“Every time we’ve gone from a peak in milk prices to a trough, it corresponds to time periods when we’ve had a decline in exports or a leveling off of exports,” said Mark Stephenson, dairy policy analyst at the University of Wisconsin.
“The high milk prices we had in 2008 and then the drop into 2009 was because the world was in recession, and those dairy products we were selling to customers overseas, they couldn’t afford as many as they use to buy,” Stephenson said during the Tri-State Agricultural Lender’s Seminar.
“Those products accumulate into stocks, and that’s downward pressure on domestic prices which gets transmitted to milk price,” he said at the meeting sponsored by Iowa State University Extension and Outreach, University of Illinois Extension, University of Wisconsin-Extension and the University of Wisconsin-Platteville College of Agriculture.
The cheese stocks were relatively low going into 2015, which was the beginning of the decline of the current milk price cycle.
“That corresponds to the time period when our exports started to slow down and stocks were building,” Stephenson said. “Normally, we have a seasonal pattern of stocks building up in the spring and drawing down as we get into the fall.”
During 2019, there has been some reduction of cheese stocks.
“We still have plenty of cheese, but it’s not burdensome anymore, so that is beginning to allow milk prices to begin to rise,” Stephenson said.
Butter stocks have a strong seasonal pattern, as well.
“We’re growing butter stocks, which are a bit of concern,” Stephenson said.
“We don’t sell a lot of butter into world markets, but occasionally it’s an opportunity,” he said. “There has become a big enough difference between U.S. prices and other exporters that we’ve been purchasing quite a bit of butter, and that has been putting downward pressure on our butter prices.”
Stephenson said it is normal to see a 1% to 2% increase in milk production each year, although there is a lot of variation around that amount.
“That increase in milk production is enough to sustain the growth we have in domestic demand and anything much higher than that we have to export it,” he said.
U.S. milk production began to slow down in 2017 and that has continued into 2019.
“We had a couple of months where we didn’t produce as much milk as we did last year,” Stephenson said. “Since domestic demand has been strong, we’ve been pulling stocks down and this is what has given us relief in prices.”
The number of dairy cows on U.S. farms was growing into 2017 and then the trend reversed in 2018.
“We continue to do that in 2019, and that is part of why milk production is slowing down,” Stephenson said.
“Milk per cow grows all the time. We almost never have a year when it is less than the year before,” he said. “This is one of the strongest trends in agriculture. Sometimes it grows more and sometimes less.”
During 2016, Wisconsin had a pretty normal amount of dairy farm loss of 3.5% to 4%.
“We hit our peak of dairy farms in the 1930s with more than 3 million in the country and since then we’ve been eroding numbers,” Stephenson said. “In the middle of 2017, that rate began to pick up, and it continued through 2018 and 2019.”
The rate of farm losses in Wisconsin has hit 10%.
“That’s a huge number, and I think this will have a long tail,” Stephenson said. “I don’t see it ending even though milk prices are better because we’ve got enough farms with damaged balance sheets, and they’re not going to recapitalize their farm; they’re going to exit.”
Even with trade tensions, Stephenson said, China has purchased a massive amount of dairy products over the last several years.
“The per capita consumption in China is small at 23 pounds of dairy relative to the rest of the world average at 111 pounds and we consume 640 pounds of dairy per person in the U.S., so there is room for growth in China,” he said.
So far in 2019, the export volumes of dairy products are less than 2018, but the value is slightly higher.
“Cheese is up slightly, non-fat dry milk is down, butterfat is down and whey products are down quite a bit,” Stephenson said. “China had bought about half of our whey volume and they are down and some of that is due to swine fever.”
Dairymen have been breeding their low end animals to beef bulls, Stephenson said.
“We’ve got fewer heifers in the pipeline than we’ve had in a long time,” he said. “Even if prices are rebounding, I don’t think we’re going to have a surge in milk production like we’ve had in the past because we don’t have the animals to put in the barn.”
A more general economic downturn is the one thing, Stephenson said, that is a potential dark cloud on a more complete milk price recovery next year.
“I don’t think prices are going to feel great on farms until exports represent something between 16% to 17% of milk production on a rolling 12-month average, and now we are at 14% to 15%,” Stephenson said.
“I’m predicting an U.S. all milk price in 2019 to be up $2 from last year and continue to climb another $1.20 in 2020,” he said. “So, we could hit $20 milk next year.”