Update Highlights:

Dairy retail sales strong heading into summer

Retail dairy product sales gave only a hint of slowing as summer officially got underway, according to an updated report from the International Dairy Deli Bakery Association (IDDBA).

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Dave Natzke
Editor / Progressive Dairy

The most recent report summarizes Information Resources Inc. (IRI) U.S. grocery store sales data for the week ending May 31. It showed retail dairy sales percentage gains have been up double digits over comparable weeks in 2019 for 12 consecutive weeks, said Abrielle Backhaus, research coordinator with IDDBA. It was, however, only the second week in the past dozen in which sales growth slipped below 20% when compared to the similar week a year ago.

Year-over-year gains for the week ending May 31 were up almost 19% by value for the overall dairy category, driven by sales of cheese (up more than 27%) and butter (up almost 32%), while fluid milk sales extended recent trends (up 11%). Yogurt, which has lagged all other dairy product categories in sales growth, posted its strongest year-over-year gains, with two consecutive weeks of +4% growth.

Natural cheese had the highest increase in absolute dollars, based on the IRI date, with weekly sales up $63 million compared to a year earlier. Fluid milk sales were up $27 million.

In the deli department, natural cheese remained a sales growth leader, powered by cheese in “grab-and-go” packaging.

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The latest IDDBA report also looked at one other category with a heavy impact on dairy: frozen pizza. During the panic buying days of March, frozen pizza sales exhibited triple-digit growth over comparable weeks a year earlier and averaged a 79% increase for the month. In April, year-over-year sales were still up 53%, with May 2020 sales up between 23% and 35% compared to May 2019.

IDDBA is a nonprofit membership organization serving the dairy, deli, bakery, cheese and supermarket food service industries.

WASDE report forecasts more milk for 2020-21; prices come off the floor

The USDA’s June World Ag Supply and Demand Estimates (WASDE) report raised milk production forecasts for both 2020 and 2021, while also raising milk price projections for both years.

It should be noted that last month’s low dairy product and milk price estimates were made while markets were exhibiting severe impacts of the COVID-19 pandemic on the food service sector. While the outlook for 2020 and 2021 prices has improved, the projections still indicate some supply-demand pressures.

Milk production for 2020 is forecast at 222.5 billion pounds, up about 100 million pounds from last month’s forecast, primarily due to higher-than-expected cow numbers. If realized, it would be up about 1.9% from 2019’s total of 218.4 billion pounds.

For 2020, the all-milk price is projected to average $16.65 per hundredweight (cwt), with the Class III price at $15.65 per cwt and the Class IV price averaging $13.55 per cwt.

Using Chicago Mercantile Exchange (CME) futures prices at the close of trading on June 10, the 2020 Class III price would average about $16.74 per cwt, while the Class IV price would average about $14.97 per cwt.

The 2021 milk production forecast took a more substantial jump, up 1.2 billion pounds from last month’s forecast to 225.3 billion pounds. The increase was based on higher expected cow numbers and stronger growth in milk per cow. If realized, it would be up about 1.3% from 2020’s estimate.

In 2021, the all-milk price falls to $16.20 per cwt, with the Class III price averaging $15.10 per cwt and the Class IV price averaging $13.35 per cwt.

  • Beef outlook: The 2020 beef production forecast was raised from last month reflecting a faster-than-anticipated recovery in the pace of slaughter. The USDA expects second-half 2020 cattle placements to be higher, boosting the 2021 beef production forecast.

For 2020, cattle price forecasts were raised, reflecting current price strength and increased packer demand. The 2020 average fed cattle price was projected at $108 per cwt, up $4.50 from last month’s forecast but about $8 less than the average in 2019. For 2021, fed cattle prices were also projected higher at $110 per cwt, on expected continued strength of packer demand in the first part of the year.

  • Feed outlook: Impacting the cost side of the dairy income ledger, this month’s U.S. corn outlook is little changed from last month, with fractional increases to beginning and ending stocks. Corn used for ethanol is lowered. The projected 2020-21 season-average corn price received by producers is $3.20 per bushel, unchanged from last month and the lowest since 2006-07.

This month’s U.S. soybean supply and use projections for 2020-21 include higher beginning stocks, higher crush and slightly lower ending stocks. The U.S. season-average soybean price received by producers for 2020-21 was estimated at $8.20 per bushel, unchanged from last month’s forecast but down 30 cents from the 2019-20 average. The soybean meal price was unchanged from last month at $290 per ton but $5 less than the 2019-20 average.

FAPRI: 2020 milk price will average $16.34 per cwt

Another prominent economic outlook report, this one from the Food & Agricultural Policy Research Institute (FAPRI), offers a longer-term outlook for dairy.

Near term, the Baseline Update for U.S. Agricultural Markets looks at market conditions and announced government assistance programs as of June 1, including the impact of direct payments to producers through the Coronavirus Food Assistance Program (CFAP).

Specific to dairy, the FAPRI report expects 2020 milk prices to average $16.34 per cwt, down from the prior year’s $18.63 per cwt. Further out, annual milk prices are projected as follows: 2021 – $16.27 per cwt, 2022 – $17.31 per cwt, 2023 –  $17.98, 2024 –  $18.01 per cwt and 2025 – $18.19 per cwt.

The report forecasts U.S. dairy cow numbers will dip below 9.3 million in 2021 and 2022, before building somewhat in 2023-25. If forecasts annual milk production increases will range between 0.6% and 1.8% between 2020-25, with an overall increase of 8% between 2019 and 2025.

Bozic: Need for risk management emphasized

Lessons learned from COVID-19 show the importance of using dairy risk management tools when planning for unanticipated events, warns Marin Bozic, University of Minnesota dairy economist.

In a recent “Dairy Market Outlook and Risk Management Strategies” webinar, Bozic describes the dairy market roller coaster that started with the coronavirus-related closure of businesses in the food service industry and riding out through the dairy product price rally. The video webinar was hosted by Northwest Farm Credit Services.

Two possible pictures are emerging: a fairly rapid and large economic recovery, or an extended period of economic and geopolitical turmoil. Bozic is leaning toward the latter.

In addition to global factors, changes in the domestic dairy industry, including increased cheese processing capacity from plants at St. Johns, Michigan, and Lake Norden, South Dakota, will affect markets by potentially adding to an already heavy cheese supply.

With that market uncertainty, Bozic said use of risk management tools is on the rise: About 40% of annual U.S. milk marketings are covered by either the Dairy Revenue Protection (Dairy-RP) and Dairy Margin Coverage (DMC) programs. As much as 25% of July-September 2020 quarterly milk production is already covered under Dairy-RP.

As the level of coverage increases to a critical threshold, the government – and the dairy industry itself – may not be situated to receive or even accept federal disaster assistance, leaving producers not using risk management on the outside. For that reason, Bozic urged producers to embrace existing risk management tools.

At minimum, all producers should use DMC Tier I at the maximum coverage level ($9.50 per cwt). Using Dairy-RP, look for distance opportunities for break-even protection; in the last 60-90 days, look at purchasing coverage to mitigate losses. Consider layering in coverage a “strategy of minimal regret” while leaving upside opportunity.

Wolf: Manage risk to maintain access to outside capital

Dairy farmers face many different forms of business risks, including factors that stress production, herd health, human resources, marketing and finances. Chris Wolf, professor and dairy economist at Cornell University, discussed “Practical Risk Management Applications for Commercial Dairy Farms” in a Northeast Dairy Management webinar series.

One of the most critical considerations when managing dairy risk is the ability of a dairy business to access outside capital, Wolf said. For dairies facing thresholds for solvency or liquidity, it’s especially important to monitor financial measures that contribute to business resilience.

Plourd: 20 years of cheese price volatility in 35 trading days

In another Northeast Dairy Management webinar, June 10, Phil Plourd, president of Blimling and Associates, shared insights about the COVID-19 impact on consumer trends and the dairy supply chain.

Plourd said snapshots of dairy markets on April 17 and early June capture an unbelievable reversal of fortune and unprecedented dairy volatility. For example, the change in the cheddar block cheese price over that period – just 35 trading sessions on the Chicago Mercantile Exchange – covered an entire 20-year price range, from the low of about $1 per pound in early 2001 to all-time record-high cheddar block prices during the second week of June 2020.

He said farmers should see milk checks for June milk that are “quite spectacular,” but warned of depooling and negative producer price differentials due to the high Class III price. And with cheese prices starting to come off ceilings on June 10-11, Plourd expects cheddar block prices to moderate into the $1.70-$1.75 per pound range.

Plourd looked at the story of price volatility through the lens of consumer eating behavior. Pre-coronavirus, U.S. consumers were spending almost equal dollars at food service than they were in grocery stores. Restaurants accounted for nearly 50% of cheese and 45% of butter use. With the sudden closure of schools and restaurants, food service sales of dairy crashed, while retail sales of dairy products rose.

He noted that dollars spent at grocery stores buy more food than dollars spent in restaurants, so a smaller increase in dollar sales in grocery stores offsets larger declines at restaurants when it comes to actual dairy product volumes. With the slow reopening of restaurants now boosting dairy sales at food service, the maintenance of strong retail dairy sales are creating tremendous upheaval in the dairy supply chain.

Going forward, in many ways U.S. consumers are sticking to the basics, preparing more food at home, and evidence shows dairy does well in a “back to basics” consumer environment, Plourd said. He expects grocery stores to offer fewer, more basic items. He also suggested supply chain upheaval is not over, but the dairy industry must cater to consumer demand for convenience.

Additional podcasts in the Northeast Dairy Management webinar series follow. Advance registration is required.

  • June 17 – Good times, Bad Times: Lean and Flexibility, by Cheryl Jones, University of Kentucky

  • June 24 – 2020 Financial Check-Up, by Steve Bodart, Compeer Financial

  • July 1 – Managing Employees in Challenging Times (Because They're Always Challenging Times), by Tom Wall, The Dairy Coach

  • July 8 – Adapting Management to Changing Labor Regulations and COVID-19, featuring Rich Stup, Cornell Ag Workforce Development (moderator) and panelists: Kim Skellie, El-Vi Farms LLC; Mike McMahon, E-Z Acres LLC; and Crystal Grimaldi, Ideal Dairy Farms.  end mark
Dave Natzke