Over the past few days commodity markets, including dairy, have felt the impact of the coronavirus outbreak. This week, second half 2020 milk prices have fallen 2 to 12 cents and cheese prices continue a downward fall. What’s causing the decline? Secretary Tom Vilsack, CEO of the U.S. Dairy Export Council and former U.S. Secretary of Agriculture noted two main reasons prices are suffering: A backlog in Chinese ports and reduced demand.
1. Supply jam. Dairy products shipped to China are being delayed because of the situation at the ports.
“When China essentially took many of the workers in the ports and told them to stay home, it obviously caused a backup of container ships,” Vilsack told AgriTalk host Chip Flory. “We're working our way through that process and so we're probably going to see a continuation for several weeks of months of continued congestion at those Chinese ports, at least at the coastal ports.”
The port congestion will also increase transportation costs, he added.
2. Demand for food is being impacted. Not only are restaurants and grocery stores seeing less traffic as consumers rely on home delivery for their groceries, but tourism is down in Asia, Vilsack said.
“Very large trade, trade conferences are being are being canceled,” he said. “So, all the travel plans, all the tourism activities associated with that [are also impacted.]”
Additionally, in places were school is being canceled, demand for school lunch milk is declining. Some of that milk is becoming an ingredient in butter and cheese domestically produced which will have an effect on demand for dairy from other countries.
“There's no question this is going to have an impact on the global economy,” he says. “And that, of course, also impacts purchasing decisions that people make.”
How far will milk prices fall?
“I still think on a global basis coronavirus knocks something like 6%, maybe 7% off the dairy prices over the next 12 months,” says Nate Donnay, director of dairy intelligence at INTL FCStone. “That’s being partially offset by the poor weather in New Zealand. Although production of the U.S. and Europe seems to be running a bit strong short-term here.”
Even with that decline, Donnay’s projections are only down 4% from what he forecasted at the start of January because supply side issues will “somewhat offset” demand issues, he adds.
“But as the coronavirus is getting a bigger and bigger foothold in Europe and in the U.S., it does maybe more than a little bit, open us up to more downside risks with some direct impacts on the European and U.S. dairy markets,” he says.