Moving through the spring flush, dairy markets have climbed with a focus on the anticipation of widespread reopening of food service and the broader service sector. The strong demand that dairy has experienced at retail has been an encouraging sign throughout the pandemic, but since consumers eat more dairy when dining out, trading some degree of retail sales back to food service outlets will be a net positive for demand.

While there is reason for optimism from the domestic consumer, there is still the possibility that we cool off from current levels. Uncertainty remains over the demand implications of widespread reopening and the import needs of global markets. And a surprise to the upside in the form of government purchases is unlikely in 2021.

For the better part of the past year, competition for consumers’ food dollars has been limited. As the service sector reopens more broadly and restrictions are lifted, competition will heat up once again. To prepare for the pent-up demand, food service supply chains are restocking and retailers are maintaining their course. It’s unclear exactly what reopening will look like, but no one wants to be caught without product when it happens.

A strong start
The impact of a general reopening will be positive for demand and will be supportive to milk prices, but things could cool off somewhat following the initial restocking period. Volatility in demand as channels shift can be expected before demand settles into post-vaccine norms.

As markets ramp up in the U.S., the season is winding down in the Southern Hemisphere. The off-season in Oceania will lead to some seasonal export opportunities for the U.S. and will be price supportive for whey and milk powder headed toward China and Southeast Asia. Dairy producers in Oceania are optimistic about another profitable year ahead, which could drive production growth. In New Zealand that production growth will rely on improved milk yield per cow as environmental regulations will likely limit any additional herd growth.

Logistic disruptions and container availability issues that have contributed to global disparities in dairy commodity prices should resolve over the course of the second quarter (Q2). In China, high domestic milk prices combined with a desire to avoid logistic disruptions have been driving a rush to import, and potentially hoard commodities. This could lead to some downside risk to China’s import needs in the medium term.

While prices should be supported by strong domestic demand, government purchases are taking a step back. USDA Secretary Vilsack recently announced the end to the Farmers to Families Food box program in favor of using existing distribution channels like food banks. The dairy donation program as well as an increase in funding for the Supplemental Nutrition Assistance Program (SNAP) will benefit dairy, but in a less dramatic way than the programs of last year.

Expect some volatility as consumers, supply chains, and global markets adjust to new post-vaccine patterns. The upside of this volatility will offer opportunities to layer in milk price protection; the downside will quickly squeeze margins against elevated feed costs.

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(c) Hoard's Dairyman Intel 2021
May 3, 2021
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