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Analysis paints continued bleak picture for U.S. dairy industry
An updated quarterly analysis of the global dairy markets by RaboResearch Food and Agribusiness indicates the U.S. dairy sector and its global counterparts are in for another rough ride in the face of the global COVID-19 pandemic.
The report, released April 7, updates analysis to account for the global market disruptions due to the COVID-19 pandemic. For a struggling dairy industry, the analysis, if it holds true, will be another significant blow.
“The dairy sector is in unchartered territory and is expected to experience three waves of market movement over the next 12 months before it returns to a ‘new’ normal,” the report says. “The first wave is characterized by a spike in domestic dairy demand driven by panic buying during the first month of reduced mobility. Retail demand will offset a larger portion of declining foodservice demand.”
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The second wave is expected to be characterized by a more muted retail demand and increased logistical and financial challenges. “Consumers are expected to return to stores on an as-needed basis to fill gaps in their pantries and refrigerators rather than large shopping occasions. The prolonged impact from lower foodservice sales, the seasonal peak in Northern Hemisphere milk production, and a significant slowdown in global trade will contribute to rising year-over-year stock levels, putting downward pressure on dairy commodity prices and hence, farmgate milk prices. In addition, processing capacity, storage availability, and credit terms (liquidity) are expected to max out without government assistance.”
In the longer term, the third wave includes a likely global recession and widespread loss of income and savings, among other factors, which could keep dairy product prices and farmgate milk prices under pressure into 2021. “Dairy products are nutrient-rich and historically part of government-aided feeding programs. A deep recession may result in greater use of dairy products as more people meet the programs’ economic eligibility requirements, according to the analysis.”
The volatile market conditions are not lost in the report, which notes that “given the magnitude of market disruption, current forecasts are often outdated before they are published.”
The report also notes that dairy producers may face potential limited supplies of supplements and other veterinarian-related products. The reason: a significant producer of these products is China. Feed quality and quantity could also be impacted since nearly 80% of active ingredients for crop protection products are made in China. “As a result, there is a risk to the quantity and quality of feed, which could lead to lower milk production growth and higher costs of production for farmers,” the report says.
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Rabobank revised its forecasts to reflect a more sustained economic impact, with some prices as much as 30% lower than their pre-COVID 19 price levels. It is estimated that between 40% and 50% of U.S. milk production is covered by risk management programs that will provide some downside protection. In addition, proposed government aid packages could provide additional protection. “Nevertheless, the negative market impact from COVID-19 could have a significant negative impact on producers and accelerate dairy farm consolidation,” the report says.
The report also notes that within the global dairy marketplace, other regions are facing similar headwinds. Trade and market disruptions are not just occurring in the United States. Countries and regions are working on aid packages for their dairy industries.
To illustrate the precipitous drop in dairy prices: Over 45% of U.S. cheese production is used in the foodservice channel, and an estimated 50% of that volume has vanished. As a result, cash dairy markets are eroding quickly. The CME Cheddar block cheese price fell 37% in less than two weeks, to $1.15 per pound on April 3, the lowest level since 2009.