2021 U.S. Dairy Situation and Outlook
Written by Christopher Wolf, Cornell University
In 2020, the net income outcome for dairy farms depended on three factors: whether they signed up for risk management programs, how much they received in government payments, and where their milk was shipped.
The Dairy Margin Coverage (DMC) program generated some large payments in the spring months and was potentially a boon for small or medium sized herds with what is effectively a cap at five million pounds of production. Dairy Revenue Protection (DRP) provided significant indemnities for many who enrolled, but that depended very much on timing and contract specifics.
Government payments to dairy farmers in 2020 were primarily comprised of Coronavirus Food Assistance Program (CFAP) payments, which averaged $2.45/cwt of milk depending on farm organization and payment limits. Finally, the coronavirus pandemic made winners and losers up and down the food chain depending on factors such as the market outlet (food at home vs. away from home).
The level of uncertainty around milk prices in 2021 is exceptionally high. Until COVID-19 is under control, the economy simply cannot revert back to normal activity in many sectors. This puts a drag on any business that relies on face-to-face interaction for commerce and also means that government purchases are important to fill demand.
In 2020, government spending through existing programs such as the Supplemental Nutrition Assistance Program (SNAP) and The Emergency Food Assistance Program (TEFAP) were supplemented with the USDA’s Farmers to Families Food Box Program. The Food Box Program focused on dairy products, even with an option for only dairy products in the box. The result was that about 20% of total Food Box expenditures were spent on dairy products.
The Food Box program purchased approximately one percent of the total butterfat produced domestically in 2020, which significantly affected markets. These purchases were important in supporting milk prices and limiting dairy stock growth as well as feeding needy families.
SNAP benefits can, of course, be used to purchase dairy products but are unlikely to result in as much dairy products purchased as the Food Boxes. A recent study concluded that about 13.5% of SNAP expenditures were spent on dairy products, meaning that Food Box expenditures, on average, spent about 50% more on dairy than SNAP. It is possible that the Biden administration will continue the Food Box as it was used in 2020, but if the administration moves toward a different model, such as increasing SNAP, it could have implications for the milk price.
Another important demand consideration is export markets. U.S. dairy exports were strong in 2020 with China and Southeast Asia generating particularly strong demand. China’s economy, in particular, recovered the last two quarters of 2020 resulting in an annual GDP growth rate of 2.3%. GDP growth in 2021 for China is supposed to approach, or even exceed 8%, which may encourage further dairy product demand.
The most important destination for U.S. dairy exports is Mexico and their economy is struggling mightily with COVID-19. Cumulative U.S. dairy exports to Mexico declined by more than 15% in volume terms in 2020. Additionally, other major dairy exporters including the EU and New Zealand have made in-roads into the Mexican market in recent years after signing new trade agreements. Continued U.S. milk production growth will require exports to balance supplies.
Milk production ramped up in the second half of 2020 and investments made with government payments are likely to encourage milk production into 2021. U.S. milk production in December 2020 was 3.1% higher than a year earlier. This growth was generated by increasing the national milking herd by more than 100,000 cows (+1.1%) and increasing milk per cow by 2.0%. The need to balance increasing milk supply has resulted in significantly higher butter stocks to finish 2020, which will overhang the market in 2021.
A key factor to watch on the supply side is feed prices. The current forecast for feed prices — most notably corn and soybeans — are for the highest prices in many years. Weather events in the southern hemisphere coupled with exceptionally strong demand from China have conspired to pull down stocks and produce $5/bu corn and $15/bu soybeans. Ultimately, these feed prices will depend on acres planted and weather in summer 2021 but it bears watching. Historically, U.S. farmers have been very good about finding corn and soybean acres. Another effect of high feed prices, if they continue, will be the potential to trigger DMC payments.
While the futures markets are not particularly good at forecasting sudden changes due to supply or demand shocks, they are very efficient at forecasting average price level in general. At the current time, the futures market is forecasting about $16.56/cwt for Class III and $13.91/cwt for Class IV. The uncertainty in the market is evident in how much milk production and government program announcements generate large futures price changes. The question for any given farm then becomes what the "basis" and net milk price will be, which depends on the pool value and many other factors, including risk management programs.