When Mark Stephenson, director of UW-Madison’s Center for Dairy Profitability and dairy policy specialist with UW-Extension, forecast last fall that dairy producers would see $20 milk this year, he couldn’t have factored the COVID-19 pandemic into the equation.
But even as the pandemic has thrown many other plans and predictions out of skew and although the dairy outlook dimmed for a time, that part of Stephenson’s forecast is looking like it might hold true after all as dairy stages a steep comeback.
During the June 16 Professional Dairy Producers of Wisconsin Dairy Signal webinar, Stephenson said that he considered his forecast holding up in light of COVID-19 not as an “I told you so” moment but rather as akin to “a blind pig (that) stumbles across an acorn.”
“Twenty-dollar milk, I would have never guessed for these reasons,” Stephenson added.
Stephenson’s thoughts prior to COVID-19 and based on reasoning at that time had leaned toward hitting the $20 mark toward this fall, he said. Now, even with the market’s deep trough in April, $20 Class III milk could be reality by the end of this month.
The kind of recovery that the dairy industry has seen in a short amount of time is “nothing short of phenomenal,” added Jim Mulhern, president and CEO of the National Milk Producers Federation.
The last 100 days have been tumultuous for the industry, Mulhern said, but it does appear that dairy will indeed see a V-shaped recovery from the start of the COVID-19 pandemic.
Despite COVID-19, Mulhern said, dairy may still have the kind of year it came in looking for after struggling with several years of depressed prices.
There’s cause for optimism that dairy prices will be able to sustain the gains that have been made since the market bottomed out.
“Grocery store sales and a return to home cooking have been phenomenal for dairy,” Stephenson said, noting that’s an area that has yet to tail off.
Those retail sales have helped offset the loss of food service outlets at least somewhat, even if they can’t make up for food service losses entirely, Mulhern said.
Restaurants reopening — and restocking — as well as a sense that things might be heading back to a kind of “normal” have also helped optimism, Stephenson said.
Quick-serve restaurants, which are often dairy friendly, that stayed open for carryout were helpful for the industry, Mulhern said, and as more casual and upscale dining options open, some relief may be seen there as well.
Export opportunities for U.S., particularly with powder, which is still at a discount on the global market, remain available, too, Stephenson said.
Efforts to cut back milk production in addition to something of a pause on herd buildup and expansion have been good so far, Mulhern said, and if the industry doesn’t get back into a herd expansion cycle, that could bode well for the future of recovery.
USDA’s Farmers to Families Food Box Program and other government interventions have contributed to price buoyancy as well, Stephenson and Mulhern said.
While dairy had one difficult quarter, producers who signed up for $9.50 coverage through Dairy Margin Coverage, got direct payments from the government worth about $6.20 per hundredweight through Coronavirus Food Assistance Program, or put floor under prices with something like Dairy-RP in the fourth quarter of 2019 will be getting about a quarter’s worth of payments, Stephenson said.
“If you had any two out of three of those, you’re largely held harmless this year,” Stephenson said.
Still, there will be potential stumbling blocks that may give producers a reason to remain cautious.
A shift back to overproduction and oversupply, which may happen if a $20 milk price entices producers to jump in while prices look good, may be detrimental.
Strong prices would signal that the market wants more product, at least for a month or two, Stephenson said, but “don’t get up a big head of steam with milk production because I don’t think we’ve got that kind of optimism out there.”
“We do not need more milk,” Mulhern added, agreeing that while the market signal to produce more milk — and make more money — may be strong, if production increases significantly, the price will be driven down.
“Keep in mind,” Mulhern said, “that the prices we have are the result of demand creation and discipline on the supply side. It’s all about supply and demand.”
Without the government stepping in to create what could be called “artificial demand” by buying product during the pandemic, Mulhern said, dairy would not be looking at things getting back on track but rather at milk prices that would be the lowest seen in years.
While there’s a good chance that production will indeed pick up, Mulhern said, keeping production at a 1% or less increase from last year will put the industry in a much better shape.
Producers should also keep the large amount of existing dairy stocks in mind as another potential factor that is “ready to make us disappointed about prices,” Stephenson said.
The overall impact of COVID-19 on the U.S. and global economies will also have to be a consideration for dairy going forward.
The U.S. is technically in a recession right now, Stephenson said, and a mutation or second round of COVID-19 might also spell trouble.
“This isn’t a sprint,” Stephenson said. “This is going to take, in my opinion, a couple years before we climb out of this.”
There will be opportunities and pessimism in the future, Stephenson said, and producers can watch for those opportunities but also take the chance to shore themselves up if they are at risk.
“Most any major event in life is a duality. ... You can’t have light without dark,” Stephenson said. “We can’t have a blessing without a curse. We’ve had our curse, but have we learned something as a result of this?
“We’ve got volatile prices. We’ve known that for a long time, but we’ve also come to realize that, I think, this volatility can destroy our businesses. We need to make sure that we look at that and think about it and deal with it. We’ve got tools available. The market will finally reward that, so I would say think about this blessing that we have and what we’ve learned through COVID and put it to good use going forward.”