Monthly Dairy Market Update - October 28, 2020

This year will go into the record books as the strangest and wildest year for dairy markets in recent history. The year started with January CME butter and cheese remarkably close in value, averaging near $1.88 and $1.91/lb., respectively. That was significant because it was the first time the monthly average CME block price exceeded the butter price since April 2014. January’s blockbarrel price spread was a wide 34 cents per pound, and the difference between the Class III and IV milk prices was just 40 cents.

Business was booming for most sectors of the global economy. Dairy markets were looking at a potential drought in New Zealand, carrying out of Brexit, implementation of the U.S.-Mexico-Canada Agreement, and what a newly minted U.S.- China trade agreement could mean for markets, possibly bringing the yearlong trade war between the two nations to an end. Prospects for the year looked particularly good, but then reports surfaced that a new severe flu-like illness had started to spread.

By March, the world understood that 2020 would be a year like no other, while still not fully comprehending the underestimation of that statement. CME Cheddar block prices would soon plummet to $1/lb., butter would plunge to near $1.15 and nonfat dry milk (NFDM) powder would drop to almost 79 cents. Unlike the government’s response to the financial collapse of 2008-09, Congress responded swiftly this time to stimulate the economy, passing various measures, including the Coronavirus Aid, Relief, and Economic Security (CARES) Act. During difficult times, the dairy industry has historically asked for billions of dollars but typically only received millions, with 2019 trade aid a case in point. This time, though, armed with billions of dollars, USDA issued direct payments to farmers, tapped Section 32 purchases (those authorized for use during unsettled markets), and implemented the Farmers to Families Food Box Program. The government infused billions of dollars into the system at once, and in a complete reversal, CME Cheddar cheese markets moved higher, peaking at a record high of $3/lb. 

While the economy was officially in recession, the temporary $600/week federal unemployment aid kept spending—and demand—pushing ahead, and large swaths of the economy were less affected than those hit hard by the coronavirus. This overall economic resiliency along with pandemic fatigue sent people to backyard parties and restaurant patios in late spring, setting up the final leg of the market trifecta.

Butter and NFDM prices also recovered, but their paths higher were plodding, and somewhat limited, compared to cheese. Less or no government money was spent on these products. Butter got 8% of the money earmarked for products through September, while cheese received 80% of the funds and NFDM got nothing. The unequal aid helps to explain this year’s wide gap between Class III and IV milk prices. The price gap reached an apex in July, with Class III prices exceeding Class IV by $10.78/cwt., a figure that seemed unfathomable before 2020. Between January and October, the spot butter market shed 51.5 cents, resulting in the lowest holiday butter prices since 2013. 

Futures traders expect butter and NFDM prices to recover next year, predicated on the new cheese plant in St. Johns, Michigan, diverting milk away from churns and dryers and reducing supplies of butter and powder. However, that assertion is tenuous. Milk production is strong in California, where output increased 3.2% over the previous year in September. While there may be less butter and milk powder produced east of the Mississippi in 2021 than in 2020, expanding output west of the river could backfill some of the losses.

The river could backfill some of the losses. The butter market presents a puzzling contrast. Processors increased production 6.5% over the previous year through August, but retail demand was double-digits higher, suggesting markets were capable of absorbing new production. However, USDA’s commercial disappearance of butter through August was only 26.7 million pounds, or 1.6%, higher than in 2019 after adjusting for leap day. The disparity between production and disappearance was a major reason for this season’s price correction, indicating just how severe the declines in foodservice have been. As people move indoors this winter, foodservice demand could plummet again, moving even more butter into warehouses.