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Milk Prices Test Historic Highs        07/08 14:12

   Dairy prices have soared higher since setting long-term lows in April, 
surrounding the COVID-19 crisis that abruptly changed dairy demand and 
production levels. Milk prices rallied over 200% from April lows with current 
levels nearing all-time highs. 

Rick Kment
DTN Analyst

   Milk futures traded near $20 per cwt in early January, but the COVID-19 
pandemic had a significant effect on milk prices as the demand shift for dairy 
products left many producers with no processing home through much of April.

   Changes in the livestock markets were much reported through March and April, 
including backed up production and processing. However, the dairy industry has 
an even more limited shelf life, eliminating the ability to back up production 
and processing.

   For dairy producers, the inability to sell milk to processors meant one of 
two things: either "dry up" cows, thereby prematurely ending the production 
cycle and waiting until the next cycle before that animal will produce milk 
again; or keep milking these cows and dump the milk. We saw many reports of 
millions of gallons of milk dumped on fields and plowed into the soil as 
fertilizer. This pandemic came at the worst time of year in the dairy 
production cycle. The spring "flush" is considered peak production time and 
limiting milk output near this peak will significantly affect overall milk 
production through the rest of the year.

   The significant shift in market prices is being driven by differing factors, 
which makes this move even more volatile and could continue to leave markets 
plagued with rapid shifts through most of the year. Tighter milk supplies and 
growing demand for dairy products through the end of last year left prices 
moving higher into the holiday season of 2019. However, the abrupt change in 
buyer demand habits during March and April 2020 -- due to the coronavirus 
shutting down the economy -- sparked significant disruptions in the way milk 
and dairy products were processed. For example, the majority of fluid milk 
demand has traditionally been from the food service industry. This includes 
school lunch programs, colleges, cafeterias, restaurants and catering venues. A 
large segment of the processing industry is setup to process and package milk 
in either small single serving containers (school lunches) or large commercial 
dispensers. The abrupt and immediate change in the food service industry in 
March left these production lines dark, with the infrastructure not able to 
effectively transition to producing milk for retail suppliers (think gallon 
bottles).

   Once the shock to the system set in -- and markets tumbled to $11.23 per cwt 
during the month of April -- renewed demand for retail dairy products, such as 
cheese, butter and other processed dairy products surged as consumers flooded 
grocery stores and cleared shelves of many products. As a result, barrel cheese 
prices surged from an April low of $1 per pound to current levels of $2.37 per 
pound. These cheese price levels are the highest seen since 2014 and near 
historic levels.

   Class III milk futures are currently trading at $23.40 per cwt, which is a 
208% rally from April lows, with the expectation that increased demand support 
through the summer months will continue to drive strong buying in most dairy 
products, including fluid milk, ice cream, cheese and butter products. Even 
though the food service industry is still struggling to regain market share due 
to social distancing and limited consumer demand, schools planning to reopen 
and return to a semi-normal routine through the fall and winter is expected to 
keep demand for dairy products strong through the end of the year.

   Given current milk and cheese price levels, it is likely the majority of 
gains have already been priced into the complex, but the effect of the 
coronavirus on the dairy industry is likely to disrupt the normal milk 
production cycle for months, if not years.

   Rick Kment can be reached at rick.kment@dtn.com




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