The author is The EV Baker Professor of Agricultural Economics Emeritus at Cornell University. His primary focus over the last 42 years has been on the economics of dairy markets and policy.
After four-plus years of being in the doldrums, milk prices finally started to pick up in the second half of 2019. Forecasts were rolling along so well that the only question on the minds of market analysts was how high the top would be in 2020.
Out of nowhere, a runaway truck slammed into the entire dairy market. That out-of-control vehicle known as COVID-19 came in with so much velocity that it was difficult to even catch a license plate number.
We have since had time to assess the carnage that has included shuttered restaurants, unemployment just shy of Great Depression levels, and people waiting in long lines for donated food. The extraordinary conditions of the Pandemic Economy pretty much explain the collapse in milk prices we saw early in the year.
Remember last year?
In 2019, prices were trending up. It seemed like every morning I’d scan the news and see the market was up. Then, the next day, it was down. No wait, it’s back up. What could we really expect for 2020?
This high degree of uncertainty is illustrated when tracking the June 2020 Class III milk price as it evolved from mid-2019 until about the time of the Pandemic Economy in early February. Markets moved by rather big amounts in the opposite direction on nearly a daily basis. Whether you are selling or buying, that kind of volatility can make you crazy.
Then the runaway truck known as COVID-19 crashed into the market. Perhaps the most pronounced visual is the collapse in the expected price for June that began at the dawn of the Pandemic Economy, only to be followed by its meteoric rise beginning in late April. By the time you read this, I suspect we will be trending down again.
With the regretful help of collapsing milk prices, we started to get milk production under control in quick order. Usually it takes quite a bit of time for farmers to change their commitment to milk production because of low prices, but with new and vigorous base-excess pricing plans by cooperatives, I think this response was accelerated.
A bit later we started to get some help from the slow but persistent re-opening of restaurants and government-subsidized food donations. The latter has played a significant role in the burst of prices that occurred in early to mid-June. This was especially exacerbated by companies who won Food Box bids and began to race around to acquire product to put in those boxes; companies that often didn’t know anything about buying dairy products.
As much as we might hope that we will continue to see price strength in 2020, as I write this on June 15, there are already signs of retreat and considerably lower expectations for the last half of the year. A second wave of COVID-19 at the end of the year and into early 2021 will only bring more discouragement to markets.
Dairy folks have known for a long time that market supply and demand balances on a knife’s edge. Jiggle a little bit to the left or a little bit to the right, and milk prices can soar or collapse. If you thought it was tough before, the current environment has redefined what volatility means.
So, is there anything that can be done about it? That is both an old question and a new one. As before, it is a question for you and anyone else trying to make a living in the dairy industry, but it is also a question for public policy. While the basic question is old, the new question might be how long can you wait if you haven’t found some kind of strategy for dealing with market volatility?
What do I think?
A few candid thoughts
No. 1. Just like the typical advice for small investors in the stock market, that is to say almost all of us, it’s wisest to play the long game. Develop your basic business plan around expected average prices and stick to it. Don’t let low prices get you overly pessimistic, but also don’t let high prices get you overly optimistic. The objective of this game is profitability over a period of time, say three to five years, not necessarily every year.
No. 2. The long game is around expected average prices, but if you can’t survive the bad times, you won’t be around to play the long game. Survival is about liquidity and solvency. Borrowing money or not paying your bills on time helps with liquidity but it damages profitability and risks insolvency.
One strategy to deal with this challenge is to build more working capital and have more feed on hand or committed. If you don’t have profits in one year, it is hard to build these kinds of reserves, but having them may make all the difference in surviving the bad years.
No. 3. One of the lessons for public policy is the benefit of having solid safety net programs in place before disaster strikes and using them. For all their good intentions, it is very difficult to get new government programs in place after a disaster strikes. Indeed, it is not unusual for such programs to come into effect after markets have already come to their own solution. Let me suggest two cases in point.
The first case point: Given the outlook for 2020, it isn’t surprising that many farmers did not sign up for Dairy Margin Coverage. Of those who did, I suspect the vast majority were farmers who chose to take advantage of the big premium discount offered to those who made a five-year commitment. About one-third of U.S. farms will get substantial payments under DMC.
Had everyone participated, there would have been no need for the direct payments under the Coronavirus Food Assistance Program (CFAP). Moreover, those DMC payments are coming to the mailbox a lot more quickly than the CFAP payments will.
The second case point: Providing assistance in the form of food boxes to families no longer able to support themselves is a wonderful humanitarian gesture. However, the Supplemental Nutrition Assistance Program (SNAP), which helps needy families get food year-round, has a far bigger financial impact than food pantries, and it doesn’t require you to keep your car in a line that feels like the first day of the state fair to get a cardboard box full of groceries.
An ounce of prevention
None of this is to fault the new initiatives that had the best of intentions at heart, but the fact remains that we have a lot of good programs already in place. The old adage of an ounce of prevention beats a pound of cure comes to mind.
We are all hoping that things return to normal soon. I’m not so sure we were doing such a great job of coping with the old normal, and I fear the new normal will come with even greater challenges all along the dairy supply chain. We should approach this with hope and optimism but also with an understanding that strategies that may have been good enough two or five years ago are probably not enough to ensure success in what is to come.