Riding the Whipsaw

Ever since I can remember, people have described watching the volatility in dairy markets as something like riding a roller coaster. But, in 2020, it’s more comparable to a whipsaw. Those who work in the trading industry often use the term “whipsaw” to describe when a market abruptly moves in the opposite and unexpected direction. That is what we have been seeing all year in the dairy markets.

In the beginning of 2020, most analysts expected the year to be slightly better than average. The markets in January reflected that. The Class III milk price that month closed at $17.05 per hundredweight, while the Class IV price was $16.65 per cwt. Class III milk futures for the next 12 months showed an average price of $17.59, with the price never dipping below $17 or moving above $18 at any point in 2020. Class IV milk futures were also fairly strong, with the price averaging $17.58 per cwt. for 2020.

Then the pandemic swept in as a “black swan event” in March and put pressure on the markets.  April’s Class III price closed at $13.07 per cwt., with the Class IV price at $11.40, some of the lowest levels seen in the past decade. Milk futures fell hard, with CME prices at the end of April projecting a 12-month Class III price forecast at $14.73 per cwt. and a Class IV 12-month forecast at $12.55 per cwt. Headlines read, “Worst Margins Yet to Come,” with analysts expecting the ripple effects of the pandemic to be significant and long-lasting.

Up, Down, Up and Down Again?

By June, though, Class III prices had rebounded strong, with the June Class III price closing at $21.04 per cwt., near the highest level in the past five years. Class IV prices remained soft, with the June Class IV price closing at $12.90, near record lows. Still, the Class III price helped pull the All-Milk Price, and farmers’ mailbox price, up near or above breakeven levels. Questions about negative Producer Price Differentials (PPDs) began to surface, with the huge difference in the Class III and Class IV price weighing heavily on the blend price.

September saw milk prices falling again, with the September Class III price closing at $16.43 per cwt., down more than $8 from July’s high of $24.54. Class IV prices remained low but stable, with the September price announced at $12.75 per cwt. Dairy farmers feared that milk prices could continue plummeting into the fall. But now we are looking at record highs again in the Class III milk markets.

October’s Class III price closed at $21.61 per cwt., with CME projecting the November Class III price at $23.40 and the December Class III price at $19.81, as of November 10. Class III milk prices into 2021 are slightly above average, with the first six months averaging $16.91 per cwt. and the second half at $16.56 per cwt. Class IV prices are also expected to rebound somewhat, with the 12-month average price in 2021 projected at $15.33 per cwt., based on current CME milk futures prices.

Dairy exports throughout 2020 have been strong, which has helped to strengthen milk prices. The latest data shows dairy export volumes, on a total milk solids basis, up 17 percent year-over-year to 190,435 tons in August, with year-to-date volumes up 16 percent from a year ago. August’s volumes were a record high for the month, while the value of dairy exports was up 11% to $548.8 million. Strong domestic retail dairy sales coupled with government programs like the USDA’s Food Box Program have also been helping dairy demand.

Uncertainty Continues in 2021

The question is, “Will this trend continue into 2021, or will the pandemic start putting pressure on domestic sales or export markets as more countries fight the spread of the virus?” Nobody knows what the market is going to do with cases of COVID-19 reaching record highs again while restaurants and other businesses fear another round of shut-downs. Despite decent Class III and Class IV milk price projections on the CME, market analysts are forecasting milk prices to soften into the winter, with expected increases in supply outweighing the relatively strong demand right now.

Still, whether we will be seeing record highs, record lows or stable milk prices into the coming year is anyone’s guess. The bottom line is more Pennsylvania dairy farm families need to start considering price risk management as an essential part of their business. Unless you have cash reserves to carry you through price valleys, having that milk price protection is the only way to protect yourself from the devastation that low milk markets can cause to your dairy.

December 12 is the deadline for dairy farm families to enroll in the USDA’S Dairy Margin Coverage Program for the 2021 Program Year. DMC is margin-based insurance where the margin each month is calculated by subtracting the national corn, soybean meal and blended alfalfa hay price from the U.S. all-milk price. The resulting actual margin is then compared to the margin selected by the dairy farmer to determine if an indemnity is owed.

DMC Is One Tool to Protect Risks

Dairy farmers can use the DMC Program to protect margins levels between $4.00 and $9.50 per cwt. for production levels of between 5% and 95% of their production history. For dairies with less than 5 million pounds, or Tier 1, the cost to protect a margin of $9.50 is 15 cents per hundredweight. For dairies with more than 5 million pounds of production history (Tier 2), the maximum margin is capped at $8.00 with a different, more expensive premium structure. However, Tier 2 dairies can insure up to 5 million pounds of production history at Tier 1 margins and premiums.

In 2019, the DMC program returned a net benefit of $0.39 per cwt. for anyone who enrolled up to 5 million pounds of production history at the $9.50 maximum DMC margin coverage. The net benefit, so far, for 2020 is just above 50 cents per cwt. at the $9.50 margin coverage. During the 2020 enrollment period, the USDA was not projecting any payments for 2020. The updated version of the USDA’s DMC Decision Tool for 2021 no longer projects margins and instead calculates a trigger price from projected feed cost. Current projections indicate that for 2021 DMC will set a Class III trigger price of around $17.00 per cwt. That is not a bad Class III price floor for 15 cents.

While the DMC Program might not be for every dairy farm, it is one way to protect your operation from the whipsaw effect our current situation has been having on dairy markets. To learn more about the program and enroll, visit your local USDA Farm Service Agency. If you would like to have someone help you think through your risk management strategy, our Dairy Risk Education Program Manager Zach Myers is available to meet with you or talk with you over the phone. Do not hesitate to give him a call at 336-468-0726. He is here to help.

Editor’s Note: This column is written by Jayne Sebright, executive director for the Center for Dairy Excellence, and published monthly in the Lancaster Farming Dairy Reporter.