The author is a market analyst for Daily Dairy Report.

Dairy producers can count on only one thing over the next 12 months: volatility. This past spring and summer, market behavior embodied a wide range of emotions that veered from panic lows to euphoric highs. The pandemic has disrupted supply chains and upended consumer habits, which could lead to more wild swings in the milk markets.

The dairy industry, which has largely adapted to these unusual times, is now moving more product through retail and government food programs and less through restaurant and food service channels. Dairy is affordable, nutritious, convenient, and familiar, making dairy products a popular staple for Americans, many of whom are now cooking more frequently at home.

As pizza sales boom and grilled cheeses sizzle, sales of Italian- and American-style cheeses are soaring. Shoppers are filling their grocery carts with noticeably more milk and butter than they did in the past. They are also embracing everyday indulgences like ice cream.

Product casualties

Still, the pandemic has undeniably taken a toll. Devastated restaurant sales have eroded demand for butterfat and stifled orders for some value-added products. While Americans are slathering butter on homemade sourdough, they cook with less butter and cream than their counterparts in commercial kitchens. And cheesemakers are having trouble moving the types of cheeses that delight chefs but baffle novice cooks.

Many students are learning from home, forcing bottlers to cut back on pints and chugs. Remote employees are likely doctoring their own coffee with milk or cream and savoring fewer lattes at coffee shops. Even fitness buffs have slackened their pace, and sales of recovery drinks and whey supplements have slowed.

The industry headed into fall with ample cheese stocks and burdensome butter inventories. This fall and winter, due to a lack of other diversions, bakers could spend more time in the kitchen, but the shortened football season likely will reduce demand for pizza, nachos, and dairy-heavy dips compared to years past. Holiday gatherings will probably be more intimate and less frequent, meaning fewer cheese trays, canapés, and crème brûlées. Consumers may also be more budget-conscious, making the holidays a bit less festive.

While consumer wariness continues to weigh on domestic demand, export prospects have improved. U.S. cheese is by no means a bargain, but it’s at least likely to attract more buyers than it did this summer when CME spot Cheddar reached all-time highs. U.S. butterfat is priced to move, and American milk powder is the cheapest in the world.

Dry whey is heading abroad at a good clip, and China seems hungry for more. Although African swine fever remains an issue, it is no longer running rampant, and the world’s largest swine herd is starting to recover. USDA’s analyst in China expects 2020 piglet feed consumption to climb 56% this year, and whey is a critical ingredient in that product. Chinese whey imports reached all-time highs in July.

While the weaker dollar makes U.S. goods more attractive than competitors’ products, the anemic global economy suggests a broad slowdown in trade of all sorts, including dairy. For example, in the first seven months of the year, the United States sent 15% less nonfat dry milk (NDM) to Mexico, the United States’ largest foreign market, compared to the same period in 2019. A battered Mexican economy could weaken U.S. milk powder exports even further and drag already depressed U.S. Class IV values lower.

The world of unknowns

Of course, there are plenty of wildcards in the demand forecast. If scientists discover a reliable vaccine against COVID-19 and consumers feel safe to revert to most of their old habits, dairy demand would probably climb. But a new wave of infections would almost certainly be detrimental to sales. And there is always the possibility that the government will meddle in markets or muddle trading relationships, particularly in an election year.

Inventories could grow

Meanwhile, supplies are likely to grow. Output is sharply higher in the Southern Hemisphere, with strong rebounds in milk production in South America and Australia. New Zealand’s dairy season is also off to a great start. Milk collections are climbing slowly but steadily in Europe. In the long run, stricter environmental regulations will constrain cow numbers in Europe and New Zealand, but for now, milk yields will likely continue to advance, creating more competition for dairy exports.

In the U.S., dairy producers suffered a harrowing spring, record-breaking heat in parts of the nation, and summer milk checks that fell well short of what the futures market promised. In many areas, supply management programs remain in place. And yet, year-to-date milk output has climbed at the fastest pace since 2017.

Class III values were sky high this summer, prompting dairy producers to keep their barns full. Shrinking dairy heifer supplies — the consequence of years of crossbreeding with beef genetics — could cap growth eventually, but processing capacity limitations will serve as a more immediate check on industry expansion.

Putting it together

Although runaway growth is improbable, milk and dairy product supplies are likely to rise more quickly than demand, putting pressure on dairy product values this coming year. But the risk of big market swings remains great.

With that in mind, dairy producers should look for opportunities to put a floor under their milk revenue to protect against disaster in these unpredictable times. While volatility has raised the cost of risk management, it will likely be worth the price.