Dairy economy outlook for 2022

by Sally Colby

Dr. Mark Stephenson, director of dairy policy at the University of Wisconsin-Madison, said dairy producers have experienced a string of unusual years, but looking back and making comparisons can help producers anticipate the year ahead.

Stephenson said domestic demand has been good, with an increase in per capita consumption of all dairy products. “We had some fairly optimistic forecasts for milk prices at the end of 2019,” he said. “We saw cow numbers increasing in January, February and March. In March, we had too much milk, plants weren’t able to sell finished product to restaurant chains and we had a lot of supply management imposed by our cooperatives or plants we direct ship to.” The result was culled dairy cows.

However, cow numbers rose by the end of 2020 and peaked in May 2021 to over 9.5 million. “We haven’t seen that many cows in the U.S. dairy herd for a quarter of a century,” said Stephenson. “It’s a lot of capacity and represents a lot of opportunity to produce milk. We started to have trouble keeping that many cows in the national herd because margins were thin. Although milk prices were good, feed costs were high and we saw exits of herds.”

Lowering cow numbers is one way dairy farmers reduced production during supply controls. Farmers also responded to supply controls through reduced milk per cow until there was a need for stronger supplies. Stephenson said dairies were able to reduce milk production on a short-term basis. “In the past, if you’re doing something that is taking the top off a lactation curve, you can’t get that back until the next lactation,” he said. “Better feeding and farm management has allowed farms to pivot much more quickly. In June, we had an increase in milk per cow, and that was persistent until August.” November production levels were below a year earlier, and Stephenson attributed this slowdown to high feed costs.

Export demand has been strong on all dairy products in several categories, with skim and whey exports showing the most growth. There’s been some friction with exports, partly due to port congestion and shipping costs. Most dairy products are shipped in shipping containers, and during peak congestion, the cost to ship from the Port of Los Angeles to China went from about $3,000/container to $20,000. That cost has leveled off a bit to about $12,000/container. Stephenson predicted port congestion will be an issue for the next two to three years.

The dollar value is gaining strength, which Stephenson said is good for purchasers. “With exports, a strong dollar means it takes more value in other currencies to buy U.S. product,” he said. “The value of the dollar retreated all the way through early 2021, but since about mid-2021, the dollar has been strengthening.”

Prices of U.S. products are competitive, and the U.S. remains competitive with milk powder prices because we export about half of the product made in the U.S. Stephenson said cheese prices are occasionally competitive, and since mid-2020 and through 2021 we’ve seen competitive cheese prices and have been selling more cheese overseas. Butter prices have been strong in the U.S. and even stronger in the EU and Oceania. This is an indication that butterfat is tight around the world and we’re exporting more than in the past.

“This is a product we have to be sure we’re going to export because we need to make an 82% butterfat product, not the 80% we normally do, and it has to be in different package sizes for export,” said Stephenson. “If we can be assured that butter prices are going to be competitive, we can manufacture product for export on a regular basis.”

The Federal Reserve likes to see inflation at around 2% – too much inflation is disruptive. Since the Great Recession in 2008 and 2009 and periodic high levels of unemployment, the Fed has looked less at inflation and more at employment levels to determine whether to tighten the money supply. Stephenson noted that the rate of inflation hasn’t been as large as it is currently since the 1980s.

“Fiscal policy is the government spending money – not the Federal Reserve,” said Stephenson. “The Federal Reserve deals with monetary policy. We’ve had big spending from government because of stimulus money for COVID for job losses, and that can be a source of inflation. Spending money to counteract job losses wouldn’t necessarily be inflationary on its own … Putting money in their hand is only a different source of income, not necessarily more money in the marketplace.”

Stephenson explained that major infrastructure spending hasn’t happened yet, but by the time money goes into roads, bridges and broadband, that large amount of money can lead to persistent inflation. Spending on climate change abatement could also pump more money into the U.S. economy and lead to persistent inflation.

If the Fed wants to rein in inflation, interest rates will rise, which Stephenson said makes borrowing money less appealing. The result will be less spending and more saving. He recommended farmers carefully evaluate capital investments. “An asset didn’t have to pay for itself in terms of the investment because we could count on a tractor or land increasing in value,” he said, recalling the economy of 40 years ago. “We found out in the late ‘80s and early ‘90s we couldn’t always count on that. If you have extra money at the end of the year and want to invest in capital goods, do it on the basis of return on investment, not on the expected return on asset values.”

Summarizing 2021 and predicting for 2022, Stephenson said domestic demand has been lackluster but with strong demand despite a bad year. “Cheese plants are sopping up some of the extra milk, and there isn’t a lot of extra cream,” he said. “Export demand has been strong across all product categories – the world is tight on supplies and I think there’s going to be an opportunity to sell more product. Our competition has shown that the EU is down in milk production. There’s some friction in exports, but port congestion is getting better and product prices are competitive. We should pick up market share because of this over the next year.” He noted inflation is the big unknown and advised farmers to be cautious and consider investments carefully.

Stephenson predicted 2022 will be a good year for milk prices. “We’re looking at an increase from last year – about a $22 U.S. all milk price average,” he said, adding that there may be bumps that cause volatility. “It could be a good milk price as long as costs of production aren’t high. Continue to look at risk management options and always look to control variable costs of production.”

Leave A Comment