Commodity Report: Dairy Industry Highs and Lows
6/22/2020
dairy cows
 

Volatile. That’s the single word to best describe the dairy industry since COVID-19 paralyzed the U.S.

 

The pandemic’s dark shadow thwarted what was hoped to be a turnaround year for dairy producers. And, while it has provided unprecedented market challenges, it’s not all gloom and doom.

 

“We came in to 2020 feeling bullish from a producer’s standpoint,” explains Ben Spitzley, vice president and commercial lending dairy group manager with GreenStone Farm Credit Services.

 

“Toward the end of 2019, it looked like we were trending upward and turning the corner,” he adds.

 

“Supply and demand fundamentals were aligning, and improved trade negotiations were starting to push a price rebound. In November 2019 we had the highest price in five years, approaching $20 per hundredweight,” says Spitzley.

 

He paired that optimism in price with the euphoric anticipation of a world-class cheese processing plant coming online this fall in mid-Michigan, promising to provide a significant investment and boost in Michigan dairy.

 

It seemed the industry was primed to rally, but then came March 2020.

 

COVID-19 

 

Across the U.S., many governors were issuing ‘stay at home’ orders, and entertainment events, schools and restaurants closed. Prior to the pandemic, consumers were eating 52% of their meals away from home. That suddenly changed and milk prices plummeted.

 

“In April and May dairy consumption fell 45-50%,” Spitzley says. “With all school systems closed, inventory began backing up pretty quickly.”

 

Retail demand improved, as consumption at home rose. But the industry wasn’t nimble enough to move product normally destined for schools and other institutions to grocery stores.

 

The marketing shift and the ensuing glut of product put downward pressure on dairy farmer’s income.

 

Restaurants are major markets for butter and cheese products. Processing plants producing for a food-service scale had to find ways to start making products for single-family purchases.

 

“Processors had to change from making 40-pound blocks of butter for food service, to quarter-pound sticks of butter – that takes time,” says Spitzley, who points out grocery stores were limiting butter and milk purchases for a period while the industry adapted.

 

At the same time, the oversupply of milk, unable to be processed, was being dumped in both Michigan and Wisconsin, mostly during the month of April, exacerbated by the spring flush.

 

“This was certainly frustrating for dairy producers and consumers,” Spitzley adds. “The consumer doesn’t get dairy products directly from the farm. Processors plants run lean and it didn’t help that two huge fluid milk providers, Borden and Dean’s, were in bankruptcy prior to COVID-19.”

 

In addition to dumping milk, the industry adapted supply management practices to cut 5 to 20% of production by culling cows, lowing the number of milkings per day and adjusting feed rations.

 

Still, May prices hit the lowest price seen in 11 years –  $12.14 for Class III dairy. As low as that was, it did not dip to forecasts of $11 or less, that some feared.

 

It was propped up with a May 4 USDA announcement of an additional $120 million of Section 32 purchases of dairy products. Also, as part of the Coronavirus Food Assistance Program, USDA is purchasing at least $317 million of dairy products for the Farmers to Families Food Box Program. And through the Food Purchase and Distribution Program, USDA plans to purchase $68 million in dairy products to mitigate the impact on farmers of unjustified trade retaliation by foreign nations.

 

Dairy farmers were also eligible for the Payroll Protection Plan.

 

June is Dairy Month

 

As dairy producers roll into June, they are feeling the benefits of government intervention and a bit of relief during its designed month to celebrate.

 

“We went from the lowest price in May to trading at the highest price in five years a month later,” Spitzley says. We went from $12.14 in May, to trading $20.42 in June for Class III. Wisconsin will see strong milk check prices for June, probably about $21, while Michigan will be about $18.”

 

With the economy opening up and restaurants coming back online, the demand is returning. “The key term now is recovery, and I’m pretty optimistic in seeing supply and demand fundamentals aligning,” says Spitzley, while also noting favorable trade agreements with USMCA, China and Japan.

 

One downside to the government-infused bump is food service is now facing higher food prices as they struggle to get back online.

 

“The government intervention was adequate, but I hope it doesn’t send false signals and we see supply ramp up,” Spitzley says. “It shouldn’t get too aggressive as we have tight feed supplies and lower levels of heifers available.”

 

Dairy is a commodity that reacts to what the market asks for, he explains, while advising producers to use risk management practices, including Dairy Revenue Protection.

“It will be necessary to maintain strong balance sheets to survive the highs and lows, and dairies leveraged need risk protection,” Spitzley says.

 

“What hasn’t changed is that milk is a commodity and having a low cost of production is paramount to producing a commodity at a profitable level,” he adds.

 

There are two models for profitability, one being the lowest-cost producer who benefits from economies of scale, or being a value-added producer filling a niche market to offset higher costs of production.

 

While the average among GreenStone’s client base (pre-COVID-19) is about $17 per hundredweight, there’s a $5-per-cwt range from top to bottom. “If a producer is on that higher range of the scale, they will need to lower cost or command an above-average pay price from the market,” comments Spitzley.

 

The good news is the industry is growing 1-2% a year, even though fluid milk consumption has declined, it is more than offset from cheese and butter purchases.

“We eat more dairy than we drink,” he says. “It takes 10 pounds of milk to make a pound of cheese, and we’re seeing an insurgence in whey and protein purchases.”

 

Farmer stress

 

In addition to handling the constantly changing, tangible impacts of COVID-19, MSU Extension educators, like Phil Durst, are also focused on assisting farmers on a personal level. Durst has reached out to more than 70 dairy farmers from some farms which have been around for as long as 100 years and might have to cease operation.

 

The burden has been too much to bear, particularly for Wisconsin’s many smaller farmers. Data from the Wisconsin Department of Agriculture revealed, as of Jan. 1, there were 7,292 total milk cow herds in Wisconsin, which was 818 fewer than at the beginning of 2019. The state lost 638 dairy farms in 2018 totaling almost 1,500 closed in just two years.

 

In Michigan, as of Jan. 1, there were 1,254 permitted dairy farms in the state, according to the Michigan Department of Agriculture and Rural Development, a decline from five years ago when there were 1,927 permitted farms.

 

“People are afraid of what the future holds,” Durst says. “Mental health is a big issue. It's important to be able to have the science to share, but maybe the most important thing right now is just talking about how farmers are handling all this stress.

 

I think it's important we balance providing the resources and connect people to people, and try to empathize with them, to listen to them, and to challenge them.”

 

 

 



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