The COVID-19 pandemic has most certainly impacted the financial stability of the country, put the economy into recession, and even raised concerns of a coming depression. As many businesses and organizations brace for this potential reality in the next year, dairy producers must ask themselves, “What happens when a recession and high production meet?”

That’s a concern that Cornell economist Andy Novakovic is closely monitoring as 2020 comes to an end and questions begin to circulate as to what milk prices might be in 2021. It’s evident that milk output is on the rise, as September production was 2.35% higher than 2019’s level and the national cow herd is also growing. On the flip side, it appears dairy product sales are not keeping pace with the swelling milk production.

With this knowledge in mind, panelists on the October 21 Hoard’s Dairyman DairyLivestream sponsored by Diamond V attempted to answer the question, “Can dairy sales maintain momentum in 2021?” You can read about how dairy sales faired thus far through the pandemic in the Intel “The pandemic propelled these dairy categories,” but as the group looked to the future, they were much more bearish.

According to Novakovic, the question has two arms:
1. How will consumers react?
2. Will there be production restraints?

“I think the fate of prices and how this all looks is primarily in consumers’ hands,” the seasoned economist said. “When I think about consumers, I think about what they need, what they want, and what can they afford?”

During the heart of the pandemic, people focused on what they needed. As time progressed, what they could afford became reliant on the economy. What they want is hard to put a finger on, but those who have done more cooking and enjoyed it may not return to pre-pandemic purchasing behaviors.

While the situation surrounding this economic event is hugely different than the Great Recession of 2008, IRi’s John Crawford and his team have spent time reviewing how consumer purchasing was impacted during that time to see if any lessons could be gleaned and applied to the current event.

“While it is different, I would say that consumer confidence is still going to take a shot here, and that absolutely happened back in 2008,” the vice president of client insights for dairy explained. “One thing that we do see is that less costly products do well. We also see indulgent and premium products do well. Where we see the challenge is in those midrange products.”

The midrange products he used as examples included odd-sized grocer items such as half-gallon ice cream tubs. Crawford also reminded listeners that an important impactor on consumer behavior will be how quickly restaurants can return to full capacity service.

Production-side considerations
When it comes to milk production, Novakovic and fellow panelist Mike Brown, who is the Dairy Supply Chain Director at Kroger Co., shared significant concern about its impact on future farm gate prices.

“I looked at the forward buying of the future market as a buyer of products, and I think it’s optimistic,” noted Brown. “If I was a producer, I would be looking at those closely,” he warned. His concern is that rising production and better feed crops this year will mean expanded production that has no home.

“The other thing is production, and I think we’ll all aware the programs that primarily cooperatives have created to restrain production growth that were put into place in the early stages of the pandemic are still on the books,” reminded Novakovic. “Will there be any will to implement some of those programs? If that were to happen, that could have a pretty potent effect. I don’t want anyone putting my name down on a piece of paper as a proponent of supply management, but those kind of choices could make a big difference.”

While 2021 production and prices are still more than ambiguous, there is plenty of concern to warrant producers looking to mitigate risk and identify options for securing budgets.

An ongoing series of events
DairyLivestream will air twice each month for the remainder of this year. The next broadcast “Taking a position on milk prices” will be on Wednesday, November 4. Each episode is designed for panelists to answer over 30 minutes of audience questions. If you haven’t joined a DairyLivestream broadcast yet, register here. Registering once registers you for all future events.

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(c) Hoard's Dairyman Intel 2020
October 22, 2020
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