Three takeaways from the 2020 dairy markets
Ben Laine, Rabo Agrifinance
December 24, 2020
Volatility is nothing new to the dairy industry. We have adapted as consumer trends have shifted, as dairy production models have evolved, and with the ebb and flow of global markets. But 2020 brought a new level of uncertainty and has reminded us that anything can happen. Take this opportunity to reflect on what you’ve learned and adjust your business plans as needed to build greater resiliency into your operation.
When the pandemic initially reached the U.S., supply chains were tested as milk, and dairy demand, rapidly shifted channels from food service and schools to retail. This shift was not without friction. Producers dumped substantial amounts of milk in April when cooperatives and other milk buyers instituted emergency restrictions on the amount of milk that could be shipped.
Before 2020, it would have been impossible to imagine the level of disruption we experienced. Now that it has happened, though, it remains within the realm of scenarios we need to consider. We don’t expect something like this to happen again, but we now know that it could.
The three takeaways With that in mind, here are three opportunities to take what we learned through 2020 and prepare for 2021 and beyond.
Producers should consider developing a contingency plan in case emergency base programs return. The approaches we saw this year included drying cows off early, culling, altering rations, and reducing the number of milkings per day. There is no single approach that is right for all farms in all situations. Cull cow prices, feed costs, and the expected duration of the crisis at hand are factors to consider when deciding which approach is best.
Cooperatives and other milk buyers should develop and communicate details on when and how emergency milk supply restrictions will be implemented. Much of the industry was understandably caught off guard in 2020 and was forced to improvise measures to slow milk shipments.
Don’t abandon hedging and risk management plans. The volatility of 2020 was more than just volatility in Class III milk prices. It was a complete departure from normal price relationships, including the block/barrel spread, Class III and IV spread, and dramatically negative producer price differentials. This made traditional hedging instruments and insurance programs less effective. Take the long view and work with your risk managers and advisers to determine if any tweaks need to be made to your risk management plan's parameters, but don’t give up on your strategies.
Not a new normal We don’t expect the events of 2020 to be the “new normal.” We expect 2021 to be much less volatile than 2020, and we hope that normal market forces will avoid the need for any major milk dumping or supply-side restrictions in the future.
RaboResearch’s outlook for 2021 includes improving demand alongside positive — but modest — global production increases. This should help avoid any collapses in price like what we saw at the beginning of the pandemic. More modest levels of government aid should limit the extreme spikes to the upside we saw in 2020.
But as with any emergency plan, the time to make it is before you need it.