Milk Markets Can Change Quickly, A Lesson from 2020
November 16, 2020
One thing that can be said of the market this year is that it can change quickly and dramatically. We have always seen the psychology of traders changing quickly as they react to various market movements or news. However, underlying cash prices generally do not change quite as quickly, that is, until this year. There have been numerous outside influences from other markets, but also outside influences that have changed market fundamentals.
The impact of COVID-19 took the market by surprise as dramatic measures were taken to try to contain the spread of the virus. Restaurants and schools were shut down along with other non-essential businesses. This resulted in an upheaval in the food service industry prompting the cancelation of many venues that utilized large amounts of dairy products. Consumer demand at the retail level skyrocketed, but the logistics of getting dairy to meet that demand was in disarray and could not switch over quickly enough. It took a little while, but the retail and food service industry adjusted to the shift in demand. Along came the Farmers to Families Fox Box program through the USDA which resulted in a huge shift in the industry resulting in strong demand for cheese and milk. The supply of fresh cheese became tight and cheese prices increased dramatically. That ended in mid-July resulting in cheese prices crashing. Another round of government purchasing for the Food Box program took place in early September once again propelling cheese prices higher due to strong demand for fresh cheese. That has now come to an end even though we are in the fourth round of the Food Box program. That is because is it the smallest of the program this year as well as demand slowing for the end of the year.
Some might question the decline during this time of year due to it being the strongest season for dairy demand. Yes, demand it at its peak, but buyers, packagers and recutters, and retail have already purchased quite a bit of product for the holidays. That changes the purchasing to be done on an as-needed basis as fill-in orders continue to be placed. The demand for fresh cheese has suddenly switched turning sellers more aggressive as they need to move product as quickly as possible. Buyers have moved to the sidelines purchasing as prices decline.
What is being seen again is that price fall faster than they increase. The market showed us that in August and it is showing it again. Last week, barrel cheese price fell 70 3/4 cents changing the market dramatically. Block cheese price fell 42 1/2 cents, but the fall of barrels was very dramatic. However, it was not the record decline for a one-week period. The record decline took place during the week of August 7th when barrels fell 71 3/4 cents. From current indications, this weakness has not yet run its course. There is no way of knowing how far prices will fall, but there is a strong possibility they may fall further than they did in July through August.
There is the possibility that the government could continue the Food Box program again next year, but we certainly cannot and should not count on that. How long the food service industry will be impacted is anyone’s guess, Current predictions are that it might possibly remain this way through much of next year. A recent study by the Meat Demand Monitor found that only about one-third of the general population will feel comfortable with indoor restaurant dining even if they have a vaccine. It will take time for demand from the food service industry to bounce back. Hopefully, retail demand will make up most of the shortfall.