The coronavirus is the latest in a long line of hurdles the dairy industry has faced. But just how is it affecting the dairy markets and what might we see as a result?
2020 is already a year that many would like to forget and as the coronavirus outbreak continues to touch almost all of us in some way, global businesses are attempting to evaluate its effects both in the short and long-term.
Like many other sectors, dairy is at the mercies of fluctuating markets and wider worldwide conditions. So for those within the dairy supply chain the arrival of COVID-19 was an unexpected further headache for a sector that already had its share of ups and downs of late, with GDT down at all of the February and March events (6 of the last 10 events in total).
In the US, fear that SARS-CoV-2 (the viral strain that causes COVID-19) could disrupt the U.S. food supply quickly led to the U.S. Department for Homeland Security (DHS) confirming food and agriculture as a critical infrastructure industry so that those within the supply chain could continue to operate as close to normal as possible within any new restrictions being placed to halt the spread of the virus.
This saw both government officials and those within dairy industry associations working in tandem to reassure consumers that the U.S. supply chain remained safe and stable.
Even so, there were fears within dairy that the US economy would see a demand shock turning what had begun to look like the first good year in five into one of potentially widespread economic devastation, according to National Milk Producers Federation (NMPF) president and chief executive officer Jim Mulhern.
Writing to agriculture secretary Sonny Perdue, Mulhern warned that the last five weeks showed the U.S. Department of Agriculture’s estimate of 2020 milk prices implied a drop of about $2.85bn at farm level, with further drops possible as the impact of the coronavirus outbreak spreads.
Mulhern was referring to February figures from the USDA’s Dairy Margin Coverage decision tool that originally suggested that we wouldn’t see a single month where the program’s margin would drop beneath the maximum coverage threshold of $9.50/cwt.
Just a month later, the same forecasting tool predicted margins below that from March to October, with five of those months coming in below $9/cwt.
Looking further afield, Australia could face similar problems. Although its milk volumes in both December and January actually exceeded expectations, Dairy Australia is still expecting a drop of between three and five per cent across the whole 2019-20 season, according to its March Situation and Outlook report. The country had already been left reeling from local droughts, bushfires and the spread of African Swine Fever, so forecasts that national milk production could now drop to between 8.3bn and 8.5bn litres for the full 2019-20 season, as it ponders the damage as a result of Covid-19.
Yet, by mid-March, the US supply-chain remained steady, even as demand for dairy in retail/E-commerce surged, according to Michael Dykes, president and CEO of the International Dairy Foods Association (IDFA).
In order to try and ensure this continues, Dykes believes that the IDFA will need to work closely with federal agencies and the White House to ensure transportation routes and supply lines in different regions of the country remain free of disruption as the months progress.
With such routes crucial to commerce and public safety Dykes argues that they will play a key role going forward in keeping staples, like milk, affordable and available at retail facilities and distribution outlets in educational establishments across the country.
“We are working closely with the USDA to remain flexible in how dairy processors get milk to schools and school districts who are continuing to provide meals to the millions of children who need them each day, despite closures, through distribution at schools, churches, parks and other community sites,” he says.
The rapid spread of Covid-19 has caused immediate supply chain issues in some quarters that are difficult to circumnavigate. As the disease gathered pace many borders began to close, before flights in turn were also grounded.
Add to this further procedures and protocols being put in place to help arrest the advance of COVID-19 across continents and it’s easy to understand why those within the industry are concerned for a sector that has already faced strained margins.
Indeed, it’s fair to say the dairy market has got problems at both ends. On the one hand, it’s suffering a severe drop in demand in the foodservice sector and the pressures that brings. At the same time in many areas milk production is now quite simply too high for over-stretched processing operations and current market capacity.
So what does the data tell us? Wider indications suggest a downward trend for the time being which has pushed the Global Dairy Trade Price Index down by almost 4% during the past few weeks, making the event 257 increase of 1.2% both unexpected and very welcome.
Having noted those price decreases and a steady decline in the market alongside this across Europe, the European Milk Board (EMB) has urged the European Commission to act to reduce surplus milk volumes with the introduction of a voluntary reception scheme alongside capping. The point being that only wide ranging measures can hope to have any desired effect on the EU and that these can then be adjusted in line with changing market conditions as and when required.
But in the UK, milk processors have been under pressure to keep supermarket shelves stocked as retail demand peaks have been at higher levels than those seen at Christmas.
To give that some context, In-store sales jumped by 20.5% in March compared to the same period in 2019, with a 43% uptick in the week ending March 21, according to new figures from Nielsen.
Moreover, a heightened consumer demand for dairy products such as milk, yoghurt and butter has brought good news in some quarters as several firms in the dairy supply chain begin to actively recruit.
Muller has just announced a recruitment drive for more than 300 new key workers during the UK’s current lockdown. Its Milk & More operation, the UKs largest milk grocery delivery service, has also revealed that it will look to recruit new 100 milkmen and women off the back of a record 25,000 new customers during the second week of March.
Interestingly, Kantar Worldpanel estimates some 503m more in-home meals will be eaten per week in this lockdown period, a rise of 38%. For dairy this means an increase of 190m more potential meal occasions per week, driven by teas, coffees and cereal now being eaten in the home.
Looking at cheese, this is weighted more towards lunch with 71% of the estimated rise of 52m weekly occasions occurring at lunchtime, with a similar pattern occurring for yoghurt. Butter occasions look set to rise by 34m per week too, with 67% of these occurring at lunchtime.
Of course, this spike comes at a time when foodservice sales have also fallen off a cliff, with cafés, pubs and restaurants forced to close their doors. Estimates from the Department for Environment, Food and Rural Affairs (DEFRA) suggest that some 8m litres of milk is supplied to the foodservice sector every week. So, with this accounting for up to 15% of the UK’s liquid milk sector, around 50% of total UK milk consumption, there will be difficult times ahead.
Despite this, dairy exports had remained fairly stable following the implementation of EU measures to help keep traffic and exports flowing, Things can quickly change though, particularly with greater numbers of supply chain workers begin to self-isolate. A run on that within particular production facilities and the fleet would render new EU fast-tracking measures useless and this is why firms, such as Muller, are factoring this in as part in the recruitment process to reinforce the supply chain on the front-end.
A countrywide lockdown scenario presents a whole host of unknowns for dairy though. Where at first there were panic-buying, reductions in the number of people visiting retail outlets now means an excess as far as milk is concerned. But not only are those shoppers making few trips to supermarkets, they’re also being limited in what they can purchase by retailers keen to prevent recurring empty shelve scenarios. Of course, with some of the volume previously having been sold in foodservice being diverted into retail, problems are only going to be exacerbated.
With the UK producing some 35m litres of milk per day those closures and a drop in demand are starting to hit dairy farmers and prices. This has seen some begin to dump milk as processors halt collections, with around 5m litres a week at risk of being discarded, according to the FT.
That has prompted the Royal Association of British Dairy Farmers (RABDF) to ask the government to reimburse dairy farmers who are receiving a significantly reduced value or are having to dispose of their milk as a result of their processor being heavily reliant on the foodservice sector.
By reimbursing around 300 dairy famers in the UK at the standard milk price of 25ppl for conventional, the hope is that they will remain in business and prevent any further wider disruption through undersupply later in the year if and when things return to normal.
Peter Alvis, chairman of the RABDF, believes that this measure and the removal of ‘excess distressed milk’ should help to stabilise current spot prices whilst safeguard against long-term market distortion.
“It will also allow those affected dairy farmers to continue to pay for invoices for farm inputs to the wider local/rural supply industry beyond the farmgate and will prevent extra cows being culled which will exacerbate the problems in the beef supply chain,” he adds.
In the U.S., much like the spread of coronavirus, things are escalating quickly. Milk prices have begun to fall sharply and not even the in-store purchases can make up for the reduction in supply to the foodservice sector. That in turn has led to a surplus that is forcing farmers to open tanks and dump thousands of litres as the spread of the virus filters through to production.
Although some dumping usually occurs during the spring, such unprecedented conditions mean that we can expect things to be “even more aggressive,” explains Alyssa Badger, director of operations at HighGround Dairy, in an interview with Bloomberg.
“There’s no way to offset how much loss we’re seeing with school closings and foodservice demand in the form of cheese and butter, just because someone’s buying an extra gallon of milk,” she says.
As Kristen Coady, vice president, corporate communications, Dairy Farmers of America, attests, such sudden changes in demand result in uncertainty, thereby forcing some dairy manufacturers to cut and change production schedules or build inventories.
“Due to the excess milk and plants already operating at capacity, there is more milk right now than space available in processing plants,” she adds.
However, by quickly signing the new USD2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act into law, the dairy industry can now expect to receive multi-million-dollar purchases of dairy products by the federal government alongside other forms of relief as the year progresses.
The U.S. Department of Agriculture (USDA) has already confirmed that CARES “contains $9.5bn in assistance for agriculture producers who have been impacted by Covid-19 along with a $14bn replenishment to the Commodity Credit Corporation”.
With CARES also including billions of dollars to support federal nutrition and feeding programs, as well as $450m for the USDA to provide food banks with additional resources for food and distribution, Dykes is among those urging for record purchases of fluid and powdered milk, cheese, and other dairy products, as well as other foods and commodities.
He asserts that the market gap created by the closure of restaurants, cafes, bars and other foodservice operators as a result of COVID-19 has created a major market gap for dairy producers and processors.
So, while retail sales have climbed steadily, the loss of foodservice, which accounted for roughly 50% of all food sales, has presented a significant challenge to the industry, one reason he feels the USDA should act to direct products to food banks to help people in need.
“This will prioritise those most in need, provide certainty to producers and agribusinesses, and restore needed balance in the marketplace,” he adds.
In Wisconsin, one of the largest dairy producers in the U.S., the wider economic implications are already beginning to hit home.
According to Mark Stephenson, director of Dairy Policy Analysis at UW-Madison, prices of milk futures have gone down amid the concerns.That’s a problem, given that whey exports to China are their biggest product in terms of sales.
As he explains in an interview to NBC15, the dairy industry makes up a significant portion of the economy for Wisconsin, contributing around $45bn dollars to the state.
In China, two things are happening. For a country whose dairy intake has been rising steadily in recent years, there has been a dramatic slow down in consumption of dairy in public places with the shuttering of restaurants and foodservice areas in recent months.
This, in turn, could have a knock-on effect in terms of imports should the ongoing scenario continue to play out for a number of months. New Zealand’s problems in that market in recent times have been well documented. China is also Australia's biggest export destination for dairy products shipping around 245,000 tonnes, roughly 30 per cent of its dairy production in terms of volume.
In China dairy sales have been down and are further expected to fall between 20 and 40% in H1, making this ‘the worst sales season in recent years’, according to Dairy Products China News. Q1 GDP figures are due out tomorrow and should be interesting to say the least.
This has forced some producers to dispose of milk and cull herds. Indeed, for a time, China was almost at a standstill and even though there are positive signs that the peak of the outbreak may have passed with the reopening of Wuhan, the imbalance between milk supply and demand is set to grow further. Later in the year that may result in further drops in milk pricing and a renewed appetite for imports, giving Chinese farmers further cause for concern.
So, where will this take us as we head into the summer and beyond? Well, if things continue on their current trajectory (and there is no second wave of the virus) you might expect that consumer buying in China would be starting to return to somewhere around normal in the second half of the year and Rabobank seems to echo our sentiments there. As in effect, a delayed economic recovery will also present a major downward price risk in terms of current global dairy expectations. The wider economic picture in China remains challenging - with some serious “structural headwinds” as economists like to call them – and a weakening RMB seems likely.
In the U.S. although the dairy industry will welcome the quick implementation of CARES, it’s difficult to see how the stimulus package will counter long-term issues like increasing global competition and any subsequent trade wars that might follow as countries continue to close borders in an attempt to slow the spread of Covid-19.
More broadly, in the face of crashing milk prices and pending bailouts following surpluses, dairy operations globally are struggling to remain profitable as they witness never before seen drops in both domestic and export demand.
Producers the world over will be hoping that lockdown measures to prevent the spread of the coronavirus take effect sooner rather than later, so that the virus-induced supply chain disruptions can be brought to an end and that the foodservice industry can be kick-started as soon as possible. In the meantime dairy associations will be looking towards government for a reassuring hand.