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Markets show sliver of optimism for dairy industry

Colleen Kottke, Wisconsin State FarmerPublished 11:40 p.m. CT May 5, 2020

Farmers have taken more than their fair share of the collective punishment meted out from the fallout of the coronavirus pandemic.

Stay-at-home orders and social distancing orders forced restaurants, stores and schools to close, leading to farmers across the country finding themselves with a depleted market for their milk.

That bleak reality was compounded this month as producers opened their April milk checks, wondering how they will cover expenses this month and beyond.

Wisconsin dairy industry experts shared their insights this week on how Wisconsin's cheese industry has been impacted by the pandemic during PDPW's weekly educational webcast The Dairy Signal.

Mark Stephenson of UW-Madison Director of Dairy Policy Analysis and Director of Wisconsin's Center for Dairy Profitability says the U.S. dairy farms have experienced an estimated loss of $10 billion loss. He estimates Wisconsin dairy farmers absorbed a $2 billion loss in revenue since Jan. 1.

"We don't know what all the losses are going to be going forward from here," Stephenson said.

On a positive note, Stephenson says U.S. dairy product prices have been competitive compared to world prices.

"That's resulted in some export sales opportunities, so we're starting to move a bit of product that way," he said.

Stephenson says milk markets responded after the U.S. Department of Agriculture announced that is will be making Section 32 purchases of $470 million, with $120 million of the monies earmarked for the purchase of dairy products. The funds will be used to buy more surplus food amid the widespread disruption of the food supply as a result of the coronavirus.

Class III futures markets look for May milk to rise 4 cents to $11.54/cwt. with June milk climbing to $13.59. The upward market trend continued upward in July to $14.79. The second half of the year is predicted to average $15.90/cwt.

"While we've still got a long ways to go to make up that drop of $6 to $7 per cwt., I think prices are starting to rebuild a little bit," Stephenson said.

Despite the pandemic, sales for dairy products were up 16% over the same week last year, higher than other agricultural products such as meat and eggs.

"Dairy sales over the last six weeks have been up about $1.6 billion in retail," Stephenson said.

John Umhoefer, Executive Director, Wisconsin Cheese Makers Association said half of the growth experienced over the past months was attributed to the retail sale of cheese.

"People are learning how to use cheese at home. So, even as we hope for restaurants and then schools to open in the future, perhaps a bit of that cheese use at home will carry over and we'll see a net rise of dairy use," Umhoefer said.

Other dairy products also saw an increase in sales. According to the USDA, cheese and butter production during March 2020 were up on the year. Total cheese production was 0.2% higher at 1.124 billion pounds, with a 1.1% decrease for Italian type cheeses canceled out by a 1.4% increase for American types.

Butter production was 194.287 million pounds, a 7.5% jump from March 2019.

"That little dip we took where people ate through their inventory appears to be on a second rise now. They've gone back to the store and bought another bunch of dairy products," he said. "People are rediscovering dairy in their homes."

While dairy products are riding the wave of sales in the retail sector, Umhoefer points out that the loss of food service sales has hurt the industry.

"That's still a deep hole to fill and thankfully retail is booming," he said. "But the net effect is that there's still a decline in dairy use. But when those doors of those restaurants open you'll see a net gain overall for dairy products."

Umhoefer says latest USDA buy follows the $3 billion fresh box program announced last month. That program will funnel $300 million to be spent each month on meats, dairy and produce that will be packed in boxes and sent to food banks across the country.

"In each box we have proposed to supply three pounds each of cheddar and of brick cheese," Umhoefer said. "They're going to be spending $100 million on dairy each month through 2020, so there's going to be a lot of dairy products moving to food banks."

Shipments of food boxes are expected this month, with the newest round of food purchases occurring in July, according to the USDA announcement.

Stephenson says moving product out of processing and directly into demand channels where it will be consumed which will benefit the dairy industry in the long run.

"The problem you have with dairy products that get tucked away in storage are much like we saw after the last recession in 2009. A large stockpile of product can overhang the market for years keeping downward pressure on where prices could go simply because we know it's there and ready to come out," Stephenson said.

Umhoefer agrees that food bank product won't be an issue for future markets. However, there are many private cheese companies and cooperatives that have lost food service sales that have put a great deal of mozzarella and cheddar into cold storage.

"That is going to have to come out and hit the market in the future," he said. "Hopefully that happens when there's a lot more market to hit when hundreds of thousands of restaurants reopen."

While that may keep a quick rise in price from happening, Umhoefer says the industry will have to work its way through the stocks being created now before markets return to normal.

"On the bright side, processors are taking that risk and putting away their product, which means they're still taking in fresh milk," he said. "The longer we go where you don't have that sale to food service, the more stress on the system because they're making cheese and not getting paid for it, and they're still paying the dairy farmer as best they can. So there's a lot of equity being burned through in this industry where they're making a product with no sale."

Stephenson likened the process to 'flattening the curve' in the dairy industry.

"We may have a longer lasting impact, but it won't be as bad during the bad part. We're managing to process most of the milk that's being produced. And even if it does overhand the markets for a period of time while we clear it out, it's not the worst thing," Stephenson said. "The most recent cold storage report showed that the cheese stocks were lower than expected. So, I think the world was prepared to have a little bit more cheese put away."