Dairy commodity prices and therefore farmgate milk prices will be under pressure from “three waves of market movement,” according to a report on global dairy markets issued
The report describes the first wave, panic buying at retail driven by government directives for stay-in-place. In the short term, these purchases offset the large declines in food service sales. The second wave predicts lower retail purchases along with more processing challenges. The impact of lower restaurant sales and the spring milk flush in the northern hemisphere along with a slowdown in worldwide trade will all contribute to rising dairy stocks and lower commodity and dairy farm prices, describing the milk dumping that is occurring.
The report predicts a longer third wave that sees a global economic recession with “widespread loss of income and savings” keeping commodity and farm prices under pressure “into 2021.” (See Table 1). The report cautions that “given the magnitude of market disruption, current forecasts are often outdated before they are published.” But it states that some prices will be as much as 30% lower than pre-COVID-19 price levels.
The report describes the CME Cheddar block cheese price falling 37% in two weeks to $1.15/lb on Apr. 3, the lowest level since 2009.
Factors working against the U.S. producer prices include the difficulties in adjusting processing and logistics in the face of the big reduction in food service demand for dairy products. The report also points out that dairy farmers may face a reduced supply of supplements and veterinarian related products due to manufacturing issues in China. Also, feed quality may be impacted because China is the source of 80% of active ingredients for crop protection products.
Even though the report says that an estimated 40% to 50% of U.S. milk production is covered by risk management programs providing some measure of downside protection, even the current U.S. government relief programs will not be sufficient to protect dairy farmers from “significant negative impact” which in turn will “accelerate dairy farm consolidation.”
The Rabobank economists predict significant lowering of global trade in dairy commodities with SMP, WMP and cheese falling by 11%, 13% and 5% respectively in 2020 compared with 2019.