milk
August 31, 2018

Tariff Relief Package Could Add Up to 25 Cents To Milk Prices

 |  By: Mike Opperman

USDA recently announced how they were going to divvy up $12 billion aid package to U.S. farmers. While soybean farmers will get the majority of the payments, dairy producers will get about 3% of the total pot, or about $212 million.

The total aid package is split into three categories. The largest is direct payments to farmers, of which dairy producers stand to get about $0.12 per cwt of milk with payments capped at $125,000 for any one dairy operation. The next largest part of the package is food purchases, at about 22% of the allocation or $1.4 billion. The last 3% of the package, or $200 million, goes to agricultural trade promotion.

It remains to be seen how these allocations will impact the milk price for the remainder of 2018 and into 2019, says Nate Donnay, director of dairy market insight at INTL FCStone. Here’s how each of the three areas could have an impact:

  • Direct payments: The amount paid out is simply too small, Donnay says, to have any real impact on supply.
  • Trade promotion: These funds will be used by organizations like the U.S. Dairy Export Council to grow demand for U.S. dairy products. While these funds are useful to support that action, any benefit will likely be a long-term gain.
  • Purchase program: Of the $1.4 billion allocated for the entire program to this area, $84.9 million is targeted for the purchase of dairy products. The types of dairy products, quantities, purchase timeline or distribution is unknown, although USDA has said that the purchases will be made in four phases over the course of several months.

Donnay put together a model to examine different scenarios depending on when the product purchases are made and the products (cheese, butter, bottled milk) that the USDA eventually chooses to purchase. Here are the results:

  • Cheese and butter prices could improve 1 to 2 cents. “Those estimates may be on the high side depending on the types of cheese that the USDA buys and the lead time given,” Donnay says.
  • Farm gate milk prices will improve between $0.124 and $0.247 per cwt.

“Overall the impacts to the dairy markets look minimal unless the USDA tries to buy $84.9 million worth of products in the next three months,” Donnay says.

Dairy Purchase Scenarios and Estimated Price Impacts

Cheese/Butter/Bottled

(% of total expenditure

Spread over

(months)

Cheese price

(USD/lb.)

Butter Price

(USD/lb.)

Farm Gate Milk

(USD/cwt.)

60%/20%/20%

6

$0.014-$0.027

$0.01-$0.021

$0.15-$0.30

60%/20%/20%

12

$0.005-$0.01

$0.004-$0.008

$0.071-$0.142

33%/33%/33%

6

$0.009-$0.017

$0.017-$0.034

$0.133-$0.266

50%/10%/40%

6

$0.013-$0.025

$0.006-$0.013

$0.141-$0.281

Average

 

$0.01-$0.02

$0.009-$0.019

$0.124-$0.247

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