In a world that has changed significantly since the beginning of the year, the U.S. dairy industry is standing out among its global peers, bringing unique challenges — and unique strengths — to the table.
When COVID-19 knocked the wind out of the finally strong early 2020 milk prices producers were seeing following years of depressed prices, the U.S. in particular felt a much deeper price impact more quickly and on a deeper level, said Mary Ledman, global sector strategist for dairy of Rabobank, during a Professional Dairy Producers of Wisconsin’s Dairy Signal webinar last month.
European and North American producers were in a similar boat in terms of their high production seasons kicking into gear just as COVID-19 really began sweeping across the globe, Ledman said.
Comparatively, in Oceania, where their peak season was winding down as COVID-19 set in, Ledman said, they didn’t see a significant impact immediately.
For the European and North American producers, however, “COVID-19 could not have hit at a worse time,” Ledman said.
COVID-19 turned 2020, a year that was supposed to help dairy farmers “catch up,” Ledman said, into a situation that suddenly looked a lot less hopeful.
Compared to their global counterparts, the U.S. dairy farmer is feeling the pain of milk prices in a particularly acute way, as prices have fallen from about $17 for Class III milk to at times under $12, Ledman said.
“Nobody else has felt that type of stress or strain on their milk prices,” Ledman said.
Contributing to that drop in milk prices that has hit the U.S. hard specifically is the amount of dairy that is funneled through the food service industry, Ledman said.
“The U.S. exposure to the food service market and how quick it shut off is really what caused the back-up in U.S. milk production,” Ledman said.
In the U.S., about a third of all dairy products go to food service, Ledman said. An even higher proportion of cheese in the U.S. — about half — goes to food service.
Restaurants, even as they start to reopen, are running at a mere fraction of the capacity that they used to, and there’s little chance of them returning to 100% capacity by the end of the year — although Ledman said that maybe optimistically food service could be back at 75% capacity by the third quarter.
Spikes in frozen pizza sales, for example, have allowed some food service product providers to pivot and are one way to repurpose industrial amounts of cheese, but the year-on-year increase of those sales, while still in the increase stage, has gotten smaller since the first month or two of COVID-19 setting in, Ledman said.
In Europe, on the other hand, only about 20% of dairy products go into food service and one would be hard-pressed to find a country where perhaps 30% of cheese does so, Ledman said.
While at least a couple European governments have asked producers to cut back production, Ledman said, the oversupply is to a smaller degree than has occurred across the U.S.
Beyond domestic factors, global trade has also been thrown into something of a tailspin as COVID-19 circles the globe at different speeds.
“There is this longer term economic erosion of the decrease in global GDP that is kind of that bigger cloud out there that’s looming,” Ledman said.
While some prices are rebounding, Ledman said she isn’t calling that a recovery because there are repercussions to other global factors like cheap oil, shipping logistics and the weakness of foreign importers’ currency — for example, the Mexican peso.
Looking at global trade of skim milk powder, whole milk powder and cheese combined, a more than 15% decline is being seen for 2020, Ledman said.
The U.S. should be able to hold its place in the global economic order, though, Ledman said.
One major benefit, Ledman said, is the strength of the U.S. dollar.
“If there’s one piece of solace here for the U.S., it’s the dollar and it’s the safe haven the dollar provides,” she said.
Right now, the dollar’s strength comes from that “it’s doing the best in a bad situation,” Ledman said. How long the dollar has been in existence and how widespread the dollar’s presence is globally also help, she said.
Still, it will have to be seen if the dollar is able to maintain its strength going forward and what the next chapters for the U.S. currency will be.
Another bright spot is the move toward self-sufficiency, something that was underway before COVID-19 came into the picture.
“One of the real benefits for American agriculture that COVID-19 has presented is that food is being looked at in a different light,” Ledman said.
While things like hurricanes in the Southeast and blizzards in the Midwest may have brought some awareness to food scarcity and barren shelves in the past, nobody in this generation has experienced the kind of widespread food scarcity or fear or scarcity being seen now, Ledman said.
That, Ledman said, is likely to bring about a greater appreciation for the American farmer and a safe food supply.
“The combination of the strength of the dollar and our self-sufficiency and the strength of the food supply here will keep us as a major global leader,” Ledman said.
Ledman reminded U.S. producers that there is still going to be more, not less, volatility ahead and that producers should consider doing whatever they can based on their own individual circumstances to put more stability into their operations.