Coronavirus: Cope with the Crisis

"We will get some price strength in the second half, but how much, I don't know." ( iStock )

Six months ago, COVID-19 wasn’t even on farmers’ radar. Today, the virus has left a wide swath of destruction in its path. From coast to coast farmers are putting milk down the drain. Cooperatives and processors have implemented base programs to curb supply. For some dairy farmers, this marks a first.

“This is the first time in the 32 years I’ve been in business we’ve had to dump milk in the fields,” says Arnie VanDieden, a dairy producer in Texas.

Fellow producer Paul Hartman, from Reading, Pa., faced a similar scenario in March for the first time in his more than 30-year career.

“Our dairy processor gave a letter that the driver dropped off. It said we were supposed to dump our milk for the next two days; they weren't going to pick it up,” Hartman says. “We were shocked. All we hear is milk is in demand, stores are having trouble getting it. Then all of a sudden, they're asking us to dump our milk. It was confusing.”

THE SUDDEN LOSS OF DEMAND

Hartman’s processor told him demand was backed up. As COVID-19 hit, schools closed and industries such as restaurants and foodservice saw an abrupt halt in business, the dairy crisis started to unfold.

“We don't have an outlet for this milk,” explains Scott Brown, economist with the University of Missouri. “Even if we have plants able to process that milk, there's little reason to do it at this point due to lack of demand.

”Inventories already weighed on butter values in February and early March, but price declines accelerated in late March. Over the past several weeks, CME spot butter prices have sunk more than 50¢ to 10-year lows.

“The dairy supply chain is in shambles,” says Sarina Sharp, analyst with the Daily Dairy Report. While some processors are running at full capacity, others are operating below capacity or have closed due to a lack of orders or an absent workforce. 

“Hundreds of loads of milk will end up down the drain or into manure lagoons,” Sharp says. “In the past, when oversupply forced the industry to dump milk, processors would often discard the skim and salvage the cream. But today, even cream cannot find a home.

”As many bottlers continue to keep the nation’s grocery store shelves stocked, more surplus cream has become available. At the same time, the shuttering of restaurants and schools across the country has nearly halted the flow of butter, cream, sour cream, processed cheese, ice cream and other high-fat products through foodservice channels, Sharp adds.

From high-end restaurants to fast food chains, fewer people are eating out. In turn, those consumers are eating fewer pounds of key items such as butter and cheese. Therefore, a portion of the nation’s milk supply is without a home.

Industry sources estimate with the foodservice industry basically shutdown, there’s roughly 10% more milk than processing capacity right now. For weeks, many dairy cooperatives have asked producers to cut production or have penalized them for overproduction. 

“The decline in the foodservice business has not been offset by the increase in the retail side of business,” says Michael Dykes, president and CEO of International Dairy Foods Association (IDFA). “Overnight, we saw a paradigm shift and the business turned upside down.”

MILK MARKET NOSEDIVE

“Among the major agricultural commodities, only lean hogs have suffered a steeper decline than Class IV [milk] futures,” Sharp says. “Rising inventories and slowing exports have drug down milk powder prices over the past two months.” 

In late April, May Class III was trading around $11.28 per cwt while Class IV was sitting at $10.25. Have milk prices hit bottom?

“We are close to it, unless you think the cheese market can drop below $1 per pound,” says University of Wisconsin economist Bob Cropp. “That is possible, but hopefully we’re at the bottom.

”What happens next will depend on milk production moving forward, how quickly consumption in restaurants and foodservice rebounds, and exports.

USDA is projecting a Class III average of just $12.15 for the year. But current April futures prices would average out to more than that, Cropp says.“We will get some strength in prices in the second half, but how much — I don’t know,” he says.

 
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