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Some Thoughts on the Current State of Dairy Markets - April 1, 2020

Joan Sinclair Petzen, Farm Business Management
Northwest New York Dairy, Livestock & Field Crops

April 3, 2020

Will Milk Prices Continue to Deteriorate?

  •  Markets adjusted downward about 70 cents one day in January due to news of the epidemic in China and concern about US export markets, since China is the largest importer of dairy products in the world
  • As the pandemic spreads world across the globe, including the US, markets continue their pessimistic tone
  • With implementation of social distancing in many US states, consumers quickly reacted by buying up retail supplies of fluid milk and yogurt particularly to stock their home kitchens.  At the same time as restaurants shifted to take out only, demand for cheese and processed cheese products dropped off quickly.  Behind the scenes, milk has shifted from some plants to others trying to keep up with retail orders to meet new demand patterns.  For a few weeks, consumers will be eating out of their cupboards before going out to restock.
  • Worldwide inventories of cheese, and milk powders continue to be heavily stocked and will take to time (some months) to work down once home isolation begins to ease across the world.  As orders both domestically and worldwide pause, processors are uninclined to continue production at a pace greater than demand only to increase inventories further.
  • Northeast Markets are more diverse, with a higher percentage of Class I utilization for fluid sales.  This helps stabilize our markets and will likely result in less milk struggling to find a market in the region.  But, it remains the case, our prices float on top Class III and Class IV prices.
  • Smaller cooperatives, that rely on spot market sales, and producers who sell directly to processors are more vulnerable to being asked to dump milk and market adjustments to spread these costs across farms.  There are substantiated reports of very limited amounts of milk dumped or not picked up both in the Northeast and Upper Midwest this week.
  • Recovery of milk prices historically tend to be slower than the declines.  With the world economy in turmoil, dairy stocks worldwide high, and looking down the road several weeks before any models predict the pandemic will peak in the US, dairy markets recovery will be slow probably spanning years not months.


How bad will it get?

  • Markets hate uncertainty.  If this pandemic isn't uncertainty, then none of us can realistically define uncertainty.
  • Looking at Class III and Class IV futures Mark Stephenson, presently forecasts a $14.00 bottom farm price sometime in the May-June time period in the Upper Midwest.
  • "In 2009, those farm prices bottomed out in the mid $11 range, so this forecast isn't as low as that, but it would be worse than the lowest prices we've seen in the last 5 years," says Stephenson.
  • Fuel prices are lower now than in 2009 and that supports lower feed costs as well.


What can farms do?

  • Knee jerk reactions are not prudent.  So, take a deep breath, get focused on the things you can control and be mindful of the things you can't control but don't let them consume you as a manager.
  • Take stock of your business.  Have you been able to work down open accounts over the past couple of years and build some financial cushion? 
  • Dr. Andrew Novakovic suggests asking, "Can you survive another 3 years that look a lot like the last 4 years?  Or, what do you need to do in order to make it through that gauntlet."
  • Talk to your banker.  What are your financing needs to weather the pandemic's economic storm?
  • With an immediate 25 to 30% decline in milk prices coming your way, what is your breakeven level of production or how much milk does each cow need to make to cover her variable or direct production costs in the short run?  Figure it out.  That just changed dramatically in the last week.
  • You might consider culling cows not making a contribution toward your fixed costs at this point.
  • Continue to take the best care you can of the herd, they make the cash flow and are your future.
  • Spring is in the air, planting and harvesting season is upon us.  Prepare for timely field operations to maximize your supply of quality home grown feed.
  • Maximize the use of manure nutrients, apply lime where it is needed to allow crops to efficiently use the nutrients available.
  • Work with your nutritionist to balance rations with the lower price structure in mind.
  • Follow recommended sanitation and social distancing procedures from the CDC and Health Departments to ensure your family and employees stay healthy.




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