Farmers and analysts alike expected milk prices to suffer at the hands of COVID-19. However, what started as a price impact estimate of 6% has quickly become a much darker outlook. Markets move lower nearly every day as the impact of the virus continues to be felt across the economy and supply chain. Grocery stores struggle to keep milk on the shelf. People are eating more at home than in restaurants. Logistics companies face special challenges. A shortage of containers is likely to harm exports. And entire states are out of school for several weeks which will no doubt impact school milk consumption. All in all, analysts agree milk prices could fall a staggering 20%, which would put us in the neighborhood of 2008 prices.
“It’s kind of surreal. It's weird watching these markets implode on such limited data,” says Tom Bailey a senior dairy economist with RaboAgriFinance. “We are shifting our projections to what can effectively be described as a recession.”
While domestically, anecdotal evidence points to a short-term boom in retail sales, it’s not likely to be enough to offset other challenges. Bailey says he’s hearing some retailers report 50-100% growth in the last week, some of that growth including classic cheese and milk.
“We don't have the exact data yet so it's still mostly anecdotal and hearsay at this stage,” he says.
That kind of growth is big, but is it big enough to offset other factors like restaurant service?
“Open table, for example, they're showing reservations down 20 to 50%. So, that's one external data point we can look at,” he says. “And now they're obviously closing bars and restaurants and limiting sales to takeout at this stage.”
According to Black Box Intelligence, restaurant sales in Seattle were down about 20% during the first full week of heightened awareness of the spreading virus. High-end and full-service restaurants appear to be getting hit harder than quick serve and to-go service, says Nate Donnay senior dairy analyst at INTL FCStone, to-go sales there were up 10.5%.
“It’s likely that we’ll see drive through, to-go, and food delivery sales get a positive bump from the covid-19 concerns while in-restaurant/sit-down sales take a big hit,” he says. “It all probably nets out to a net negative for food service sales, but the hit will not be evenly distributed across restaurant types and food categories. Delivered pizza seems very well positioned and that could help to dampen the impact on the cheese market.”
Donnay says a 20% decline in restaurant sales across the country for 3 months would likely equate to total milk equivalent disappearance being down 1-2% for the year.
“That would likely reduce dairy prices by about 15% from what they otherwise would have been,” he says adding that with all the state shutdowns and restaurant closings, assuming a 20% drop in prices “might not be enough.”
Restaurant demand isn’t the only factor at play. Additionally, school milk consumption will fall dramatically with the wide swaths of school closures leaving many kids without milk. School milk consumption accounts for roughly 7% of national consumption. However, some bigger school districts like New York is looking to provide kids with food who won’t have it otherwise.
“And oftentimes those programs will be open at any students so you can see a lot of people still using those channels, but I suspect people to stay home who can,” he adds.
Limited export containers, oil prices and other macroeconomic factors could mean trouble for export markets, Bailey says.
“Middle East and North Africa are certainly going to be lower, but that doesn't do it to us directly. It's going to impact Oceania, and European exporters, who will then have products into Southeast Asia where we said profit analysis especially Asian image can be weak because of economic troubles in China. If their demand is weak, exports will be weak.”
“Over the next month or two dairy prices should hold up,” but Bailey says farmers should expect “significant price pressure” to follow as the dust settles and a recession settles in over the next year.
“Over the next two to three months with oil prices being where they are, and other macroeconomic factors being considered, potential loss of employment affordability of importers with weaker currencies and so on the impact to dairy prices are inevitable.”
Bailey says they’re expecting prices to be down 15 to 25%. “So, I'd say downside risk of 25%, this puts us in 2008 territory, roughly, for dairy prices.”
Is there a bright side?
It’s early to say, but Bailey says there’s still a chance we get through this quickly with a market recovery before the end of the year. Think more in terms of a deep V pricing and market curve rather than a prolonged deep recession.
“It will depend on how the curve of this virus goes, before people start traveling eating out again but there's gonna be a lot of skepticism,” he admits. “But when things start turning around, there's a good chance that the protective systems for the economy and government support, will help us recover faster.”
At this point in time, Rabobank analysts expect prices to remain buoyed over the short term before the impacts of a recession are felt in the second half of 2020.
“It could be a steeper, sharper dive and a quicker recovery, like a V,” he says. “That’s what we’re all hoping for, but it all depends on how the next month plays out and how this virus spreads.”