It’s refreshing and optimistic to turn the calendar to a new year, but the ramifications of COVID-19 on dairy’s economic health are far from over. The most concerning could be that milk supply and demand are trending in two different directions.
Just ahead of the “spring flush” of milk, U.S. cow numbers have grown 100,000 head between December 2019 and December 2020. It’s complicated to say exactly why so many farmers added cows, but better farm gate prices driven by government payments and purchases last year likely played a role.
At the same time, food service sales opportunities have taken just small steps back toward normalcy. The National Restaurant Association’s estimate for total restaurant sales in 2020 is now $240 billion less (down 27%) than they had projected at the beginning of last year. If your milk is sold through restaurant channels or school lunches, those demand needs are likely going to keep creating a wide range of pay prices versus cooperatives that sell to other markets.
“That’s going to continue to be an issue as we’re still not out of the woods in this pandemic,” said Chris Wolf, Cornell University economist, on the February 17 Hoard’s Dairyman DairyLivestream. He added, “Looking at the supply situation that we currently have, there’s some reason to think these co-op base programs may be part of the discussion again.”
We’re also still sitting on pretty high stocks of butter that were made last year to balance supply, Wolf pointed out.
Finally, the government payments that actually made 2020 the best year in quite a few for many dairy producers are probably not going to see much light in a new year and new administration. That’s leading bankers to project that 2021 cash flow is likely to look more like 2019’s than 2020’s, noted Sam Miller, who manages agricultural banking for BMO Harris Bank.
Know your plan
With all of this in mind, Miller and Roger Murray of Farm Credit East emphasized that there are more risk management tools available now than in years past. As lenders, they want to know that you’re aware of the options and have a plan to handle what might be thrown your way.
“We try not to overstep our bounds when it comes to managing and understanding what the management is doing with price protection, but we do want to understand what their overall goals are and what their plan is for the year,” Murray said of the relationships with their farmers.
Though we can’t prepare for all of the risk a farm may face in a year, both bankers cited that frequent sensitivity analysis on measures like your cost of production and breakeven costs are a good way to account for what you can.
An ongoing series of events
The next broadcast of DairyLivestream will be on Wednesday, March 3 at 11 a.m. CST. 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.