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Rabobank: Dairy facing three waves

Progressive Dairy Editor Dave Natzke Published on 08 April 2020

The global dairy sector is in unchartered territory and could experience three waves of market movement over the next 12 months before returning to a “new” normal, according to a “Coronavirus Update” report from RaboResearch.

Rabobank global dairy strategist Mary Ledman characterizes the dairy outlook in three waves:

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1. Already underway, the first wave is a spike in domestic dairy demand driven by panic buying during the first months of health concerns and travel restrictions as consumers isolate in homes. The retail demand is helping offset a portion of declining food service demand. However, more than 45% of U.S. cheese production is used in the food service channel and about 50% of that market has vanished.

2. That’s followed by more muted retail demand and increased logistical and financial challenges. Consumers are expected to return to stores on an as-needed basis to meet their needs. However, the prolonged impact on lower food service sales, the seasonal peak in Northern Hemisphere milk production and a significant slowdown in global trade will contribute to rising dairy stocks, putting downward pressure on dairy commodity prices and, as a result, farm-level milk prices. In addition, processing capacity and storage availability will be stretched, while dairy liquidity will “max out.”

3. The third, and longer-term wave, includes a likely global recession and widespread loss of income and savings, among other factors, that could keep dairy product and farmgate milk prices under pressure into 2021. At the same time, increased use of nutrient-dense dairy products in government feeding assistance programs could boost consumption.

In recognition of the rapidly changing supply and demand conditions, Rabobank adjusted a previous quarterly outlook, warning that any forecast may become outdated quickly. The latest outlook, as of April 7, projects 2020 milk prices that could be 30% lower than pre-COVID-19 price levels.

About 40%-50% of U.S. milk production is covered by risk management programs that will provide some downside protection, and government aid packages are likely to add support. However, the negative market impact from COVID-19 could have a significant impact on producers and accelerate dairy farm consolidation, Ledman warned.

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She cited significant negative impacts of global dairy trade marked by logistical and workforce issues, import contraction in China, plunging oil prices that reduce the buying power of countries with petroleum-based economies and generally weaker global economic growth.

Government intervention will play a critical role in how intense the waves impact dairy, Ledman said. In the U.S., tools could include additional government purchases of dairy products, compensating dairy producers for dumped milk, the reopening of the Dairy Margin Coverage program, implementation of a voluntary supply management program and establishment of a recourse loan program to supply working capital.

Global Dairy Trade index up

In one bit of good news, the index of Global Dairy Trade (GDT) dairy product prices rose in the latest auction, held April 7. Small increases in most major product categories pushed the overall index up 1.2%. A price summary follows:

  • Skim milk powder was down 0.8% to $2,514 per metric ton (MT).
  • Butter was up 4.5% to $4,263 per MT.
  • Whole milk powder was up 2.1% to $2,820 per MT.
  • Cheddar cheese was up 0.2% to $4,359 per MT.

The next GDT auction is April 21.

March Class III and Class IV prices down

Federal Milk Marketing Order (FMMO) Class III and Class IV milk price continued to descend in March.

At $16.25 per hundredweight (cwt), the Class III milk price was down 75 cents from February but still $1.21 more than March 2019. It’s the lowest since April 2019.

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The February 2020 Class IV milk price fell $1.33 from February to $14.87 per cwt. It’s down 84 cents from March 2019 and the lowest since September 2018.

NMPF podcast: Dairy difficulties to reverberate for months

National Milk Producers Federation (NMPF) chief economist Peter Vitaliano says current coronavirus-created gloom over dairy prices as expressed in futures markets may turn out be overstated in the end, but that the pain felt by producers over the next few months will be real as lower prices make their way into milk checks paid to farmers for their milk.

“These are unusual circumstances that I’m not sure the futures have figured them out yet,” Vitaliano said in an NMPF podcast. Because milk in stores now was purchased at earlier, higher prices, “producers are not seeing this in their milk checks yet,” he said. “That’s going to come over the next several months because the forecasts are all indicating that we’re going to be to be hitting the trough in May and June.”

Read: NMPF, IDFA propose ‘Milk Crisis Plan.’

ADC seeks seasonal, regional adjustments to Milk Crisis Plan

While applauding the “Milk Crisis Plan” from the National Milk Producers Federation (NMPF) and International Dairy Foods Association (IDFA), the American Dairy Coalition is recommending proposal changes to ensure milk production reductions required under the plan are fairly applied.

“Every player in the dairy supply chain – producers, processors, retailers and affiliated industries – is scrambling to avert the industry’s collapse in the shadow of COVID-19,” said Laurie Fischer, ADC chief executive officer, in a statement released April 7. “Much about [the Milk Crisis Plan] deserves applause: It bluntly assesses the upheaval caused by plunging restaurant and school sales and rocketing grocery store demand. It also seeks to align the supply/demand gap as quickly and efficiently as possible.”

However, Fischer said, a “fatal flaw” in the proposal’s “producer initiatives” could spur more market disruptions than it resolves, she warned.

Under the proposal, dairy producers would receive a $3-per-cwt payment on 90% of their milk production if they cut production by 10% from a March 2020 baseline.

“Unfortunately, the arbitrary March benchmark will not work,” Fischer said. ”For the dairy industry to have a meaningful and market-effective impact, production needs a different baseline – it must be seasonally adjusted and region specific.”

Fischer said asking producers to trim 10% from their March milk production baseline would essentially mean little to no change in the nation’s milk product inventory as that amount is already is built in due to production declines related to warmer summer temperatures.

In addition, a one-size-fits-all proposal fails to account for the geographic differences built into the industry, she said.  end mark

Dave Natzke
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