ECONOMIC OUTLOOK

ECONOMIC OUTLOOK Milk Production Is Up Despite Infl ation

BY GARY LATTA

Something on a lot of people’s minds right now is soaring energy prices. The effect of rising fuel prices is being felt not just in the U.S. but around the world. No doubt, most of you have felt the effect at the pump, but energy prices impact nearly everything in our daily lives — running our cars, heating our homes, food we consume and most goods we buy. Nearly all input costs on a dairy farm, processing plant and in distribution are impacted by energy expenses in many ways.

Gasoline prices are now at a seven-year high and at a national average of about $3.08 a gallon, according to AAA reports. It was just a year ago that pump gas was averaging $1.97 a gallon. New York’s statewide average per gallon price for regular grade gas right now is $3.14 according to AAA. The numbers, of course, vary slightly across states and location. Massachusetts is at $2.97. Pennsylvania is $3.18. Vermont is $2.98, and Maine is at $3.06 per gallon. And, you can tack on an additional 10 to 20 cents per gallon for diesel.

Some economists believe these fuel hikes are a temporary consequence of the pandemic. Others feel high energy costs to be the fallout from increased government spending driven primarily by the new administration in D.C.

U.S. Federal Reserve Chair Jerome Powell indicated in testimony on June 21 that U.S. infl ation has increased notably in recent months as the economy continues to reopen. Higher rates of infl ation reduce purchasing power as time goes on, unless wages and rates of return adjust along with infl ation.

The Consumer Price Index for all items rose 5% in May and was the largest 12-month jump since 2008. Food at home rose less than 1%, and food away from home was up 4% in May. The CPI change for gasoline and fuel oil has risen about 55% over the last 12 months.

The Heritage Foundation, a D.C. think tank, reports the recent rise in the CPI is stoking fears of 1970s-style high infl ation and stagfl ation. Stagfl ation is when an economy exhibits both high unemployment and infl ation.

For dairy producers, adding to the woes of energy costs are rising feed prices. Corn is now around $5.30 a bushel, which is about $2 a bushel more than this time last year. Soybeans are $5.60 a bushel more than last year, and alfalfa hay is $7 per ton more than last year.

DESPITE HIGH COSTS, MILK PRODUCTION IS UP

If anyone thought high input costs would slow U.S. dairy producers down, then you have not yet seen the latest Milk Production Report released June 21. May milk production was up 4% above May of last year among the 24 major producing states according to the USDA report. For all U.S. states

combined, the increase was 4.6%. That is a large increase, especially when one considers the exceptional drought that has been ongoing in the West and Southwest since last year. In recent months, there has also been dangerous heat in the Southwest that farmers must contend with. Heat takes a toll on dairy cow comfort and suppresses milk production. Despite the heat and drought out West, California and New Mexico production was up 5% and 6%, respectively. Oregon was up just under 1%, while Washington, Arizona and Utah were fl at to down slightly.

The Northeast has been enjoying quite favorable weather conditions, and May milk production in New York was up 4.2% versus May of last year. Both Pennsylvania and Vermont were up 1.8%, while our neighbors in Ohio were up 3.2%. New York and Ohio both added cows, while Pennsylvania and Vermont reduced cow numbers. However, all four of these states are showing increases in output per cow. Signifi cant growth in milk production is evident in Colorado, Indiana, Iowa, Kansas, Michigan, Minnesota, South Dakota, Wisconsin and Texas. These states are above the national average for production growth, which appears to be driven by expansions in cow numbers. For the 24 major milk producing states, production per cow was 63 pounds above May of last year with a sizable addition of 152,000 cows.

Some say the way to higher milk prices is by growing demand. However, even demand growth can be overwhelmed by an even greater growth in milk supply. A recent Rabobank dairy outlook forecasts a rather low 1% supply growth among the world’s major dairy producing countries from now until 2022 due to adverse weather conditions and high feed costs — some of which are being experienced here in the U.S. So far, U.S. production growth shows little sign of abating soon. The U.S. does, however, seem to be enjoying decent domestic demand for its dairy products with the economy reopening, and exports have been brisk.

U.S. DAIRY EXPORTS ARE COMPETITIVELY PRICED

Combined U.S. dairy exports are doing well, as products are competitively priced in relation to the world market. In its June release, The U.S. Dairy Export Council said, “April proved another robust month of growth for U.S. dairy exports. Volume on a milk solids equivalent grew by 25% compared to April 2020, with gains in every major U.S. dairy product.” Butterfat exports are up over 250% versus April of last year. Cheese exports are up over 50%, while nonfat dry milk and whey are up 16% and 17%, respectively. The USDEC believes that, as international demand accelerates, and we have available competitively priced product from the U.S., we should continue to see strong cheese exports into the summer and early fall. Exports are utilizing milk supplies and contributing to higher U.S. domestic prices.

LONG-TERM SOLUTIONS TO IMPROVE U.S. FOOD SYSTEM

On the political side, one must notice that U.S. Secretary of Agriculture Tom Vilsack has been busy on a variety of fronts since he took offi ce again in late February 2021. Vilsack seems committed to long-term solutions that rebuild an improved food system in the U.S. Since January, the USDA has provided more than $11 billion worth of assistance to producers, as well as food and agriculture businesses.

The number of milk cows on farms in the United States was 9.51 million head, 145,000 head more than May 2020, and 5,000 head more than April 2021.

Monthly Milk Production - 24 Selected States

Million pounds

19,000

18,500

18,000

17,500

17,000

16,500

2020 2021

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: USDA

On June 15, Vilsack announced the USDA’s Pandemic Assistance for Producers Initiative. The USDA claims that, as the economy continues to improve, relief efforts are underway to help producers and ag businesses with securing the resources needed to thrive in 2021 and beyond. The funding associated with this assistance is to serve as a bridge from disruptions associated with the pandemic and improve the food system. There are several specific improved supports for dairy farmers and processors within this Pandemic Assistance Initiative. One of these supports calls for additional pandemic payments targeted to dairy farmers that have demonstrated losses that have not been covered by previous pandemic assistance. In a Senate Appropriations Committee hearing on June 15, Vilsack highlighted three specific points in an exchange with Sen. Patrick Leahy of Vermont regarding dairy assistance. The third point Vilsack made was quite interesting. “We are creating a program to help reduce the differential that occurred between Class I and Class III milk pricing because of a disproportionate number of purchases of cheese during the food box effort,” Vilsack said.

A POSITIVE OUTLOOK

Looking ahead at dairy prices, most observers in academia and government feel that they will remain firm as the economy continues to reopen and exports stay strong. How much higher is yet to be seen. Most are also forecasting a narrower gap between Class III and IV prices, which reduce, and hopefully eliminate, negative PPDs. The USDA believes that output per cow will drop a bit in the third quarter due to continued heat and dry weather. Exports are expected to remain good, and domestic use will continue to pick up, which will absorb milk supplies.

The USDA lowered its recent 2021 annual forecast for cheese prices based on a slight softening trend. However, butter, nonfat dry milk and dry whey have all been increased in the forecast. The lower cheese price offsets the increase in dry whey, therefore the Class III forecast was lowered by 25 cents to $17.45 per cwt. Higher expected butter and nonfat dry milk prices raises the Class IV price 10 cents to $15.85. The USDA’s June forecast for the 2021 all-milk price is lowered 10 cents to $18.85 per cwt.

Gary Latta is a dairy product specialist consultant for the Northeast Dairy Foods Association, Inc. He has more than 30 years of experience in providing economic analysis, statistics and information to the dairy processing industry.