News & Resources

Milk-Production Increase Outstripping Supply Gains, NMPF’s Vitaliano Says

February 8, 2021

Milk production is increasing faster than demand is recovering, making 2021 a challenging year for dairy farmers, said Peter Vitaliano, NMPF’s chief economist, in an NMPF podcast released today.

“On balance, things are improving a little bit” in dairy demand, “but they’re still falling short of the milk production rate of increase,” Vitaliano said. Still, bright spots remain for the medium- and longer-term dairy outlook. Demand for U.S. dairy exports is at record levels, and demand for dairy away from home should increase as the COVID-19 pandemic fades, he said.

The full podcast is here. You can also find this and other NMPF podcasts on Apple Podcasts, SpotifySoundCloud and iHeart Radio. Broadcast outlets may use the MP3 file. Please attribute information to NMPF.

 

Transcript

Alan Bjerga, NMPF: Hello, and welcome to the Dairy Defined Podcast. The new year is bringing a cold outlook for dairy prices. Payments are expected under the Dairy Margin Coverage Program for most of the year, but production is still continuing to increase and the expansion of dairy herds has recently picked up to its fastest pace since 1998. So, what’s going on here?

Alan Bjerga, NMPF: Demystifying markets is what Peter Vitaliano does. He’s the chief economist for the National Milk Producers Federation, he’s the author of its monthly Dairy Market Report, available on nmpf.org, and he’s been closely watching what’s going on. Thanks for joining us again, Peter.

Peter Vitaliano, NMPF: My pleasure. Actually, the margin outlook that you just referenced is primarily because of the increased milk production outlook. Last year was, as we all know, a very unusual year. Milk production stayed relatively constrained, even though we entered the year just before the pandemic hit with a surge of cow numbers and milk production. That was cut off and largely held in abeyance throughout almost all of the year. And that was good, because total dairy demand was affected by a significant drop in food service use. Retail sales did increase and exports were good, but on balance, the pandemic reduced total dairy production. A, let’s say constraint in the rate of increase of milk production was very, very welcomed. Government purchases, through the Food Box and other programs, did help make up for a lot of that lost food service consumption.

Alan Bjerga, NMPF: Tell us some of the factors that are accelerating the current growth.

Peter Vitaliano, NMPF: Well, last year was, as I say, it was a tough year in many ways, but because of the government purchases stepping in to make up for some of the lost market consumption, the relative restraint of dairy production, milk production growth, plus the relatively large direct payments through the CFAP program created a situation where returns to milk production were not all that bad. We only had two months out of all of last year where we had very low margins and large payments. And that was an indication that margins were not all that bad for the year. And a lot of farmers, again, a year ago, dairy farmers, even after several years of low prices and stress margins, were accelerating production just before the pandemic hit. A year later now, they’re essentially resuming that production increase. And so we’re seeing cow numbers go up, milk production going up and again, it’s exceeding the rate of consumption increase. And so there’s going to have to be a balance for them somewhere in there, but right now the outlook is more milk production relative to demand and lower prices and stress margins for several months now.

Alan Bjerga, NMPF: Let’s talk a little bit about that demand. How is this year comparing to last year?

Peter Vitaliano, NMPF: Total consumption through all of these channels has been improving a little bit throughout the year, the last year and it continues at this through the first month of this year, as far as we’ve been seeing. Retail is not quite as strong as it was in the earlier months of the pandemic, where everybody stocked up and through buying through supermarkets, but that’s still where a lot of the increase is coming. We’re on track. We need one more month of data, but it’s almost certain that last year will be a record year of dairy exports from the United States in terms of total volume of product. Food service is kind of, it’s going to continue to be depressed, but it may not be, going forward this year, quite as depressed as it was sort of at the height of the, we actually had two big waves of the pandemic shutdowns last spring and then again, last fall. So on balance, things are improving a little bit, but they’re still falling short of the milk production rate of increase.

Alan Bjerga, NMPF: And all of this, of course, has implications on policy choices and policy implementation. And you’ve already mentioned for all the volatility last year, there was a robust federal safety net, perhaps imperfect, but it was there.

Peter Vitaliano, NMPF: Well, Last year, there were two big waves of Food Box purchases. And bear in mind, the Food Box Program was not the only avenue through which dairy products were purchased for food donation purposes to, again, help make up for some of the loss of food service use. But the non Food Box purchases came pretty steadily throughout the year. The Food Box purchases were very, very heavily concentrated in two batches and we could see that very readily looking at any kind of a milk or cheese price chart, where we saw two big peaks of prices.

This year, there was an announcement that there was going to be another round of Food Box purchases. The futures markets reacted briefly to that, but they basically shrugged that off. So at the moment, the expectation of market players is that we’re not going to see that same price effect from the Food Box purchases until we see at least more information, we see what’s actually been moving in the market and possibly some additional purchases announced. But for right now, the futures markets are looking like they did last year during the time when there was a lull in those purchases.

Alan Bjerga, NMPF: So that sounds, honestly, it sounds kind of a little bit dreary, Peter.

Peter Vitaliano, NMPF: Well, the dreary part is, going back to where we started, is the fact that milk production at the moment is just much stronger than it was throughout a good part of last year.

Alan Bjerga, NMPF: But maybe a little less dramatic, too. I mean, there were all that discussion last year and challenges with negative PPDs and the record-breaking volatility. Could we get a little bit of a break from that this year?

Peter Vitaliano, NMPF: Totally. Again, it’s a trade-off. The disruptions we saw in the federal order programs, the negative PPDs, the massive depooling of Class III milk that resulted from it, the wide divergence between the relatively new Class I price mover compared to the old, higher up mover, those were all artifacts of that very unstable pattern of prices, particularly for cheese prices, driven pretty heavily by those two big waves of Food Box purchases. It kind of had a reverberation like a boulder being dropped into a pool with ripples going out, and bouncing off the sides, and coming back and interacting. With sustained, relatively stable lower prices, those problems will disappear and be replaced by the problem of low prices.

Alan Bjerga, NMPF: So what hopeful signs could there be for dairy this year? I know you’ve already mentioned exports.

Peter Vitaliano, NMPF: World markets continue to be strong. Our major export competitors are not increasing their milk production like we are. The United States should can and should be exporting more commercially because world prices are coming up to our relatively low levels for a lot of key products that we normally don’t export, like butter and cheese. We have the Cooperatives Working Together program that’s helping to bridge that gap, but it can only do so much. We should look forward, particularly as long as US prices stay relatively low compared to the world markets, to seeing another very strong year of dairy exports.

Again, there’s a couple of months’ lag before we actually get the data, but all the expectations are we can count on the export part of it pulling its weight, along with retail. The key thing, again, is food service and institutional use. Until schools fully reopen for in-person instruction, they’re not going to be purchasing as much fluid milk and other dairy products. And as long as people are reluctant to go out and eat as wholeheartedly as they’ve done before the pandemic, we’re going to continue to see a depression in food service use. And again, we’ve not yet seen very, very large scale Food Box purchases in the pipeline yet this year.

Alan Bjerga, NMPF: If you’re a dairy producer, what should you be watching for in the economy over the next few months?

Peter Vitaliano, NMPF: Should be looking for the race between COVID vaccinations and a attenuation of the holiday season related surge that we’ve gone through that may be peaking in terms of coronavirus new cases and fatalities. We do have the wild card of these more resistant or more contagious strains coming on. And so we can look at the COVID situation, which is basically continuing to drive the dairy consumption situation, it’s a mix of positive influences and negative influences. The negative influences come from when people are just COVID fatigued and let down their guard, and don’t wear masks, and don’t social distance, and go to large gatherings. And that’s what gave us the spikes through the holiday season, Thanksgiving, Christmas, and New Year’s.

How much people are going to be getting together at Super Bowl parties is going to be a wild card coming up in the next couple of weeks. The new strains, but the vaccination rate, which is spreading and people continuing to be cautious about social distancing and double masking, those are all influences and we don’t yet know how they’re going to be working to reduce the intensity of the pandemic, which is still with us but is showing signs of attenuation. The key is going to be: When are people going to feel comfortable getting together to have parties and family dinners, and going out to restaurants and consuming more dairy away from home?

Alan Bjerga, NMPF: We’re speaking with Peter Vitaliano. He’s the chief economist for the National Milk Producers Federation. Peter, thanks so much for having some time to join us today.

Peter Vitaliano, NMPF: My pleasure.

Alan Bjerga, NMPF: And that’s it for today’s podcast. Be sure to look at NMPF’s risk management page, and you can get there from our home page at nmpf.org, for more of Peter’s analysis and to subscribe to the Dairy Market Report. You can also find this podcast online on nmpf.org and you can subscribe to this podcast on Apple Podcasts, Spotify, SoundCloud, iTunes, and Google Play. It’s all under the podcast name Dairy Defined. Thanks for joining us.