Milk production increase outstripping supply gains
Milk production is increasing faster than demand is recovering, making 2021 a challenging year for dairy farmers, says Peter Vitaliano, National Milk Producer Federation's (NMPF) chief economist.
"On balance, things are improving a little bit (in dairy demand)," Vitaliano said during this week's NMPF podcast, "but they're still falling short of the milk production rate of increase."
While the outlook for future dairy prices may seem gloomy, Vitaliano says bright spots remain for the medium- and longer-term dairy outlook including record level exports and international demand for dairy sales.
After several years of low prices and stressed margins, entering 2021 dairy farmers were eager to make up for lost ground and began accelerating production and rebuilding cow numbers. But as the impact of the coronavirus hit the shores of the U.S., food production across the country was impacted drastically thanks to lost markets and disruptions in the supply chain.
"Milk production was largely cut off and largely held in abeyance throughout most of the year," Vitaliano said. "While retail sales increased and exports were good, the pandemic reduced total dairy production. Let's say the constraint in the rate of increase of milk production was very welcome."
Vitaliano says government purchases through the Food Box program and other programs helped agriculture make up for lost food service consumption
"Lost market consumption, the relative restraint of dairy production and milk production growth plus the relatively large direct payments through the CFAP program created a situation where returns to milk production were not bad at all," he said. "We only had two months out of all of last year where we had very low margins and large payments."
A year later, Vitaliano says farmers are essentially resuming that increase in production.
"So, we're seeing cow numbers and milk production going up, and again it's exceeding the rate of consumption. There's going to have to be a balance from somewhere," Vitaliano said. "Right now the outlook is...lower prices and stressed margins for several months."
While total consumption has been improving, it isn't as robust like it was in the early months of the pandemic where consumers stocked up on food items via the local grocery store.
Vitaliano believes exports will continue to grow in terms of total volume of product. Food service demand will remain depressed, but not as notable as during the first wave of the pandemic.
Markets responded well during the two big waves of food box purchases, but Vitaliano doesn't feel subsequent programs will have the same impact.
"The futures market reacted briefly to the announcement of the latest food box purchase, but they've basically shrugged that off," Vitaliano said. "The expectation of market players is that we're not going to see that same price effect from the food box purchases until we see what's been moving in the market and possibly some additional purchases are announced. But right now the futures markets are looking like they did last year when there was a lull between purchases."
Farmers are longing for a bit of good news, especially after enduring the financial effects of negative Producer Price Differentials and the massive de-pooling of Class III milk that resulted from it, Vitaliano said.
"The good news is that world markets continue to be strong," Vitaliano said. "Our major export competitors are not increasing their milk production like we are. As long as US prices stay relatively low compared to the world markets we should be able to look forward to another strong year of dairy exports."
Until schools fully re-open for in-person instruction, Vitaliano says food service demand for fluid milk and other dairy products will remain sluggish.
"And as long as people are reluctant to go out and eat as wholeheartedly as they did before the pandemic we're going to see a depression in food service use," Vitaliano said. "And, we haven't seen very large scale food box purchases in the pipeline yet."