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Stephenson: Pandemic will weigh on dairy markets into 2021

Progressive Dairy Editor Dave Natzke Published on 26 October 2020

The COVID-19 pandemic has weighed heavily on 2020 dairy markets, and that influence is likely to continue for the foreseeable future, according to Mark Stephenson, University of Wisconsin – Madison director of dairy policy analysis. Stephenson discussed factors impacting milk producers and markets during a northeastern Wisconsin farm management update meeting for agricultural professionals, held virtually on Oct. 22.

Stephenson said the pandemic is entering a third surge in the U.S. The first was the initial surge in March and April; the second was in July. Each was followed by a period of “entrenchment” when the coronavirus outbreak slowed. The third surge is underway and, at the time of the October webinar, had not yet peaked.

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“We’re not done with the pandemic, and it’s going to affect our dairy markets,” Stephenson said.

All channels impacted

There’s no dairy handbook on dealing with a pandemic, Stephenson noted. The impact of the pandemic on consumer behavior has impacted nearly all dairy product sales channels, including retail, food service and exports. Prior to the pandemic, more than 50% of all cheese and butter was consumed outside the home through food service (restaurants and institutions).

Restaurant closures and capacity restrictions have cut sharply into food service sales. There’s a notable exception – pizza – thanks to take out and delivery options.

Beyond restaurants, the USDA’s “Farmers to Families Food Box” program has also been especially helpful in supporting cheese sales. “Food boxes might have accounted for 4%-5% of U.S. milk production, so the dairy products that have been included in those giveaways have been significant,” he said.

Retail grocery store sales of cheese have been higher than the year before throughout the pandemic. (Read: Weekly Digest: Retail dairy sales end summer on a high note and Retail dairy sales strong in September.)

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The combined sales of cheese on pizzas at retail and through food box distribution has helped maintain overall cheese consumption. Since the pandemic outbreak, April-October 2020 U.S. cheese sales are down just 0.4% compared to the same period a year earlier, far less than the forecast decline of 5%.

Beyond cheese, at-home fluid milk consumption has been stronger, especially in gallon and half-gallon containers, he said. And, with more home cooking and baking, in-home consumption of butter has helped make up for some of the lost food service/institutional sales.

However, while exports of milk powders and whey are adding some support to prices, butter stocks are building. (The USDA’s Cold Storage numbers were released after Stephenson’s presentation, showing that while Sept. 30 butter stocks were down 7% from Aug. 31, they were up 18% from a year earlier.)

“The fat surplus is one thing that is a little bit concerning and is going to keep pressure on prices,” Stephenson said.

Government payments substantial

USDA payments through two Coronavirus Food Assistance Programs (CFAP) have been vital to dairy producers. Payments through CFAP 1 equaled $6.20 per hundredweight (cwt) on first-quarter 2020 milk production. Payments through CFAP 2 equal $1.20 per cwt on April-December production. That averages out to about $2.45 per cwt on annual milk marketings for the year.

That combination of government payments and for those dairy producers using risk management, milk income could average near $21 per cwt in 2020.

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“We haven't seen anything like that [since] 2014; this almost looks like recovery in terms of milk income,” Stephenson said.

There is one wild card for individual dairy producer milk checks: the impact of negative producer price differentials (PPDs), which are now likely to last into the first quarter of 2021.

Factors cloud outlook

Looking ahead, an economic recession and unemployment will affect dairy prices and sales. Stephenson differentiated between the recession of 2009 – which he said produced a decline in the value of assets – with a recession tied to the ongoing coronavirus pandemic, impacting employment and household cash flow.

About 71% of the U.S. economy is primarily based on consumption, he explained. In comparison, about 34% of China’s economy is based on consumption. “When consumption can’t be maintained, it affects GDP [gross domestic product] and it might result in a longer-term hit,” Stephenson said.

For that reason, a weaker domestic market makes exports even more important. Historical trends show domestic and worldwide recessions result in a tremendous plunge in milk prices. When exports absorb more milk, prices rise.

Watching milk production

Eventually, the pandemic will get under control, Stephenson said. However, he has concerns about the dairy market, especially with milk production again on the rise.

The pandemic and resulting market impacts have whipsawed U.S. milk production. After stronger increases in the first quarter of the year, implementation of base-excess programs to balance supply-demand drove production lower in May and into June. While production was held in check last spring, better milk prices and government payments have spurred growth, and July-August production has posted sharper increases.

“I wonder if we have our foot caught on the gas pedal a little too hard” he said. “I’m not really sure how much milk we can handle.”

On the demand side, there’s both upside and downside potential for dairy prices. Strong retail sales and reopening restaurants fuel an optimistic outlook. The end of government assistance payments and growth in both domestic and global milk production temper that outlook.

Stephenson-Cropp podcast

Continuing the discussion on dairy markets and the coronavirus pandemic, Stephenson was joined by Bob Cropp, dairy economics professor emeritus at the University of Wisconsin – Madison, during the duo’s monthly dairy situation and outlook podcast.

Cropp noted near-term Class III milk prices could be record highs, driven by a strong cheese market. (As of the close of trading on Oct. 23, October Class III futures settled at $21.63 per cwt; November and December closed limit higher at $22.19 and $20.16 per cwt, respectively. Class IV milk futures have been lower but spot prices for nonfat dry milk have been climbing steadily.)

While the futures market has Class III-Class IV prices coming together later in 2021, “I don't know how much the futures market really can read the pandemic playbook because I'm not really sure that's been written yet,” Stephenson said.

For now, Stephenson and Cropp urge producers to take advantage of risk management opportunities, especially as feed prices rise and the likelihood of direct payments to dairy producers diminishes.

Current projections indicate there will be Dairy Margin Coverage (DMC) indemnity payments for those covered at the $9.50 per cwt level during the first half of 2021. For those not already enrolled, the deadline to sign up for 2021 DMC is Dec. 11, 2020.

“As we look into next year, there remains a lot of uncertainty about milk prices,” Cropp said in his monthly outlook report. ”The level of milk production, domestic sales and exports are crucial. But so important will be how soon the COVID-19 virus slows down. Until it does, restaurants will not be fully open, schools and colleges will be virtual learning rather than in-person instruction. Major sports will not have audiences in the stands, and major events and conferences will not be held or if they are, they may be virtual. The COVID-19 virus is hurting not only the U.S. economy but the world economy which impacts domestic sales and exports.”

“Think about your risk protection. I don't think we're done with this yet,” Stephenson concluded.

Read Bob Cropp’s October 2020 Dairy Situation and Outlook report here.  end mark

Dave Natzke
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