Dairy farmers who endured paper-thin margins in recent years have reason for optimism in the year ahead.
USDA’s current price projections for 2022 surpass the $20-mark (at $20.25 per hundredweight) for all milk, with Class IV and Class III average price estimates close behind at $18.70 and $17.75, respectively.
If realized, the price increases for the three milk classifications would range between 80 cents and $2.70 per hundredweight above USDA’s November 2021 estimates.
“There’s reasons to finally be upbeat in dairy,” Dan Basse, president of AgResource Company in Chicago, said recently at the annual Agricultural Bankers Conference. “It’s taken us eight years to get back to where we were in 2014 (if milk prices surpass $20).”
Basse estimates Class III and IV milk prices could reach as high as $21 to $23 next year, driven by surging demand, a possible smaller supply and inflationary pressure.
Longer-term, a proposed shift in ag policy in the European Union could shift the EU market from a net exporter to net importer of dairy.
“World demand for dairy products remains strong,” Basse said. “I believe exports are the bullish driver of the future.”
The U.S. exported an all-time high of 16% of milk solids produced nationwide in 2020. And, exports so far this year, from January through September, bubbled a whopping 14% above last year’s record pace.
“As we head into 2022, we’ll have another record year for dairy exports,” Basse said. “One of the bigger buyers is China. They use a lot of whey as a milk replacer for piglets.”
U.S. dairy cow numbers increased 2% from 2020 to July 2021 to 9.5 million head. But, Basse believes the yearly total could decline due in part to strength in the beef market, with slaughter up 14%.
“U.S. dairy cow slaughter has been elevated. Cull prices have been strong,” Basse said. “That’s a big margin enhancer for dairies.”
But what effect will price inflation have on demand for dairy products and beef?
“Inflation is not going to be leaving us any time soon. I think it will be around at least the next 12-18 months,” the analyst said. “There’s no indication of protein switching. World demand for dairy products remains strong.”
That includes surging demand for cheese and butter, with global butter demand growing at a 7% clip.
“U.S. butter supplies are ample. It’s an export opportunity now,” Basse said. “World butter prices have been rising.”
Price inflation also represents one of the biggest risks for the dairy industry heading into 2022, as well, with feed costs near historic highs.
“We’re bullish for the milk market. But, my biggest concern is the price of feed. It could be the Achilles heel of the dairy industry,” Basse said. “It’s how you manage risk. Lock up profitable margins.”
Potential growth in the dairy industry also could be squeezed by processing bottlenecks.
“We’re almost at maximum (milk processing) capacity,” Basse said. “We need more capital and investment.”
Overall, Basse believes farmers are in the midst of a commodity supercycle that could last 2-3 years.