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Dairy Markets - Returning to a New Normal

Andy Faulman

April 30, 2021

It feels like it was ages ago, but only a year has gone by since the first shelter in place orders were instated. I certainly remember the rush on the grocery stores (empty toilet paper shelves and all!) when the governor of my state declared a shelter in place order.

For all of us, it was the first taste of a global pandemic. For commodity markets, it was a shock to the system that will long be remembered. For the cheese market, this was the catalyst for prices we have not seen since the break in 2009. In the subsequent year, the market has seen a lifetime of ups and downs with near record lows being followed up by record-high prices. With states starting to open back up and more and more people getting vaccinated by the day, what should we expect in the coming year?

On the home front, we are starting to see dairy product consumption rise when compared to this time last year. One of the large reasons we saw such a sharp decline in demand during the pandemic was the loss of restaurant business. Heading into the latter part of 2019 the U.S. stock market was climbing into new highs alongside a low unemployment rate. Consumer confidence was strong. Folks were going out to eat. Demand was strong. All of that came to an end when shelter in place orders were issued.

Concerning restaurants, the rebound from that fallout is still in play. Data released by OpenTable, the online restaurant reservation service, reported January restaurant sales down as much as 60% from 2019 levels. Current OpenTable data shows restaurant traffic down only 21% from 2019 levels. Diving into restaurant consumption, we are seeing this increase in restaurant traffic reflected in the butter market. February’s commercial usage of butter was up 28% YOY. This matters because, in a normal year, 40% of U.S. butter consumption takes place out of the home. That is a lot of butter!

As Covid vaccinations start rolling out around the country, it is clear we will start to see an increase in not only restaurant business, but things like travel, social gatherings, going to baseball games, etc. But what about the rest of the globe? What has stuck out to me over the past few months has been the strength coming out of the Global Dairy Trade auction (GDT). Since the beginning of the year, the GDT Price Index (see attached chart) has been steadily increasing. Referring to the attached chart, the GDT Price Index is sitting at price levels we have not seen since 2014. When compared to the U.S., recent GDT sales have shown cheddar prices at a near $2.00 equivalent along with skim prices at a $1.55 equivalent to our nonfat market. These prices have not been a flash in the pan either; they have held since the end of February. After climbing to these price levels, the market has been able to maintain them rather than revert back to lower ones.

This, in my opinion, is a sign of strength.

As the U.S. and the rest of the globe work towards getting back to the old normal, we are seeing demand for food increase. Recent export data for the U.S. shows that total dairy exports were up 1.5% YOY. Given the higher bias, producers are encouraged to use put options or DRP insurance to manage risk to allow for potential upward price growth.


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