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Friday, November 20, 2020
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Dairy Outlook 'Iffy' for 2021

by Jerry Goshert

Published: Friday, November 20, 2020

As consumers choose to eat more meals at home, the dairy industry is trying to adjust. A new cheese plant in St. Johns, Mich. opened just last month and is expected to utilize some of the excess milk that is overhanging the market. Processors are also changing how they package certain products.

But as the industry looks ahead to 2021, there is a lot of uncertainty about how the COVID-19 pandemic will affect consumer behavior.

For dairy farmers, the 2021 milk price outlook is iffy at best. Higher feed prices threaten to squeeze margins, and higher production, both at home and in Europe, is expected to flood the market with milk. One dairy market observer says now is the time to put a risk management plan in place for 2021.

Christopher Wolf, a Cornell University agricultural economist and former Michigan State University milk market analyst, shared his thoughts last Thursday during a virtual meeting for milk quality professionals in Indiana, Ohio, Michigan and Kentucky.

Wolf said the COVID-19 pandemic has caused major changes in the U.S. dairy market. People are eating more meals at home, especially comfort foods like soups and macaroni and cheese. While this has given a boost to sales of processed cheese, it's not so good for butter and cream demand.

Yogurt sales are a mixed story. Large containers of yogurt are moving off the shelves in greater quantities, while smaller "on the go" packages—designed for people headed to work or school—aren't selling as well.

Fluid milk sales are down, as more students participate in virtual learning, but sales of organic and extended-shelf-life products are up.

The agricultural economist pointed out that the U.S. economy is driven by consumer expenditures. Consumer spending dropped 18.5 percent from February to April, but increased 16.5 percent from May through August. The recovery was strong, but not complete.

"And it's not evenly distributed across locations or professions or income levels or industries or anything of that nature," he said. "Recovery has meant that some industries are doing okay and some are doing not very well at all.

"The other thing is that some of this recovery, especially when we're thinking about restaurants and retail food service establishment, was assisted by the fact that we were in the summer months. And you could do outdoor dining. I don't think we're going to be eating outside for very much longer. In fact, it looks like maybe not anymore."

During the pandemic, one in six restaurants have gone out of business. Wolf said this has an impact on the overall consumption of dairy foods.

That's because consumers' dining behavior is different at restaurants compared to home, according to Wolf. People who eat away from home tend to indulge in food made with generous amounts of butter and sour cream, whereas those ingredients are applied more sparingly at home.

While business at restaurants picked up this summer and fall, Wolf says there are still many people who are staying home. As a result, consumption of certain products, especially butter, remains well below average.

Oddly, butter sales are up at grocery stores, but consumption is not enough to offset the decline at restaurants.

With food service sales on the decline, there is a $1 per hundredweight gap between cheese and butter prices. According to Wolf, this disparity is one reason for the negative producer price differentials, or PPDs, which dairymen are seeing in their milk checks. Another reason is the de-pooling of Class 3 milk.

Last spring, milk demand dropped abruptly as restaurants and schools closed. This left processors with more milk than they could handle. At the peak of the pandemic in April, excess milk was dumped, totaling 349 million pounds, or 2.5 percent of the U.S. milk supply. Most of the dumping occurred in two areas, the Northeast and the Mideast.

"This is one thing that I think is pretty impressive," Wolf said, referring to the record volume of milk dumping. "It came right back down. We came right back down to the, if you will, normal levels of milk dumping and it has stayed there. So, we had one month where there was a big adjustment."

Wolf cast off the notion that the dairy industry's supply chain broke down during this time. Rather, he characterized the milk market in April 2020 as a "once-in-a-lifetime event."

"The dairy industry did quite a job in responding, I would say."

Wolf said a new cheese plant in St. Johns, will help the industry use excess milk. The plant, which opened in October, is processing 8 million pounds of milk on a daily basis.

In response to the glut of milk, processors ramped up butter and cheese production. Major co-ops launched supply control programs. Farmers reacted in various ways, depending on their situation. To cut production, some reduced cow numbers or changed feed rations. Others chose to exit the industry. Some just kept on milking and sold the commodity at lower prices.

Milk production fell dramatically in May, and prices began to climb. But that situation didn't last long. Producers once again increased their production, and, as of September, milk output stood at 2 percent above previous year's.

"And that's partly in response to the higher milk prices that we saw this summer," Wolf said. "And that's part of the concern as we look into 2021 for milk prices, especially at the farm level."

Government programs provided some relief for farmers, among them being the Dairy Margin Coverage Program, Dairy Revenue Protection Program and the Coronavirus Food Assistance Program.

On the demand side, the U.S. Department of Agriculture's Farmers-to-Families Food Box Program purchased $4 billion in food assistance, or approximately 1 percent of total U.S. annual milk production, for those in need. Dairy was one of the commodities included in those food boxes.

Wolf said cheese prices responded to the government purchases, with the Cheddar block prices rising from $1 in the spring to $3 in July. However, he said there is "extreme volatility" in the market.

Meanwhile, the spread between cheese and butter prices increased as government food boxes targeted cheese and inventories of butter piled up.

"Now, we price Class 1 (fluid milk) as the average of Class 3 (cheese) and Class 4 (butter) plus 74 cents," Wolf said. "Prior to 2018, we used to do the higher of Class 3 or Class 4."

The result of this anomaly is that fluid milk sells for less than cheese. Wolf said this has been one of the issues exacerbating the negative PPDs for producers.

Over the past six months, milk prices have been volatile. Farmers earned just $12 per hundredweight for milk in May and $24 in July. The long-range forecast has milk priced in a range of $16 and $16.50 for 2021, which Wolf said is near the cost of production. Government payments have helped the profit outlook, but one of the questions as we look to 2021 is whether farmers can count on more aid from Uncle Sam.

"If not, and we put that extra 1 or more percent of milk production back onto the market, what's that going to do to prices?"

This year, 36 percent of dairy farm income will come from government support.

Another key question for 2021 is how long the pandemic will linger and to what extent that will affect consumer expenditures on food. Other factors include higher feed prices and exports.

U.S. and European milk production are both up around 2 percent, and if that continues, Wolf said we are likely to see lower prices.

"If demand does not continue to meet that expected increase in supply, then we're going to see some pretty big and significant and quick downward pressures on farm milk prices."

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