Alan Bjerga, NMPF: Welcome to the Dairy Defined podcast. Prices are forecast to be at their highest in eight years in 2022. But with a new coronavirus variant closing schools, again, the potential for another volatile year is obvious. Explaining the promise and potential pitfalls of 2022 is Peter Vitaliano. He’s the chief economist for the National Milk Producers Federation and the author of its monthly Dairy Market report available on npf.org. Thank you for joining us again, Peter.
Peter Vitaliano, NMPF: Certainly.
Alan Bjerga, NMPF: When you take a look at forecasts for milk prices this year, it really gives a lot of hope for dairy farmers. We’re talking an all milk price of about $23 per hundred weight. What’s driving this?
Peter Vitaliano, NMPF: The biggest thing that’s happening, Alan, in the dairy economy is a very, very sharp drop off in the rate of growth of milk production and cow numbers. Basically it’s what we would call a supply side contraction. We went from, back in May, we were increasing milk production by about four and a half percent over a year earlier. Milk solids production, which is probably a bigger indication of the supply of dairy that’s on the market, was up five and a half percent. Those are now negative, basically just six, seven months later.
And what’s noteworthy is that this follows several years where, despite low prices and margins, milk production kept bouncing up, prices would knock it down to where we’d have a few months of basically flat production, but then we’d increase back up to 3% year over year growth on a fairly regular basis.
What’s noteworthy about this latest contraction is that it seems like that upward buoyancy that we’ve seen for several years in the face of not very great returns to milk production is kind of turned around. And there’s almost been a very downward bias as if after several years of fighting low prices there was kind of a tipping point occurring. And how long this will last is everybody’s guess. But what it’s doing is it is raising very, very strong price outlook, as indicated by the current dairy futures prices.
Not only is the outlook for milk prices the best in eight years, but that’s also the case for the individual dairy products, particularly butter price outlook for next year is the highest it’s ever been in a calendar year. Cheese and whey, it’s basically the second highest, also the highest in eight years.
The futures are indicating currently that this supply tightness will continue. Now, the big question is with milk prices this good and feed prices not going up as fast as they were last year, how long is that tightness going to continue? And how soon will it be before we see some expansion of milk production again?
Alan Bjerga, NMPF: The variant and its effects. How is that affecting the near term situation?
Peter Vitaliano, NMPF: If you look back again at the history of the pandemic, and going on two years now, we can talk about the history of the pandemic. The only major impact on overall consumption of dairy products that we saw was in the early months of the pandemic, when it was first hit and disrupted the traditional marketing channels for dairy products in particular. There was a rapid loss of sales and food service channels. And it took a while for the industry to sort of redirect a lot of that production over to retail, which basically grew.
But once you get past those first few months, and we did have if you go back to 2020, we had the massive government purchases of dairy products through the food box and other purchasing programs kicked in. And those have pretty much faded out over this past year, but the statistics show that overall consumption of milk and dairy products, in the domestic market, continues at a pretty steady pace.
It does not grow spectacularly, but it is difficult, once you get past those first few months of the pandemic onset, it’s difficult to find the overall statistics on dairy consumption showing a major drop. There’s just a robust appetite for milk and dairy products by U.S. consumers. And at the same time the world market has been very, very strong. And in terms of demand from China and other buyers and our major export competitors in Europe and in New Zealand and Australia have not been able to produce enough to basically continue to fulfill the demand. And the United States is benefiting from that.
We’re on track to export the largest volume by quite a bit compared to any previous year. So again, the major thing is even in the short term outlook demand for dairy seems to be extremely robust.
Alan Bjerga, NMPF: Something I think people forget about 2020, is that going into that year, the forecast prices were very high, just like this year. And it affected signup for something that is coming up with a deadline now, which is the dairy margin coverage program. A lot of people are looking at the markets and thinking, “Well, maybe I don’t need it this year.” We’re heading into another situation where prices look high. People are heading into DMC sign up. What should they be keeping in mind?
Peter Vitaliano, NMPF: They need to keep in mind that the cost of ensuring your margin for up to 5 million pounds of your production history at 950 per hundred weight, which is well above average margin levels, is so inexpensive. It is inexpensive insurance. It’s almost like your fire insurance. You don’t think, “Well, do I insure my barn for fire this year?” Or, “Do I think I’m going to be rather careful and we won’t have a problem?”
You don’t think that way for your basic insurance. You shouldn’t think that way for your DMC insurance. The futures markets look very good at the moment, but there are many months to go. The history of dairy farmers second guessing the markets, even based on the futures, is not very good. And again, given how inexpensive coverage is, our recommendation continues to be you should sign up for the program.
Many producers are already signed up for the five year. The five year enrollment feature, the gave a discount in the first year of the new program. It’s basically you should sign up every year and look what happened last year. The program paid off massively. I would strongly advise producers not to try to game the system. It often doesn’t work.
Alan Bjerga, NMPF: I want to circle back to something you said earlier where you were talking about the export market and how that is becoming an increasing driver of prices and demand. You talked a lot about supply realignment supporting prices. Talk a little bit about that demand side, specifically as it translates to exports.
Peter Vitaliano, NMPF: Well, earlier in the year, or up until just a month or so ago, China was going through another major buying spree, buying up a lot of dairy products all over the world. And that was driving up international dairy prices. China has been backing off a little bit recently, as they’ve gotten restocked, but during the period when they were buying extensively, they were kind of crowding other buyers out of the market. And those other buyers are very low on stocks now. And they’re coming in and keeping that demand pressure up.
Meanwhile, the two other major dairy product suppliers to the world, which is collectively the European Union countries and New Zealand, and to a lesser extent Australia, their production has is down and their exportable supplies are very tight for a number of reasons. The EU, at the moment essentially has very, very little exportable product, including cheese, which is their favored export dairy product. New Zealand tends to favor whole milk powder, which is a major product that China buys and where they are in their production season, they’re relatively tight.
So basically the world, the entire world market right now, has more demand than it has supply. And for the United States still, despite its own current and rapid onset of production growth reduction, is still has probably more exportable supplies, particularly cheese right now, what milk is available in this country is still going heavily into cheese. Whey prices are very good. So a lot of cheese makers are doing very, very well on their whey production. And as a result, they’re continuing to keep moving milk into cheese and whey.
Even though they’re not necessarily getting the greatest returns from the cheese portion of that at the moment. And that gives us a lot of cheese that is increasingly in strong demand internationally
Alan Bjerga, NMPF: Two years into the pandemic, what is the biggest change we are seeing in how the U.S. dairy economy works?
Peter Vitaliano, NMPF: Oh, interesting question. What’s strikes me is that despite the pandemic, when you look at both the domestic and the international market, how resilient the demand for dairy products is. We make so many different dairy products and we distribute them through so many different marketing channels. I wouldn’t say the industry is immune to a major demand contraction, but consumers domestically and internationally, have a ready appetite for dairy that the industry can pretty much count on being there from year in, year out.
The problems the industry encounters with low prices is when dairy farmers in this country, in their wonderful productivity, out produce even that strong market because there is, particularly in the domestic market, it is a relatively mature market that is not growing by leaps and bounds. It is growing steadily and dependably, but not necessarily every year guaranteed to grow as fast as dairy farmers are capable of expanding their milk production.
And that’s what we’ve seen in the last several years of relatively low prices, a tendency to keep overproducing the market that in the last six or eight months seems to have kind of evaporated. How long that that contraction will last is really the key to what the outlook for milk prices is going to next year.
Alan Bjerga, NMPF: Anything you’d like to add?
Peter Vitaliano, NMPF: If supply and demand can be kept in balance in the domestic market, dairy farmers can look forward to a good year this year. Because the price outlook is stronger than the feed price outlook at the moment.
Alan Bjerga, NMPF: We’ve been speaking with Peter Vitaliano. He is the chief economist for the National Milk Producers Federation. Peter, thank you for your time.
Peter Vitaliano, NMPF: Certainly, my pleasure. Thank you.
Alan Bjerga, NMPF: And that’s it for today’s podcast. Be sure to look at NMPF’s risk management page. You can get there from our homepage at nmpf.org. For more of Peter’s analysis and to subscribe to his Dairy Market Report, you can find this podcast online and nmpf.org, and you can subscribe to it on Apple podcast, Spotify, Google podcast, and Amazon music under the podcast name, Dairy Defined. Thank you for joining us.
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