As global milk supplies tightened toward the end of 2019, milk prices reached their highest level since 2014, coming in at more than $20 per hundredweight. USDA’s December World Agricultural Supply and Demand Estimates projected that all-milk prices in 2020 would average $19.40 per hundredweight, making 2020 the year that milk prices finally turned the corner.
In mid-January, two things happened: the U.S. and China agreed on a historical Phase 1 trade agreement whereby China made commitments to purchase $40 billion in U.S. agricultural products, and China confirmed the first case of the coronavirus. The markets mostly shrugged off the risk related to the coronavirus, and instead focused on evidence that the Phase 1 purchases would soon begin, which helped to keep milk prices steady for the better part of two months.
Everything changed in mid-March as confirmed cases of COVID-19 in the U.S. quickly led to social distancing and shelter-in-place guidelines. Demand destruction for dairy products accelerated as full- and limited-service restaurant sales declined, schools closed and exports slowed. April’s WASDE report revised the milk price outlook to an annual average price of $14.35 – down more than $5 per hundredweight, or nearly 30%, from December’s forecast. May Class III (milk used to make cheese) and IV (milk used to make nonfat dry milk powder) milk futures, reflecting demand uncertainty expected to occur during the second quarter, have declined by 39% and 42%, respectively, between Jan. 2 and April 23.
One of the ways dairy farmers can proactively manage their risk is USDA’s new Dairy Revenue Protection – developed by American Farm Bureau Federation in collaboration with American Farm Bureau Insurance Services, Inc.
Dairy Revenue Protection (Dairy Revenue Protection is Here) is an area-based crop insurance program offered by approved crop insurance providers and administered through USDA’s Risk Management Agency. DRP provides quarterly protection against revenue declines. Protection is available for the five nearby quarters. Unlike other federal dairy safety nets (DMC and LGM-Dairy), DRP does not cover risk of rising feed costs, and is designed to support dairy farmers when milk prices or cow productivity rapidly and unexpectedly decline. More than 40 billion pounds of milk were insured by DRP for calendar year 2020, and after taking into consideration of the optional protection factor, more than 51 billion pounds of milk have DRP coverage.
As of April 23, DRP is expected to make indemnities totaling nearly $1.3 billion. A majority of the indemnities, nearly $700 million, or 54%, will likely be made in the second quarter of 2020. DRP does not have limitations based on farm size, and as a result, the program payments are aligned with the major milksheds in the U.S. California is currently projected to receive $268 million in indemnities, followed by Wisconsin at $178 million, Idaho at $121 million and Texas at $113 million. Figure 2 highlights expected DRP indemnities as of April 22.
Milk prices during 2020 have fallen sharply due to COVID-19-related demand destruction. Moreover, with milk being dumped or sold at distressed prices, the re-blending of these losses across cooperative member producers or de-pooling of milk by independent processors is likely to result in farm-level milk prices that have declined by far more than what’s occurred in the futures markets.
DRP is expected to provide financial support to help offset these losses, but not all producers have DRP coverage. Recognizing this need, the administration and lawmakers have crafted a $16-billion assistance package to help livestock, dairy and specialty crop producers impacted by COVID-19 (UPDATE: What’s in USDA’s New Coronavirus Food Assistance Program?). Combined, the complementary support provided by the Coronavirus Food Assistance Package and DRP will help dairy farm families.
Producers who took the extra steps to proactively manage their risk – even when the market pointed toward higher milk prices and margins -- are more likely to endure the COVID-19-related price declines than those who did not, further emphasizing the importance of using risk management tools in the dairy industry.