Market Newsletter September 2020 | The official newsletter of Edge Dairy Farmers Cooperative

COVID-19 effects remain for dairy

Pandemic’s economic uncertainty to last into 2021

By Dr. Scott Brown, director of of strategic partnerships, University of Missouri

It seems like the closing of the U.S. economy in response to COVID-19 and the devastating effects it had on dairy product prices are a distant memory. Yet, it has just been five months. Dairy product prices have come back strong, especially cheese, and the economic situation for the dairy industry is much better than many expected while navigating the difficult times experienced months ago.

Challenges in the industry remain, as cheese prices have eased from their record highs and many producers deal with smaller than anticipated milk checks and negative producer price differentials.

Government payments to the dairy industry through the Dairy Margin Coverage program, the Coronavirus Food Assistance Program, the Paycheck Protection Program and U.S. Department of Agriculture purchases under the Farmers to Families Food Box program have helped to blunt the tough economic times.

There appears to be a growing sense that the worst of the COVID-19 effects are behind the dairy industry, but there are remaining issues related to the pandemic that must be considered carefully. Dairy producers appear poised to grow milk production in 2021, as the August USDA milk production report showed a small increase in U.S. dairy cow inventory. The USDA is projecting U.S. milk production at more than 225 billion pounds, an increase of nearly 1.5 percent over the 2020 level. The question remains whether it is wise to expand milk production in 2021 given the uncertainties surrounding COVID-19.

Predicting future milk prices in a COVID-19 world is nearly impossible, but to ignore some of the issues that remain related to COVID-19 is also not prudent. There is still considerable uncertainty about the potential for a significant rise in new cases of COVID-19 and whether another shutdown will be necessary. A successful return to in-person school learning this fall remains unclear as well. The timeline for the development of a vaccine or new quick testing methods is uncertain.

Even if new outbreaks do not lead to further restrictions, additional costs that COVID-19 has introduced in moving food products from the farm level to consumers are likely to remain. COVID-19 has increased the cost of processing, distribution and retailing. Comparing prices received by farmers to the Consumer Price Index (CPI) for food shows that a wedge has formed in 2020 between these two series. The graph shows that the June 2020 CPI for food was 4.3 percent higher than the year ago level while the prices received by farmers fell by 4.9 percent during the same period. The additional costs being borne by the many market participants between the farm and the consumer likely will remain for the foreseeable future, which could keep farm-level prices lower than anticipated.

Perhaps more worrisome is the general economic contraction that is unfolding. At some point, this will mean fewer dollars for consumers to purchase dairy products. Federal government stimulus dollars have helped consumers maintain spending on dairy products, despite the economic slowdown. U.S. real Gross Domestic Product (GDP), a measure of income, is expected to fall by around 10 percent in 2020. Although growth is projected in 2021, the level of real GDP is not expected to return to the 2019 level until 2022. The general economic slowdown could push consumer purchases of dairy products lower in 2021 especially if federal government stimulus dollars decrease.

U.S. dairy exports have been important to the outlook for dairy prices. Many countries around the world face similar economic contraction that could reduce their appetite for U.S. dairy products.

Lower dairy prices are not a certainty for 2021, but expanding milk supplies, increased costs in moving products from the farm to the retail level and general economic contraction will provide downside risk to dairy markets into 2021. Risk management should remain an important component of a dairy farmer’s plan for the next year. COVID-19 effects are far from over.