evident for 2018, 2019, and the first four months of 2020. The second quarter of 2020 saw a significant increase in the percent Class I utilization in the Northeast (Federal Order 1), Mideast (Federal Order 33), Midwest (Federal Order 30), and the average of all Federal Orders. What is interesting is this percent utilization was short-lived for the Northeast, while all the other examined orders and national average remained elevated above the seasonal average. Even the Upper Midwest, which historically has a low percent of Class I utilization, saw a significant increase for the past few months of 2020. It will be interesting to see if this trend continues for the rest of 2020 across the federal orders.
 
Figure 3: Percent Utilization for Class I Milk for Federal Orders 1, 33, 30, and National Average by Month
 
 
USDA Agricultural Marketing Services, 2020.
 
Income Over Feed Cost, Margin, and All Milk Price Trends
 
Table 1: 12 month Pennsylvania and U.S. All Milk Income, Feed Cost, Income over Feed Cost ($/milk cow/day)
 
 
¹Based on corn, alfalfa hay, and soybean meal equivalents to produce 75 lbs. of milk (Bailey & Ishler, 2007)
²The 3 year average actual IOFC breakeven in Pennsylvania from 2015-2017 was $9.00 ± $1.67 ($/milk cow/day) (Beck, Ishler, Goodling, 2018).
 
Table 2: 12 month Pennsylvania and U.S. All Milk Price, Feed Cost, Milk Margin ($/cwt for lactating cows)
 
 
¹Based on corn, alfalfa hay, and soybean meal equivalents to produce 75 lbs. of milk (Bailey & Ishler, 2007)
²The 3 year average actual Milk Margin breakeven in Pennsylvania from 2015-2017 was $12.33 ± $2.29 ($/cwt) (Beck, Ishler, Goodling, 2018).
 
Figure 4: Twelve month Pennsylvania Milk Income and Income Over Feed Cost ($/milk cow/day)
 
 
²The 3 year average actual IOFC breakeven in Pennsylvania from 2015-2017 was $9.00 ± $1.67 ($/milk cow/day) (Beck, Ishler, Goodling, 2018).
 
Table 3: Twenty-four month Actual and Predicted* Class III, Class IV, and Pennsylvania All Milk Price ($/cwt)
 
MonthClass III PriceClass IV PricePA All Milk Price
Sep-19$18.31$16.35$19.60
Oct-19$18.72$16.39$20.10
Nov-19$20.45$16.60$21.00
Dec-19$19.37$16.70$20.90
Jan-20$17.05$16.65$20.20
Feb-20$17.00$16.20$19.40
Mar-20$16.25$14.80$18.90
Apr-20$13.07$11.40$15.30
May-20$12.14$10.67$14.00
Jun-20$21.04$12.90$16.30
Jul-20$24.54$13.76$19.30
Aug-20$19.77$12.53$18.10
Sep-20$16.43$12.75$17.24
Oct-20$21.27$13.53$20.65
Nov-20$20.66$14.22$20.75
Dec-20$18.38$14.46$19.87
Jan-21$17.11$14.69$19.23
Feb-21$16.62$14.81$19.08
Mar-21$16.60$15.29$19.32
Apr-21$16.43$15.47$18.62
May-21$16.52$15.62$18.74
Jun-21$16.57$15.88$18.90
Jul-21$16.84$16.04$19.17
Aug-21$16.87$16.28$19.31
Sep-21$16.97$16.50$19.47

*Italicized predicted values based on Class III and Class IV futures regression (Beck, Ishler, and Goodling 2018; Gould, 2019).
 
To look at feed costs and estimated income over feed costs at varying production levels by zip code, check out the Penn State Extension Dairy Team's DairyCents  or DairyCents Pro  apps today.
 
Data sources for price data
  • All Milk Price: Pennsylvania and U.S. All Milk Price (USDA National Ag Statistics Service, 2020)
  • Current Class III and Class IV Price (USDA Ag Marketing Services, 2020)
  • Predicted Class III, Class IV Price (CME Group, 2020)
  • Alfalfa Hay: Pennsylvania and U.S. monthly Alfalfa Hay Price (USDA National Ag Statistics Service, 2020)
  • Corn Grain: Pennsylvania and U.S. monthly Corn Grain Price (USDA National Ag Statistics Service, 2020)
  • Soybean Meal: Feed Price List (Ishler, 2020) and average of Decatur, Illinois Rail and Truck Soybean Meal, High Protein prices, National Feedstuffs (USDA Ag Marketing Services, 2020)
Source : psu.edu