As a result, dairy farmers are already dumping milk that can’t find a market or selling it at distressed prices.
To get a grasp of what might happen to prices, Peter Vitaliano, chief economist for the National Milk Producers Federation, said he’s closely following the milk futures market.
“That’s sort of where the dairy industry collectively is trying to digest what it thinks is going to happen,” he said in an NMPF podcast this week.
Throughout March, the futures were showing almost a steady deterioration of the price outlook for 2020. There was a brief pause in the middle of the month and then a big decline. So far in April, the futures seem to have hit a bottom. They went up a couple of times, seeming to retest that bottom, he said.
“It may still be a false bottom, but this is a fairly long pause,” he said.
The futures have stayed at an average milk price in 2020 of $16 to $16.50 per hundredweight, he said.
That’s the all-milk price, which represents the gross price to farmers before deductions such as hauling charges and cooperative dues, according to USDA.
“We will hope that is the bottom,” he said.
That would be down about $2.50 from last year’s average prices, he said.
USDA’s latest monthly forecast of the average price in 2020 is $14.35, $2 lower than the futures are indicating.
“So we will see if that’s an outlier forecast or whether that’s a harbinger of things to come,” he said.
But he’s cautiously optimistic the futures are at a temporary bottom. It’s lasted about two weeks and weathered a substantial collapse in product prices, particularly for cheese, he said.
“There’s a little bit of robustness in the futures outlook at this point. It’s not pretty, but it’s not continuing to deteriorate,” he said.
But the expectation for milk prices is bad. The supply chain can’t handle the rapid change from tremendous losses in foodservice and a little increase in demand at retail, he said.
The forecast is for prices to hit a bottom in the middle of the year with improvement toward the end of the year, he said.
“But there’s going to be tremendous damage during the meantime,” he said.
The only way to get supply and demand back in balance in a reasonable timeframe is to decrease the milk supply to more closely match the substantial decrease in demand, he said.
Dairy farmers need some financial assistance to make the kind of cuts that are needed, he said. And that’s a key part of the recommendations developed by NMPF and the International Dairy Foods Association.
The two groups are requesting USDA pay dairy farmers $3 a hundredweight on their milk for six months if dairy farmers decrease their milk production by 10%.
“That type of unified, collective, government action would probably be the best, most effective and speediest way of rebalancing supply and demand,” he said.
Market forces do work, but not that quickly, he said.