‘Nothing But Volatility’
The continuing COVID-19 pandemic and its effect on restaurants and other institutions along with the USDA Farm-to-Family Food Box program has left a huge amount of dairy market volatility in its wake.
Block and barrel cheese prices spreads remain extremely wide, again driven by the above factors, say University of Wisconsin dairy economists Bob Cropp and Mark Stephenson. Traditionally, the spread between blocks and barrels is only 4₵/lb; it has at times this summer reached $1/lb.
“Each is now in its own supply/demand situation,” says Cropp. “The government has been buying more block-type cheese through the Food Box program. That puts a real demand on for blocks and fresh cheddar.”
This demand has led to higher milk prices, which in turn is fueling milk production, up 2% in July and another 1.8% in August. Western states—particularly Texas, Idaho, South Dakota, Colorado and Kansas-- are up substantially.
“I’m a little worried about this much milk production,” says Cropp. “We can’t handle this 1.8% growth unless we have some awfully good exports.”
In this environment, it’s very difficult to forecast prices. The futures markets have Class III prices above $17.50 the last quarter of 2020. “I’d be surprised we hold prices as high as this,” says Cropp.
“We’ll have a little jump in sales for Christmas and the holidays, but we’re not going to have the family gatherings we used to have [because of COVID],” he says. And while the NFL and college football games are being held, people aren’t having those gatherings either.
Stephenson notes that with all the volatility, negative Producer Price Differentials (PPDs) are likely for the rest of the year in many of the Federal Orders with component pricing. Depending on the amount of depooling that occurs, those PPDs could be negative by a $1/cwt or more in some of these Federal Orders, he estimates.
Dairy farmers will be able to sign up for the 2021 Dairy Margin Coverage Program beginning October 12. Last year, many farmers opted out the program because futures prices heading into 2020 were very strong.
“I hope people look at DMC as risk management,” Stephenson says. “Markets do things that are not expected.”