December 12, 2020 at 4:31 p.m.

A year unlike any other

Plourd talks volatile dairy markets, trends going forward

By By Krista Kuzma- | Comments: 0 | Leave a comment

    During the Minnesota Milk Producers Association virtual meeting Dec. 2, Phil Plourd presented “Sudden Storm,” an overview of dairy within the past year and predictions for the markets going forward.
    “In the massive understatement department, it’s a year unlike any other,” said Plourd, president of Blimling and Associates Inc.
    While many dairy farmers rang in 2020 with optimism for climbing milk prices, they were instead met with a year of the most volatility recorded, Plourd said.
    “Just looking at the cheese market, cheddar blocks went from $2 before the pandemic to $1 to $3 back to $1.50 back to $3 and then back to $1.60,” he said. “The volatility we’ve seen in the cheese market is clearly way out in the stratosphere versus anything we’ve ever seen before.”
    The cheddar market topped at 42% price volatility, the highest it has been since 2008 when volatility was at 27%, Plourd said.
    Price swings in the milk market are attributed to the disruption of the typical American daily life due to the coronavirus pandemic.
    For the past 20 years, Americans have been trending more toward eating out rather than buying their food at the grocery store. In 2019, food services dollar sales even reached above grocery sales. Before the pandemic, restaurants accounted for about 50% of the U.S. cheese sales and 45% of the U.S. butter use.
    “The rule we always talk about is never underestimate the laziness of the American consumer,” Plourd said.
    In March, when shut downs were implemented in many areas of the country, food service and restaurant spending plummeted 38% while grocery store spending skyrocketed 31%. In April, the gap between those two stretched even further to 55% and 19%, respectively; however, since then, people have been slowly shifting back toward their pre-pandemic spending habits with grocery stores up 8% and restaurant sales down 7%.
    “What this tells you is Americans have made the transition for figuring out how to get food delivered to them or someway access someone else’s cooking in a way that was unimaginable during the beginning of the pandemic,” Plourd said.
    While there are challenges and shortcomings facing restaurants, they have shifted to offer carryout, takeout, curbside pickup and online ordering as ways to increase sales. Ghost kitchens, a pop-up type of restaurant with limited offerings and delivery only, is also now a new phenomenon coming into the food service industry.
    “As we look at a world where we’re looking at more pickup, carry out and delivery, we’re looking at a world where questions about portability become very important,” Plourd said. “We’ve always talked about perishability with dairy, but     I think portability is a huge question.”
    The food landscape going forward is changing, Plourd said.
    “Dining is still going to be popular once we get passed the vaccine, but what we’ve done in the pandemic era is accelerate trends that were already underway, which was sitting on the Lazy Boy, pushing some buttons and the food arrives,” he said. “We’ve just done three to five years worth of growth in 5 to 10 months.”
    Likewise, grocery stores are also seeing exponential changes with online grocery sales, which accounted for $1.2 billion in August 2019 and increased to $7 billion by June.
    “How well do our dairy products make the trip from the grocery store to the home?” Plourd said. “The infrastructure is building up and retailers have invested a lot of dollars to make the click and collect grocery experience pretty good.”
    This will be hard for specialty cheese sales, which relies on in-store demonstrations to drive sales.
    “It might make specialty products harder to debut,” Plourd said.
    People working from home has and will continue to skew the past trends. Going forward, telecommuting will be a permanent situation for an increasing amount of people.
    “Fewer people are getting in the car and driving to work and are not stopping at Dunkin, McDonalds or Starbucks along the way,” Plourd said.
    No longer working in the bigger cities means fewer people making lunch and dinner plans. Plus, no longer coming into a physical office means Americans are searching for more land and space.
    “We are seeing a suburban and rural real estate boom,” Plourd said.
    Students in kindergarten through 12th grade are also learning from home, with nearly 60% of them starting the school year virtually. School milk makes up about 8% of fluid milk sales, which are not being made up at home, Plourd said.
    “If schools are only at 50% capacity, that’s 43 million pounds of milk per week we’re losing,” he said. “That’s an issue.”
    What has helped dairy sales are the United States Department of Agriculture food boxes brought forth by the Trump administration. Having the cheapest cheese in the world has also helped the current export market, Plourd said.
    “That offers some promise for keeping the market a little cleaned up in the months ahead,” he said.
    With the Dairy Margin Coverage and the Coronavirus Food Assistance Program, dairy farm profit margins are looking to be good this year, Plourd said.
    “The farm financial picture is looking a little squeezier for 2021,” Plourd said.
    Government food boxes will no longer buy excess product and CFAP money will not exist, either. Futures have grain prices going higher and milk prices dropping.
    Milk production is projected to be up 1.4%, Plourd said, but that will drop below 1% for the second half of next year because of deteriorating farm finances.
    A dairy farm’s location and local processor might differentiate which ones make more money.
    “If you’re shipping milk to a cheese plant that is not pooling and paying on cheese yield, you’re seeing high payouts, and you see that in local areas,” Plourd said. “But, a farm shipping in the Mideast to a plant that doesn’t have class III sales see a different reality. That’s why it’s hard to generalize about milk production.”
    Plourd said the Dairy Revenue Protection program and DMC both do a good job of protecting dairy operations of varying sizes, with about 25% of U.S. milk in 2020 being covered by DRP.
    “We do have good insulation against downward prices,” Plourd said.
    While many farmers thought 2020 would bring a dairy market that would be profitable, that has only been the case because of the government support of nearly $50 billion, Plourd said.
    “It suggests the markets have been so-so, but the majority of farmers still see good times ahead,” Plourd said. “There are a lot of convenient tools to manage price risk. Use them. I think it’s no time to go to sleep, and I think the government is less likely to come to the rescue in 2021.”


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