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Dairy Economy Is on the Upswing

Published: Friday, June 26, 2020

The following is from Dairy Management Inc.

The worst of the coronavirus-induced plunge in the dairy economy may be over.

The sharp drop in dairy product prices in April, prompted by the pandemic, has been followed by a strong recovery in cash market prices in May that's continuing into June. Cash cheese prices rebounded dramatically from $1 a pound in the first half of April to record levels in less than eight weeks. Cash butter prices, to a lesser extent, have also rebounded from April lows.

This market turnaround has been caused by actions and developments that have reduced milk supply and strengthened dairy product demand. Dairy cooperatives widely implemented temporary base-excess price plans, while dairy farmers changed their feeding and milking practices and culled some additional cows.

Government purchases of dairy products expanded substantially as Congress provided billions of dollars in emergency relief to the U.S. Department of Agriculture. More recently, food service establishments resumed significant dairy purchases to replenish empty stocks in anticipation of staged reopenings. And retail sales of key dairy products have been above year-earlier levels throughout the pandemic episode, as consumers largely went back to the basics of grocery shopping and home cooking.

Dairy-farmer income will also be boosted by federal direct payments of $6.20 per hundredweight for first quarter milk production. These developments together have improved the financial outlook for the nation's dairy farmers markedly from how it first appeared during March's collapse driven by the COVID-19 pandemic.

Looking ahead, April and May will be the two worst months of 2020 for dairy farmers for both prices and margins. But beyond these two months, the dairy futures-based outlook has improved significantly since the end of April.

At that time, the outlook was for a very slow and painful recovery for margins throughout the remainder of 2020, with June being as bad as May and DMC margins remaining below $9.50 per hundredweight through the end of the year. But by the end of May, the outlook indicated the margin would be up not far below that level in June, and then remain above $10 per hundredweight for July through December.

By mid-June, dairy futures markets indicated that milk prices would remain well above $18 per hundredweight every month during the entire second half of 2020, and average during that period about $18.60 per hundredweight, which was the average price for all of 2019.

And if the total estimated Coronavirus Food Assistance Program (CFAP) direct payment amounts are thought of as supplements to milk prices during the two months of expected very low prices and margins, SApril and May, together with average DMC payments, those augmented prices would also average about the same $18.60 per hundredweight for those two months.

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