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Perspective:
Dairy Markets

COVID-19 crashes dairy markets, with details on USDA help uncertain

Lucas Fuess

Lucas Fuess is the director of dairy market intelligence at HighGround Dairy*, Chicago, a firm specializing in dairy hedging, risk management and market analysis services. He contributes this column exclusively for Cheese Market News®.

To say that COVID-19 has created an unprecedented shake up in the lives of billions around the globe is likely an understatement. Words do not seem to highlight the severity and novelty of the crisis, nor did most people ever imagine that a pandemic could so starkly change lifestyles in just a few short weeks. Millions of people lost their jobs, shattering unemployment claim records. Stock market volatility is at 2008, and even 1930s, levels, with some millennials suddenly facing the first recession of their working lives. Travel has ground to a halt, with the Transportation Security Administration screening fewer than 100,000 people per day, sharply lower than the millions who used to pass through security on a normal, American day in the past.

The sense of normal has been fundamentally shaken — and might never return. Will handshaking continue as a societal custom? What about the future for packed sports stadiums or concert halls with thousands of people pushed together?

Dairy has not escaped the unprecedented changes seen throughout all markets in recent weeks. Nearly all products have seen both spot and futures market prices crash lower at rates not seen since the 2008/09 crisis. While the dry whey price has remained constant, cheese, butter, nonfat dry milk, and both Class III and Class IV values have each shed significant value. Closed restaurants have slashed foodservice sales, cutting dairy demand quickly at extraordinary levels.

The supply chain has rushed to adapt; there is certainly no shortage of milk, but normal processing and distribution disruptions have created immense challenges as consumer spending broadly shifts. This demand collapse arrived just as milk production was reaching its seasonal peak in many regions across the country, pushing supplies to burdensome levels. Milk dumping skyrocketed over the past two weeks to the dismay of farmers who work tirelessly to produce a quality product; dumping will likely approach near-record levels throughout April as the market adjusts to oversupply. The dumping and food waste have attracted mainstream media attention, with consumers struggling to understand why raw milk is dumped while limits on purchases remain at grocery stores.

Current beliefs point to several more weeks of social distancing, with the COVID-19 curve peaking in mid-April. Businesses might start to slowly reopen by Memorial Day, but the pace of lightening social distancing remains relatively unknown at this point. Regardless, it is unlikely consumers will rush back to restaurants at the pre-virus pace. Travel will remain limited for several months through a combination of businesses slashing travel budgets, conferences and meetings through summer being delayed or canceled, and people generally not wanting to risk infection on airplanes. These factors each point to months of reduced dairy demand, regardless of how quickly the U.S. can fight the virus and reopen the economy.

HighGround is not predicting that milk and dairy product prices will rebound quickly. While May will likely mark the market bottom, farmers will not see profitable prices for several months. Volatility is intense with futures markets trading at the daily limits for multiple consecutive days. Even with low forecasted product prices, buyers are not stepping in to secure supply as demand remains unknown.

The International Dairy Foods

Association and National Milk Producers Federation released a joint proposal this week with suggestions USDA can take to assist during this crisis. Measures include:

• Offsetting the steep decline in farm milk prices and encouraging producers to reduce excess supply resulting from demand disappearance by paying producers $3 per hundredweight on 90% of their production if they cut production by 10% from the March 2020 baseline.

• Compensating all producers and handlers for milk that must be disposed/dumped.

• Expanding availability of working capital for processors.

• Purchasing substantial volumes of dairy products for feeding programs.

HighGround is not confident that these measures will sharply support prices. A key aspect will be timing of USDA relief; all measures are simply proposals, and USDA action could take time with little to no assistance immediately. There is some discussion that USDA should not step in to assist and let the market function as designed, but the Trump administration has shown throughout the past two years of trade disputes its willingness to provide assistance to farmers and will likely be drawn to payments or support of some type.

After timing, the key question turns to how much of the CARES Act agricultural funding will be allocated toward dairy when agricultural commodity prices across most industries have fallen due to the virus. Paying dairy farmers to reduce production by as much as 10% and/or increasing dairy product purchases for food banks would quickly cost billions of dollars. There remain multiple unknowns with how the situation will unfold in coming weeks, making market forecasts difficult when details change by the day… or hour.

Regardless, a few facts will likely remain true in the coming weeks: Both the U.S. and globe will face burdensome milk supplies for several months, keeping prices depressed. Demand will remain weak throughout the remainder of the year as consumers will remain hesitant to eat out or mingle in crowds even after social distancing rules are relaxed. This oversupply coupled with collapsed demand will see dairy farmers struggle for profitability, with culling to surge and bankruptcies imminent. While end users can secure cheap product, buying hesitance will remain as demand will be unpredictable. Volatility will persist.

While the HighGround team continues telework, we thank those essential employees who do not have that option: farmers, truck drivers, dairy processing plant employees, grocery store employees, and health care workers working hard throughout this crisis.

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.

*These observations include information from sources believed to be reliable, but no independent verification has been made and therefore their accuracy and completeness cannot be guaranteed. Opinions and recommendations expressed are the opinion of the authors and are subject to change without notice. The risk of loss in trading futures contracts or commodity options can be substantial, and investors should carefully consider the inherent risks of such an investment in light of their financial condition.

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