While the COVID-19 pandemic has grabbed headlines for its negative effect on industries across the globe, some market spaces are doing very well in these otherwise trying times. One such industry is the American dairy market. To understand this shift, Sara Dorland, Managing Partner at Ceres Dairy Risk Management, presented a recent webinar in conjunction with Agri-Access. Here are a few of the key highlights.
Volatility In The Market Remains
It wasn’t always this way. A month ago, the dairy market was plummeting to decades-low levels with cheese markets sitting around $1. Today that value has increased 100%. “Volatility isn’t necessaarily a bad thing,” Dorland says. “You just have to be prepared for it.”
Preparing for this volatility correctly brings about plenty of opportunity for those who are ready. “A good plan allows you to take advantage of these opportunities but not expose yourself to so much risk,” Dorland says.
The Brutality of April Is Over
In the month of April alone restaurants experienced a decline rate of same-store sales of 55%, the worst in recorded history for the industry. At the same time dairy producers were forced to dump an estimate 3.7 million gallons of milk each day.
Since then, numbers have stabilized and risen, in part thanks to the creativity of the food service industry and its ability to institute pick-up and delivery options. Trade also remains stronger than expected, helping the industry stabilize.
In addition, milk production is expected to increase in part because the COVID-19 pandemic prevented many cows from going to slaughter. Applicable cows have since remained in the milking herd.
Demand Is Skyrocketing
“It’s like trying to fit an elephant through the front door,” Dorland says the current dairy demand. Between the USDA and the food service industry, orders are rushing in as the market reemerges from lockdown. “Now it’s going to be on the public to consume,” Dorland says, cautioning that consumption will be slowed by the social distancing that is still being applied to restaurants across the country.
In addition to the milk demand, the cheese market is also booming as suppliers work to gill orders placed previously – when American cheese carried the lowest price in the world. This has helped maintain strong trade numbers that fall in line with last year’s trade statistics. Dorland is cautionary, however, on whether this will continue as the United States figures to return to its role as the most expensive cheese provider in the world in quarter three.
Government Stimulus Programs Have Helped
The USDA’s initial pledge to purchase $100,000,000 worth of dairy products for a series of months and it eventual purchase of $300,000,000 in dairy products in a month and a half had a strong beneficial effect on the industry.
Cheddar block prices have climbed to $1.92 per pound up from $1.0075 per pound one month ago. Cheddar barrels have seen similar growth with a current rate of $1.8525, up from $1.0125 one month ago. Dorland cautions that the market could dip if such stimulus is not included in the USDA’s next fiscal budget.
Taking Steps Toward Risk Management
While the market presents considerable opportunity, there is risk as well. To protect against risk in the market, Dorland recommends farmers and processors:
• Create a realistic budget, one that is based on the facts you have, not your hopes;
• Understand your costs so you know what it will truly take to derive an acceptable margin;
• Create a risk management budget to determine what you will be willing to spend to maintain those margins;
• Identify a program you feel will work to meet your cost and risk objectives.
These findings encapsulate only a small portion of Dorland’s webinar. You can learn more about Dorland’s advice for using risk management, predicting the duration of the resupply pipeline, paying attention to the trigger price and more by requesting the webinar recording. If you have any other questions surrounding the U.S. dairy market, please contact us today.