Rosier outlook for dairy farmers in 2020, experts say

It's been a long, hard road since 2015, but things are looking up for dairy farmers in 2020, according to University of Wisconsin economists.

That was the optimistic prediction made by Dr. Mark Stephenson, director of Dairy Policy Analysis at the University of Wisconsin-Madison and director of the Center for Dairy Profitability and his co-host Bob Cropp, emeritus professor in the Department of Agricultural and Applied Economics, University of Wisconsin-Madison, during the November “Dairy Situation and Outlook” podcast this week.

Farmers had little to cheer about at the beginning of 2019, with Class III milk prices averaging just $14.30 in the first quarter. As the year progressed, prices began a slow recovery, hitting nearly $20.20/cwt. for November before falling back to around $18.60 for December.

"The last time Class III prices were over $20 was November 2014," said Cropp, adding that much improved cheese prices helped push milk prices upward.

On the Chicago Mercantile Exchange (CME), 40-pound cheddar blocks rose above $2 per pound for most of September and October, peaking at $2.375 before falling below $2 last week. 

"There have been some strange relationships between blocks and barrels," Cropp said. "At one time in September barrels were 44 cents below blocks, and then on Nov. 12 barrels were 37 cents higher than blocks."

Cheddar cheese production is lagging 3.1% below a year ago in September, and combined with strong seasonal cheese sales and strong September cheese exports, cheese stocks have tightened cheese stocks, contributed to higher cheese prices.

Cropp says that September cheese exports were 12% higher than a year ago led by increases of 31% to Mexico, 9% to South Korea and exports nearly triple to United Arab Emirates.

"Cheese exports to date were 3% higher than a year ago," Cropp pointed out. 

Stephenson called sales of nonfat dry milk a "bright spot in the markets," with tighter stocks and higher exports pushing prices up to $1.235. September nonfat dry milk exports were 25% higher than a year ago, with sales to Southeast Asia 36% higher and 14% higher to Mexico.

"We've had some talks about China working hard to rapidly rebuild their swine herd, so part of what we're seeing in exports of nonfat dry milk and whey may be part of what we're seeing," Stephenson said.

After monthly increases of less than 1% February through August U.S. milk production increased 1.3% for both September and October. Cow numbers are also creeping upward, albeit slowly. Milk cow numbers were trending downward since the beginning of the year, but increased 5,000 head September to October.

Cropp says big jumps in herd numbers occurred in Texas with an increase of 9.3% AND 6% in Colorado. Cow numbers are also rebounding in Michigan that saw a 3% gain.

"They have a large new processing plant in the central part of the state that is being built fast and furiously, and I'm betting the cow numbers are creeping up to make sure they can keep that plant full when it opens next year," Stephenson said.

Cow numbers in Wisconsin were up 1%.

Cropp says he doesn't expect a notable surge in cow numbers in the coming year.

"I don't see milk production coming on strong for many reasons. With the financial stress farmers are under, we won't see much in the way of expansion. Reduced feed quality will impact production per cow and replacement numbers (are static) and farmers are still exiting the business," he said.

Stephenson says he expects milk production to be impacted by feed quality this winter. An informal survey sent out to Extension agents across the state was very telling of farmers' struggle against an adverse growing season.

"No one reported that the forage in their county was better than average, but rather okay to poor quality," Stephenson said. "I think we're going to have some problems with milk per cow when we start to get into this silage."

Both Cropp and Stephenson predict milk prices to average higher in 2020 than 2019.

"Dairy farmers respond to higher milk prices by producing more milk. But I just don't see milk production coming on very strong," Cropp said. "After four and half years of very depressed milk prices dairy farmers lost equity. They will need to build back equity before major expansions."

With higher milk prices, Cropp says dairy farmers may find it still profitable to keep lower producing cows.

He says the growth in the nation's dairy herd will be tempered by the continued exiting of dairy farmers and a tighter supply of dairy heifers.

Lower quality forages and higher feed prices will offset increases in milk per cow this winter and into spring, Cropp said, adding that milk processing plant capacities in the Northeast and Upper Midwest are being closely monitored to meet market needs.

Cropp expects cheese prices to weaken following the holiday demand for butter and cheese, causing the Class III milk price to fall below $18 in January.

Because the futures are a little more optimistic for 2020, Cropp predicts Class III prices averaging in the $17.40’s for the first quarter, the $17.30’s for the second quarter, the $18.20’s for the third quarter and the $18.70’s fourth quarter for an average near $18 for the year.

"This is well over $1 to $1.20 higher than the average for this year," Cropp said. "Things look a lot rosier for 2020 than we have seen in the past 4 1/2 years."