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Dairy getting supply/demand ‘crash course’

August 19, 2020

Krissa Welshans

Expectation that prices will continue to erode during second half of 2020 has not changed.

The dairy sector is notoriously price inelastic in that small changes in demand or supply can cause large price movements -- something that has been very apparent this year, according to National Milk Producers Federation vice president of economic policy and market research Dr. Peter Vitaliano.

"We’ve seen over the last several months an unprecedented series of major changes in both supply and demand that have whipsawed prices both down and up and now heading back down again, just obeying the laws of supply and demand,” he said.

At the beginning of the novel coronavirus pandemic, Vitaliano explained that there was sudden loss of a lot of dairy demand, particularly from the foodservice sector, and while consumers were buying more at retail stores, these sales did not overcome the loss of foodservice sales. Consequently, prices dropped -- and at a time when farmers were expanding production.

The dairy sector quickly adjusted the supply chain, the government made product purchases and producers pulled back on production, all of which helped absorb some of the shock, he relayed.

Now, however, a second wave of COVID-19 cases has continued to affect foodservice demand, and whether schools open or stay closed remains in limbo, which means that school milk purchases, particularly of fluid milk, will likely be smaller than they would normally, Vitaliano said.

“That’s putting some additional milk into the supply for other products, such as cheese,” he said.

Furthermore, this is all happening as farmers are once again expanding.

“The bottom line is we have seen almost in many cases record-high monthly increases, monthly high record decreases in a number of the major pricing categories,” Vitaliano said.

It has indeed been a rollercoaster ride, he added.

According to Vitaliano, when COVID-19 first emerged in the spring, the outlook was for prices to take a very deep dive, hitting bottom about the middle of the year and then slowly recovering during the rest of the year.

As the industry moved on a number of actions to address the outlook, “that [monthly] pattern changed,” he said, shifting to where a peak was starting to develop in the middle of the year. As the industry developed a fairly strong supply and demand shortage, prices hit their peak in July and then were expected to fall for the rest of the year.

“That pattern was first established in early June, and it hasn’t changed since,” Vitaliano noted.

As of right now, Vitaliano said the futures are basically fine-tuning how far prices will erode through the end of the year. What has not changed since June is the expectation that prices will continue to erode, but what has changed is that some of the monthly fall prices may be higher than what was expected, he explained.

Factors at play are the impact of school closures, foodservice recovery, milk production and exports.

The main thing to keep an eye on domestically is what happens in foodservice, Vitaliano said, adding, “It’s looking like foodservice is going to be shutting down again until this wave of the pandemic shows signs of being under control.”

Regarding milk production, Vitaliano said while producers were able to quickly get milk production under control in the spring, the milk supply has been expanding again.

He said the question will arise whether producers and cooperatives can "sort of heavily reinstitute those production restrictions again in response to the lower level of demand.”

On the export front, Vitaliano said the world market is also experiencing “a bit of a price meltdown” as COVID-19 problems seem to be expanding to a number of key dairy importing countries.

To sum up the year, he said the dairy sector went from a decent outlook at the start to a dismal one in April and May and then to an extreme high in June and July. Now, it looks like another down cycle is around the corner, driven by significant erosion in the price of cheese through the end of the year.

“We’re getting a crash course in how supply and demand works in the dairy industry,” Vitaliano said.



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