by Sally Colby

Commodity risk analyst Katie Burgess, Blimling and Associates, works with clients across the dairy supply chain to build and execute risk management strategies. She tracks on-farm margins across the U.S., and also monitors global milk production economics.

In a recent Protecting Your Profits call sponsored by the Center for Dairy Excellence, Burgess called for optimism in the dairy industry “There’s good news to share about the dairy industry,” she said. “We ended 2019 in the best condition we’ve been in a while, especially on the Class III side of milk prices. The market was above $20 for a month, and for both the Class III and Class IV milk price side, we’ve at the highest prices since 2014.”

Burgess said the outlook for 2020 is a margin average of $10.50 cwt. “That’s the margin over feed costs,” she said. “That’s the highest margin we’ve seen since 2014. If we look back over the past 15 years, it’s the third highest number, so things are looking pretty good.”

How dairy prices rose, the factors that could push prices even higher and what could put prices under pressure is the next factor to understand. Burgess said as we head into 2020, it’s impossible to know how things are going to play out because all the normal supply and demand factors are still present, along with factors such as weather that are nearly impossible to predict.

Burgess emphasizes the poor milk prices over the past several years. “Since 2014, things haven’t been great, but especially in late 2018 and early 2019, margins got incredibly tight at the farm level,” she said, adding that dairy farmers saw that play out across the industry.

The year 2018 is most comparable to the year the government was paying farmers to get out of the dairy business. “We saw a lot of dairy cows head to slaughter last year, but the higher milk prices we’ve seen over the past few months have started to turn this rate around,” said Burgess. “Starting in 2020, I think slaughter rates are going to slow compared to what we’ve seen in the past couple of years.”

What does that mean for milk price? Cow numbers in 2019 fell to the lowest levels due to cows heading to market. “The dairy, compared to the peak we saw in 2017 and 2018, was down more than 100,000 head,” said Burgess. “Pennsylvania saw significant decreases in cow numbers, as did Virginia, Maryland and some midwestern states.”

Despite numbers, Burgess predicts milk production will grow. “As we look forward to 2020, we expect growth rate to be about 1.5% to 2.0%, and that’s around average and would be the strongest growth we’ve seen since 2014.”

Several factors are driving growth. “One, we have an easy year over year comparison,” said Burgess. “At the same time, I think high milk prices over the past few months are going to drive some growth.” Burgess added that most producers she has spoken with say they aren’t going to grow their herd this year, and most growth will be from larger producers located near processing plants.

Events around the world impact milk prices, including fires in Australia. New Zealand is the largest world exporter of dairy products, but production is primarily seasonal and highly dependent on pasture. Cows are dried off in winter, calve in spring and make milk all summer. They’re currently at peak production, but soil moisture is low. Milk production in Ireland is down following a wet fall, while milk production jumped in Germany and France.

Europe is the largest milk producer in the world, so Burgess said we pay attention to what’s happening there. “Milk growth has been slow and is expected to remain so,” she said. “They’re up one half a percent year-to-date through October of 2019. When we look at forecasts from the EU for 2020, they’re expecting about the same.”

Cheese price has been the most exciting aspect of the market. “Cheese prices in November and December popped above $2,” said Burgess. “It’s the first time we’ve seen prices that high dating back to 2014. Taking a look at the futures market for 2020, they’re definitely down from the highs, but looking pretty good compared to what we’ve seen the past five or six years.”

Burgess said one of the reasons cheese prices were higher last year is because warehouses weren’t overcrowded with product. “Last year we saw cheese inventories down on a year over year basis for the first time since 2014,” she said, “A lot of that has to do with we just didn’t have as much milk supply.”

However, demand for cheese was good in 2019, especially when milk prices were low. Retailers used aggressive promotions to move cheese, resulting in retail sales growth. A lot of cheese is sold through restaurants, despite slower restaurant traffic. However, as long as the economy is good, people go out to eat.

Burgess says the other major good news for dairy is the nonfat dry milk (NFM) market. “NFM prices have been on an upward trend for two years,” she said. “The fact that the market has gone up $0.60 in two years is an extra $5 in the milk price for U.S. dairy producers. That’s helpful for Class IV prices.”

For the next few months, Burgess expects more upside remaining in the market, but doesn’t expect another $0.30 gain as we had in the past couple of years. “That’s still okay, because if we can hang out here at about $1.30/pound for NFM, that’s still enough to lead to milk prices around the $17.00 to $18.00 mark for Class IV.”

One of the reasons for a lift in the NFM market is because NFM stock levels are declining. “Here in the U.S., we’ve seen prices gradually work their way down from the peak,” said Burgess. “In fact, the past couple of months’ inventories are at the lowest levels we’ve seen in three years. That’s definitely good news that we’re working our way through that product.”

On the other hand, butter has a sad story. “We have a lot of fat sitting around,” said Burgess. “Butter inventories are up and U.S. dairy cows continue to make more fat. Average fat test is 3.9, up from a few years ago. So even in a month when production was down, fat is up. Producers have bred for it and nutritionists are feeding for higher components.”

But it isn’t all bad news – U.S. per capita dairy consumption is going up. “One of the big good news stories is that fat isn’t bad anymore, so people switch to higher fat yogurt,” said Burgess. “There’s also the clean label effect – if it has butter instead of an oil, people are willing to include it. And people still like cheese.”