February 2021 Dairy Situation and Outlook, February 23, 2021

 Bob Cropp, Professor Emeritus, University of Wisconsin Madison, Division of Extension

Originally published online at https://fyi.extension.wisc.edu...

February milk prices will end a little weaker than January. Class III will drop below $16 to around $15.60 compared to $16.04 in January. Class IV will be around $13.30 compared to $13.75 in January. Cheese prices have been moving up and down all month and will average lower for the month than the January average of $1.5141 per pound for cheddar barrels and $1,7470 for 40-poind cheddar blocks. Currently barrels are $1.3825 per pound and blocks $1.57. 

Where milk prices head for the remainder of the year remain uncertain and cannot be forecasted with a high degree of probability because milk prices can change a lot and quickly with any change in supply or demand. Crucial will be the level of milk production, and how soon the COVID-19 virus comes under control and things start to return more to normal. The level of dairy exports will also be important.

Milk production was running 3% higher than a year ago in November and December. Milk production slowed to just a 1.6% increase in January. Milk cow numbers started to increase month to month back in July and increased another 8,000 December to January. January milk cows were 0.9% higher than a year ago. But the slow down in milk production was due to just a 0.6% increase in milk per cow which in recent months was running 2%. While milk production has slowed it is still at a level to put downward pressure on milk prices.

Milk production is likely to slow as we move through the year. Lower milk prices and higher feed costs will tighten margins over feed cost which could slow the increase in milk per cow. The January cattle inventory showed dairy replacements expected calve within the next 12 months 2% lower than a year before. So, cow numbers may stop increasing by second half of the year. USDA is forecasting cow numbers to average for the year 0.6% higher than 2020 with milk per cow up 1.4% resulting in 2021 milk production up 1.9% from 2020. That is a lot of milk and will keep pressure on milk prices.

It looks some what encouraging that new cases of the COVID-19 virus are slowing and more will be vaccinated by summer. If so, restaurants should become more fully open, and with the possibility of in person learning in schools and sports returning coming this fall food service will strengthen improving butter and cheese sales. But the return to normal maybe slow as consumers are reluctant to return fully to pre-virus consumption patterns. The level of government purchase of dairy products is not likely to be at the level of last year. The Farms to Families Food Box Program runs through April. It is uncertain if the program will be extended. There remain other government programs where dairy products will be purchased for school lunch and food banks. Anyway, the sale of milk and dairy products should strengthen as we move through the year.

Dairy exports were very positive for milk prices in 2020. Dairy exports on a milk solids equivalent volume basis were up 12.9% and set a record high. Exports were 16.0% of U.S. milk production compared to the previous record of 15.5% set back in 2013.

Dairy exports in 2021 could continue to be a favorable factor for milk prices. The price of nonfat dry milk/skim milk powder, cheese and butter are currently very price competitive on export markets. The dollar also remains weak to other currencies. Milk production in other major exporters is increasing but over all appears to be less than one percent. So, there will be some additional product available to compete with the U.S. And COVID-19 has slowed economies of most countries.  But USDA is forecasting for 2021 increased butter and whey product exports with continued strong exports of nonfat dry milk/skim milk powder.

Stock levels remain at a relatively high level and need to be drawn down for stronger milk prices. Compared to a year ago, January 31st stocks of butter were 33% higher, American cheese 3% higher and total cheese 3% higher. Butter stocks had increased 20% from December but cheese stocks were about at the same level as December.

Currently Class III futures are below $16 for February and March, returning to the low $16's by April and in the low to mid $17's May through December. Class IV dairy futures reach $14 by March, $15 by June and the low $16's October through December as butter prices are expected to increase. Such a price pattern for now seems reasonable with improved milk prices the second half of the year as milk production slows, milk and dairy product sales improve, and dairy exports are positive. But the possibility that milk prices could end up higher or lower than this remains.