The dairy industry has been on a rollercoaster ride the last twelve months. It started with panic and fear and ended with optimism and relief with the help of the 2020 government subsidies, according to Ben Spitzley, vice president and commercial lending dairy group manager with GreenStone Farm Credit Services.
To look ahead, you often have to consider the past.
“For most dairies, 2020 ended up being a profitable year with a little more working capital and additional liquidity available rolling into 2021,” he says.
During 2020 we witnessed a new level of volatility. Class III milk prices ranged from a low of $12.14 to a high of $24.54. Likewise, class IV milk bottomed at $10.67 and peaked at $16.65. The pandemic was just the most recent global event to spur a growing level of volatility to a sensitive market.
Unfortunately, during the peak, a tremendous Producer Price Differential discounted Michigan’s pay price considerably compared to other milk-producing states, preventing some regions from recognizing the highs in the market.
The PPD is a complicated formula used to discover the regional value of milk. But, essentially, Spitzley says, it’s the gap between Class III milk used to produce cheese and Class IV milk used for butter and milk powder. “If there's a wide gap, the producer can be discounted if you're heavy into Class IV milk, which Michigan is,” he says. “Generally, the gap is 75 to 80 cents. In 2020, it was as much as $8.”
Wisconsin producers generated more profit than Michigan with most of their milk going into the high-demand cheese market.
“Last year, especially the second half of the year, the government created a demand for cheese and inflated milk prices for some through the Farmers to Families Food Box program, which strived to support families struggling through the pandemic,” he explains. “It pulled up Class III milk price. That's good for the industry if you're in, say, Wisconsin, Minnesota, South Dakota, where the majority of the milk goes into the cheese. But for the East Coast, including Michigan, we have a lot of Class IV milk that did not benefit.”
The new cheese processing plant that came online last fall in mid-Michigan is promising to provide a boost to help diversify Michigan dairy.
“It is going to help us when it comes to PPD, but Michigan producers did not recognize the full benefit of it last year,” he says. “Even with the plant coming fully online, it might get us to 50% cheese utilization, and that would be a big number for us.”
However, government programs helped raise the tide of profitability last year for all, some more than others, considering business structure. That triggered increased production.
“We started seeing production increases of 3% to 4%, which was getting a little intimidating and put some pressure on the first quarter of 2021,” Spitzley says. “Prices in 2021 started falling because of the increase in supply and government’s announcement to discontinue food boxes.”
Strength in exports
Another element is playing a role in milk demand as the world hungers for protein from dairy products, he adds.
“Exports are strong,” Spitzley says. “China is buying all the whey they can for pig feed and other ingredients, as they rebuild their herds decimated by African Swine Fever. Powder exports are hitting all-time records, and not just China, but southeast Asian markets are creating a huge demand. Our prices are competitive in the global market.”
On the home front, restaurants and the food service industry are restocking and reopening as the nation recovers from the pandemic. Restaurant demand accounts for just shy of half of the nation’s domestic demand for dairy products.
“Demand is really solid, and even though production is increasing, it’s a little under 2% now – demand can keep up with that,” Spitzley says. “So, the forecast for prices is looking pretty good.”
But nothing is guaranteed. He talks with a lot of producers about risk management and the Dairy Revenue Protection program, which is a price insurance program.
“For a 50-cent premium, you can insure a $17 floor on Class IV milk – we haven’t seen anything like that since 2013,” Spitzley says. “Similarly, for $35 cents you can insure a base of $17.50 on Class III. The upside remains open if you catch a rally for some premiums.”
In addition, USDA recently reported a Class III price outlook at $16.85 for 2021 and $15.70 for Class IV, which are softer than current prices.
Spitzley’s takeaway message is, “Make sure your balance sheet is in a strong position to handle some volatility, and protect yourself with risk management tools.”
June is Dairy Month
Since 1939, National Dairy Month has encouraged families to make milk their beverage of choice based on its nutritional value. From National Today, which strives to help people celebrate special holidays and moments from around the world, here are some ways to observe National Dairy Month:
Have an ice cream sundae party -- Invite some friends over for a summer treat as you add some potassium, calcium, and yes, some sugar, to your diet.
Visit a local dairy farm -- Find out where it all comes from. Go to a nearby dairy farm and ask to learn how the process works from the start.
Drink milk to rehydrate -- Studies show milk is superior to water and sports drinks after a workout. Milk is rich in sodium and potassium — both of which help to retain fluids and cause your body to sweat less. In addition, milk contains protein to help your muscles recover quickly.