The latest COVID-19 aid bill passed by Congress was welcome news for the dairy markets. The announcement of additional food purchases sent futures price soaring Tuesday. One dairy analyst says if the futures prices hold, dairy farmers may be looking at the best prices they’ve seen in six years.
“I would say at this stage in the game, stay tuned for the details following this this new bill, because it is very roughly drawn out with not a lot of details put forward yet,” says Mike North of Ever.Ag. “But while you’re waiting for those details to come out, don’t lose sight of the price opportunities because as it sits today. If the current prices as provided, by way of futures are to be fully realized, then these prices will have brought forward the very best price opportunity since 2014. So, let’s not lose sight of what’s right in front of us and that is price.”
Key Takeaways for Dairy
As the dairy industry awaits details to see exactly how payments will be dispersed by USDA and how the new programs lined out in the bill will be crafted, North says the bill outlines three key areas that will impact dairy.
1. $1.5 Billion for New Food Purchases
“First and foremost is there’s about $1.5 billion appropriated for new for food purchases,” says North. “So, while this may not perfectly resemble the food box program, it’s going to bring government money back into the dairy markets to buy product. And that’s huge. It’s what’s got the milk market up limit right now.”
2. $400 Million for Food Donation Program
“There’s an additional 400 million being put out there for a donation program, and basically under the program, different dairy organizations are going to partner with nonprofits that distribute food to low-income individuals,” explains North. “Essentially, they would receive limited reimbursement for the products they donate.”
North says this is an opportunity to offload some expensive products that were made when prices were high, which will help reduce the inventory situation.
3. Direct Payments for Producers
“As you look at the amount of dollars that are being spent there, it’s up to $3 billion. And that’s spread across dairy farms, and livestock operations,” he adds. “So, we don’t have all the details there but there’s going be more dollars in the mailbox.”
North says while direct payments in 2021 will be good for producers’ bottom-line in the short-term, it may not be good longer-term in 2021.
“Our forecast, though, is that a lot of this is going to go towards raising milk production and really pushing our risk further out into 2021, so buyer beware, if you will,” he says.
The price of feed is climbing with the dairy futures. North says soybean meal has gone from $360 per ton to $410 per ton, a dramatic price change in just the fourth quarter of 2020. And his outlook is for feed prices to continue to push higher.
“That’s a significant change over the course of q4 and look for that to go up unfortunately, with a tight balance sheet we have for soybeans and what’s going on in Argentina with the port strike, it’s going to make it very difficult for the world price of soybean meal to relax anytime soon,” says North. “Domestically, it’s the same thing. And corn price obviously is it’s following along with whatever soybeans have been doing.”
Rising Feed Prices
With feed prices on the rise, he says dairy producers have silage in the bunker at prices considerably lower than what the board is showing today. So, he says the changing feed cost scenario will also be a 2021 issue for dairy producers. And if the imbalance occurs in prices between Class III and Class IV futures, he fears dairy producers will face negative PPD again.
“With prices now on the rise on the heels of this new bill passing absolutely producers are going to be able to do okay here,” says North. “The challenge that we’re going to have once more though, as we come through this, if the food purchases favor Class III items like cheese, more than Class IV items like butter, then we go back to talking about this negative PPD story again, which strips away some of the value that you see when you look at a price on a screen. So, the devils in the details here, and we’re still awaiting some of the details as to how this new program is going to come into play.”
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