COVID changes milk markets

by Sally Colby

Is 2020 in the rearview mirror? Dr. Mark Stephenson, director of dairy policy analysis at the University of Wisconsin-Madison, said maybe.

In early spring 2020, when the dairy industry was struggling with “what to do,” supply chains were disrupted. “We’ve learned a little better how to live with it since,” said Stephenson. “But we still aren’t done with COVID.”

Despite dumping and shortages, Stephenson said markets have done a remarkable job moving milk. “You might remember initially when we were all ‘safer at home’ in April and early May. We had shocks to the marketplace,” he said. “Historically, about half of cheese is consumed in out-of-home eating, so to have restaurants shut down is a big deal. Within the cheese category, there are some differences. The vast majority of American processed cheese, the singles that are put on a burger to make a cheeseburger, or semi-plastic cheese that’s dumped on your plate of nachos, is all foodservice.” Pizza sales were (and are) mostly takeout or home delivery, and have surged.

Cheddar prices in April reached $1/pound, a price Stephenson said hasn’t been seen since 2006. “That caused real interest from export markets,” he said. “This was well below world prices, or competitors for those cheese markets, and we sold quite a bit of cheese in a short burst. Six weeks later, we hit new all-time highs for cheese prices on the spot markets – $3/pound. Those sales were done immediately because they were well above world market prices.”

Stephenson said if supply chains are disrupted due to the pandemic or if there’s a worldwide recession like in 2008 and 2009 and countries can’t buy as much dairy product – if the product stays home on our shores – the U.S. all-milk price plunges.

“Stocks had gone up. We cleared our market of powder, but that also left a lot of cream that’s either going to be churned or used some other way,” said Stephenson. “A lot was made into butter and not as much was sold into world markets. I think we may have some opportunities to sell butter shortly.”

The U.S. is almost always competitive with dry powder prices. “We export more than half the powder made in this country,” said Stephenson. “We have to export that product – it has to be priced competitively all the time. It’s one of the reasons our Class IV prices have been below Class III prices when we have cheese that can soar on their own in the domestic market.”

Changes in milk production across the nation have also affected stability on dairy farms. A 1% to 2% increase in production is a comfortable range for the U.S. and can satisfy growth in domestic consumption of dairy products – a sector that’s always growing. “When we get above 2%, we’re in big growth territory,” said Stephenson. “That almost assuredly has to be handled through export sales, and we’re counting on that. We’re at 3% milk production growth in November. That’s big growth – we don’t get above that number very often so we have to move a lot of product.”

One method of handling the base excess plan and reducing milk coming to market is reducing herd numbers. Between March and June, dairy cow numbers were down, but have since regained strength. “This is adding capacity to produce milk in our U.S. dairy herd,” said Stephenson. “As long as we have the cow numbers and feed in the bunks, we’re likely to milk cows.” Many producers chose to maintain herd numbers and not cull to reduce milk.

Milk per cow per day also affects the national supply. Stephenson said 2020 started with big increases in per cow production, but one of the strategies was to tone down the ration because even though producers culled, those cows were not top producers. “Production per cow should have remained strong but it didn’t,” he said, adding that production actually dropped. “Part of the strategy was to have a less dense energy ration, and milk per cow dropped in May. It’s now back strong, so we have strong herd numbers and good production per cow.”

Milk production in other countries dipped at the same time U.S. milk production dipped. While the U.S. returned to more stable production, so has the rest of the world. Stephenson said we need worldwide demand to hang tight if we’re going to continue to sell a lot of dairy product into export markets.

Class IV milk has been trending downward or remaining flat, and optimism hasn’t changed much because it depends on world prices for powder. “In Class III, we’ve had the opportunity to go from a $16 expected price for January milk to well north of $18,” said Stephenson. “We’ve also had more pessimism as we look at potential demand and potential of milk coming on. It brought us back down to $16 and we’ve been fluctuating up and down for the past month or so. We aren’t sure whether we’re optimistic or pessimistic about prices in general.”

New market channels have emerged to impact dairy markets, including the USDA’s Farmers to Families Food Box initiative. “We’ve had four waves of the Farmers to Families Food Box program,” said Stephenson. “A fifth has been announced and will be buying dairy product to help fill it.” The Farmers to Families Food Box program put a demand for fresh cheese on the marketplace and eliminated much of the fresh cheese inventory.

Stephenson is optimistic about the fifth round of the Food Box program. He said the U.S. will spend $1.5 billion on the program, and dairy will be a part of it. “Initially we had just cheese and fluid milk in the program, and only certain kinds of cheese,” he said. “It’s been expanded to a variety of dairy products so we can have items like specialty cheeses, sour cream and cream cheese, which will help move different dairy products.”

Grocery store sales have remained above year earlier levels, but growth is slowing. Stephenson said people are hoping to get out soon, but many remain interested in home cooking. Schools continue to struggle, trying to figure out how to open and remain open, but more milk is being moved through schools now.

“I am forecasting a more stable price, around $18.50 for the U.S. all milk price,” said Stephenson. “But that stability has much to do with being ‘middle of the road.’ I think we’re going to have more tightness in the marketplace during some periods of time, and I think we’re going to see some time periods when markets are challenged again. I do not expect the kind of troughs we saw in April and May – we’ve been through that and the markets know better how to handle it, even if we have to have another shutdown of marketplaces.”

2021-02-16T10:31:03-05:00February 16, 2021|Eastern Edition, Western Edition|0 Comments

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