Who knows what’s ahead for dairy. We’ve seencommodity Cheddar prices zoom from the outhouse tothe penthouse during the past two and a half months.

At press time (July 13), commodity Cheddarprices were at/near an all-time record peak: $3.00 perpound. Hard to imagine these recent block Cheddarprices at the Chicago Mercantile Exchange (CME)are sustainable beyond the short-term. However, it’sclear that so far, dairy has been a beneficiary of thefood industry shifts that have caused many citizens toprepare more meals at home. Retail purchases ofdairy products have been amazingly strong since earlyMarch – at least mostly offsetting demand lost atrestaurants and food service.

Additional demand boosts have come from ex-ports to Asia, an emergency strategy invoked by someWest Coast dairy processors in late March and April,when U.S. commodity prices tanked. Further, USDA’s“food boxes” – the emergency program authorized ear-lier this year by Congress to provide supplemental nu-trition to citizens in need – have spurred cheese demand.Filling cheese contracts for those “food boxes” may becontributing to current sky-high commodity Cheddarprices, as a few novices have bid up CME Cheddarprices, hoping to magically create more cheese.

Extreme heat/humidity in major dairy regions iscurtailing both farm milk output and components con-tent of that milk. Short-term, less milk is availablethan needed by manufacturing plants in several re-gions of the country.

All that said, the cheese supply chain – fromcheese plants to distributors – is properly nervousabout the potential for a steep decline in CME Ched-dar prices. Having been burned once this year by the$0.93/lb. decline in block Cheddar prices (from mid-February to late April), firms holding cheese inven-tories are reluctant to commit to volumes more thana month or two ahead.

For purposes of this discussion, we’ll use com-modity Cheddar prices sourced from the ChicagoMercantile Exchange (CME) trading, as well asUSDA’s weekly “National Dairy Products Sales Re-port.” Over time, the cash market price of blockCheddar at CME is THE single most important bit ofdata driving the price of farm milk.

Early on, most milk pricing experts agreed that2020 was finally going to be a good year for farmmilk prices. Virtually all measures were positive. Sowhat happened?

• We saw an unpredictable and unprecedenteddecline in CME block Cheddar prices, which plum-meted from $1.9300/lb. in early February down to$1.00/lb. by late April. Farm milk prices tracked ac-cordingly. Cheese plants and marketers suffered se-rious losses relating to their inventory values.Inventorying product is a critical element in thecheese marketing game – from aged Cheddar toSwiss and Parmesan cheeses.

• Next, starting in very late April, unpredictedand unprecedented upwards momentum in blockCheddar prices followed. From late April throughearly July, block Cheddar at CME hit as high as$2.81/lb. – a $1.81/lb. increase from the late Aprilbottom of $1.00/lb. Why the increase? Demand –both domestic and export – jumped. U.S. families,starting in early or mid-March, started preparing mostmeals at home. That home-cooking included abun-

dant volumes of cheese, fluid milk, and ice cream.Let’s credit export demand, also. In late March andearly April, West Coast cheese plants reached out toAsian buyers and contracted large volumes of cheeseexports. Those exports peter out (pardon the phrase)sometime in July. As was, the combo of increaseddomestic demand (thanks to home cooking andrestaurants reopening) and stronger export demandcreated a situation where fresh cheese supplies ranscarce. The need for products to fill government“food boxes” also spurred demand, short-term.

So what’s ahead?Anyone claiming to be able to foresee dairy’s

future trends – from farm milk supplies to consumerdemand – is delusional. At best, analysts are forcedto sound like classic inconclusive economists: “Onone hand … but on the other hand.”

$21.04/cwt. Class III (cheese) milk for June???When numerous dairy producers see their finalchecks for June 2020 milk sales, they’ll wonderwhere the rest of the money is being hidden. Pre-pare for howls of confusion over milk pricing – di-rectly ahead.

Spurred by spectacular growth in cheese de-mand, June 2020’s Class III (cheese) milk pricesoared to $21.04/cwt. for farm milk testing 3.5%milk fat. June 2020’s Class III price was the greatestever, month-over-month gain for the Class III price.June’s $21.04/cwt. price represented a leap of$8.90/cwt. atop the May 2020 Class III value.

That huge $8.90 jump in Class III prices liter-ally upsets the milk-pricing apple cart. The“spillage” will be measured in terms of depoolingClass III milk from regional federal milk orders forat least June and July 2020. The always confusing,“Negative PPDs” will again surface for June 2020’sfinal calculations of the “statistical uniform prices”in USDA’s respective federal milk orders. In tan-dem, depooling of Class III milk and “negativePPDs” will put a fog over June 2020’s final milkprices to be paid to producers. Individual milk pro-curers’ actual pay prices for June 2020 milk de-liveries will in part be a measure of the integrityof those marketers.

Let’s cut through the fog of depooling and“negative PPDs” to make a critical point:

The money is in the market place. For June2020, firms selling Class III milk … as well asfirms processing Class III milk … basically re-ceived the Class III price of $21.04, or pretty close

to that. Repeat: The Class III money was in the mar-ketplace for June 2020.

The Milkweed’s printing date for July 2020 fallson the 13th of this month – the day by which most re-gional federal milk orders’ final data for June 2020will be available. However, in this issue of thepaper, there will not be time to analyze all thoseprices. Further, final milk price payments to produc-ers for June 2020 deliveries won’t be out until aroundJuly 18-20. Therefore, the table is set for this publi-cation’s August 2020 issue to analyze June 2020final payments data.

Confusion will reign …The dramatic uptick in June 2020’s Class III

prices will likely lock in place depooling and “neg-ative PPDs” for both June and July 2020. Why? TheClass I (fluid) milk base for a given month is deter-mined by so-called “advance prices” determined bycommodity prices during the first half (or so) of thepreceding month. Stated simply, the June 2020 ClassI base price was calculated using advance commod-ity prices collected during the first half of May.

The monthly Class I milk base price – to whichregional fluid differentials are added – will lag be-hind fast-rising Class III prices. Never before hasthe dairy industry witnessed such a massive leap inthe Class III price as what occurred from May toJune 2020.

Will new Class I base formula lock in depooling?

As noted: For June 2020, the difference be-tween Class III ($21.04) and Class IV ($12.90) was$8.14/cwt. — an all-time record.

One savvy observer offers the following in-sight: If the big spread between Class III and classIV (butter-powder) milk prices continues long-term,will depooling incentives become the norm in certainregional milk orders that feature high utilization of

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Dairy’s best information and insightsIssue No. 492 • July 2020

TheMilkweed

Float like a butterfly, sting like a bee.

— Muhammad Ali”“Unpredictable Future: Dairy in the “Age of Precarious”by Pete Hardin

This issue mailed on July 14, 2020

Will Producers See June 2020’s Sky-High Class III Prices???by Pete Hardin

Continued on page 4

New: Electronic Subscriptions, See Page 2

The latest Global Dairy Trade (GDT) tradingevent during the week of July 6 provided a surprisingjump in that index. Whole Milk Powder (WMP) futuresshowed some spectacular price gains, propelling the en-tire early July trading event up by an average of 8.9%.

Sources report that the nearest-term con-tract’s WMP prices absolutely stunned observers.Prior to that GDT event, WMP sourced from NewZealand had been selling at around $2,950 (US$)per metric ton ($1.3384/lb.). But the latest GDT’snear-term contract was priced at $3,505 per met-ric ton ($1.5903/lb.) – a huge jump of $25.19/lb.

Word from “down under” is that the hugespike in Contract 1’s WMP price left observers

Continued on page 12

“This is the dawning of the Age of [Precarious]”

(Apologies to The Fifth Dimension)

Whole Milk Powder BoostsEarly July GDT Index +8.9%

Continued on page 5

On one hand (the positive scenario) …One can argue cogently that 2020’s second half

will see strong farm milk prices – sustained by Ched-dar prices ranging at or above $2.00 per pound per-haps much higher. Domestic demand – propelled byexcellent retail sales – is very strong. Export saleshave also been solid, but will perhaps somewhat re-tract, volume-wise, in coming months. Spring 2020dairy retract exports were strengthened by Asia’sneeds for human-quality proteins. Asia is sufferingfrom adverse weather events on top of diseases intheir poultry and pork sectors that have diminishedthose meat supplies as protein sources.

The front half of dairy’s “supply/demand” equa-tion is, or course, supply.

One can make a very strong case that farm milkproduction during 2020’s second half will be impairedby adverse weather’s impact on crops, as well as thepending, serious shortage of replacement dairy heifers.

Short-term, here in early July, widespreadswaths of the United States are suffering from pro-longed heat and humidity. In fact, there has not beensuch a prolonged stretch of heat in central portionssince the epic drought year, 1988. And this summer,just add plenty of humidity. In the Upper Midwest,marketers report that the heat and humidity are ham-mering milk volumes and components (protein, milk-fat). In Michigan, which anticipates the monstrouslylarge, new Glanbia cheese plant coming on line in2020’s fourth quarter, many farmers see crops at theirearly summer worst since 1988. Many Michigan for-age producers saw only half a crop for the first cut-ting, and virtually no regrowth to date. Corn standsare rolling up, stressed by severe dry conditions. The

Glanbia plant, at St. Johns, when operating full tilt,has a daily capacity of 8-million lbs. of milk.

California – our biggest milk-producing state –faces a shortage of quality alfalfa. However, we’velearned in recent years that nutritionists charged withbalancing dairy herds’ rations seem able to coax 80-90 lbs. of milk per day out of cardboard fodder, whennecessary. Watch this one …

Coupled with continued, near-desperate de-mand for fresh cheese, CME Cheddar prices currentlyremain strong. The pipeline from cheese plant to endusers continues struggling to be adequately filled.

If under the threat of bodily harm to make adairy prediction, I’d forecast at least a couple yearsof tight milk supplies … with demand less pre-dictable, given the times.

On the other hand (negative scenario) … Shutting down most U.S. restaurants, schools

and businesses severely disrupted dairy’s supplychain in late-winter/early spring 2020. At that time,upwards of 40% of all dairy products consumed bythe nation’s citizens coursed through restaurants(dine-out, or take-home) and food service. As thosebusinesses started re-opening sometime in April,those channels to consumers needed to be restocked.And that restocking helped push up demand forcheese and other dairy products.

But two serious concerns arise in studying themonths ahead. First, the dramatic explosion of in-creased COVID-19 cases means many restaurants willeither again close, or significantly scale back serviceto customers.

Secondly, we must watch the impact of farhigher retail dairy product prices on consumer pur-chases. Record cheese prices and record farm milkprices mean record consumer prices – at a time whenmany families are struggling to pay their bills. The

barrage of government checks may not continue for-ever. Retail dairy product purchases are sensitive toconsumers’ finances. Watch carefully.

Future months’ potential for U.S. dairy exports isa tough call. Our spring 2020 exports were driven byAsian demand and relatively low U.S. commodityprices during March, April and part of May. Relativelylow, that is, compared to European Union and NewZealand dairy export prices. The Milkweed reported inthe May issue that at one point in late April 2020, NewZealand’s Cheddar prices were DOUBLE the blockCheddar prices at CME. Currently, New Zealand’sblock Cheddar prices fall about $1.00/lb. below CME’s.

But now, U.S. commodity cheese prices standhead-and-shoulders above global competitors’ prices.These high prices will impair global buyers’ interestin U.S. products, if they have other alternatives. Pre-dictably, coming months will see U.S. Cheddar priceshigher than what’s available from global competitors,and export opportunities will go elsewhere. Anotherconsideration: High U.S. dairy commodity priceswill attract imports – particularly low-end “stuff” (forlack of a four-letter word). Food processing is a cost-conscious business.

For much of this past spring, dairy products en-joyed price and supply advantages over meat prod-ucts (beef, pork and poultry) at supermarkets. Meatprocessors’ volumes have returned to almost normal,seasonal levels. So dairy now does not enjoy earlierprice and supply advantages over those sources forprotein in the human diet.

And in conclusion …Right now, in this uncertain “Age of Precari-

ous,” the best dairy analysts can do is lay out the po-tential possibilities. Stay tuned. 2020’s wild ridewill probably continue to be just that. 12 — The Milkweed • July 2020

Unpredictable Future: Dairy in the “Age of Precarious”, con’t

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The Drought Monitor focuses on broad-scale conditions.Local conditions may vary. For more information on theDrought Monitor, go to https://droughtmonitor.unl.edu/About.aspx

droughtmonitor.unl.edu

U.S. Drought Monitor July 7, 2020

Valid 8 a.m. EDT

(Released Thursday, Jul. 9, 2020)

Drought Impact Types:

S = Short-Term, typically less than 6 months (e.g. agriculture, grasslands)

L = Long-Term, typically greater than 6 months (e.g. hydrology, ecology)

Delineates dominant impacts

Intensity:

D0 Abnormally DryD1 Moderate DroughtD2 Severe DroughtD3 Extreme DroughtD4 Exceptional Drought

None

Author:David MiskusNOAA/NWS/NCEP/CPC

Drought Parching Western Half of U.S., Mid-East & Northeast

Hot and dry. The nation’s dairy industry had better start seriouslyfactoring in widespread drought conditions for their potential impact uponthe nation’s next year’s milk production capacity.

Dairy producers in much of California’s Central Valley, New Mexico andwest Texas, parts of Kansas, parts of the mid-East, and the Northeast arefacing drought stress on 2020’s crops. After a couple years’ reprieve, severedrought is hammering many western states. And drought conditions arerapidly expanding in the Northeast and parts of the mid-east region.

Multiple federal agencies combine to produce the weekly “U.S.Drought Monitor” map, depicted above. Just between the weekly mapscompleted June 30 and July 7, drought conditions expanded noticeably inthe Northeast, Indiana/western Ohio, and Michigan’s “Thumb.” If anything,the U.S. Drought Monitor map is behind the curve in projecting the extentof severely dry conditions across much of Michigan. Our good source in

Michigan reports that much of that state witnessed about half the normalvolume of the first cutting of forages … with little or no regrowth since. InMichigan, much corn has stopped growing and is seriously curling.

Beyond dairy … drought conditions are worsening in key grain-grow-ing states in the Central region, the Southwest, the West Coast, half of thecombined Dakotas, western Iowa, Indiana and western Ohio.

Beyond virtually all other factors impacting agriculture, Mother Na-ture rules. Weather challenges to U.S. agriculture come on top of numer-ous weather and pestilence events elsewhere in the world.

For persons interested in following weekly updates of the U.S.Drought Monitor map, that map is updated every Thursday by 8:00 a.m.(Eastern Daylight Time). The website to access that map is:

www.droughtmonitor.unl.edu

Continued from page 1