Negative Producer Price Differentials in Milk Pricing Going Down

Negative Producer Price Differentials in Milk Pricing Going Down

A University of Wisconsin-Madison economist says those negative Producer Price Differentials that have been pulling down the prices farmers are paid for their Class III milk may finally be under control. Dr. Mark Stephenson, who serves as the director of the Wisconsin Center for Dairy Profitability, said on Tuesday’s episode of the Dairy Signal that the negative PPDs will be around 40-cents in the next month. That’s opposed to the $3 to $4 levels seen during the past summer.

“We should see less negative PPDs going into the fall,” Dr. Stephenson told viewers of the Professional Dairy Producers of Wisconsin’s online forum. “The good news is the negative PPDs should be in the rearview mirror as we enter into 2021; but the bad news is we’re seeing this happen because the Class III milk price will be lower. In the long-run, it could mean that milk checks will be similar to what they are now.”

Stephenson’s presentation went into detail on how the PPDs are determined based on the spread of the various milk class prices in a given month. In summary, he said when milk is pooled, the PPD becomes negative during scenarios where the Class III price rises too fast (as it did in June and July of 2020) or when the spread between Classes I, III and IV prices gets wider.

However, he points out that there’s no rule book for price forecasting during a year that has seen a pandemic, a controversial presidential election and swinging markets.

“Volatility is going to be the name of the game,” he said. “Although we are seeing lower prices, I’m hopeful that the outcome won’t drag on for years to come like it did after the recession of 2008 and 2009.

And he adds that one of the greatest lessons learned in 2020 is that risk management is important.

“Last December, most producers saw 2020 as the year where everything was going to be better. As a result, not as many took advantage of tools like the Dairy Margin Protection program… which would have been cheap insurance coverage.”

Dr. Stephenson said fortunately, a lot of farmers are going to have more high-quality feed available going into the winter, which will help reduce input costs.

 

Source: Wisconsin Ag Connection 

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