Dairy markets on the brink as COVID-19 devastates all before it

Global dairy markets are on the brink after a devastating 10 days that has forced dairy farmers right around the world to dump unwanted milk.

As the COVID-19 pandemic continues to play havoc with the global economy, European and US prices for cheese, butter, milk powder and liquid milk have slumped to their worst level since the financial crisis of 2009.

The sheer pace of the decline in dairy markets over recent days is unprecedented and devastating

The forced closure of restaurants, hotels, cafés, takeaways and other food-service outlets has crippled a key route to market for the global dairy industry and left a huge volume of dairy product without a home.

The sheer pace of the decline in dairy markets over recent days is unprecedented and devastating.

Just a month ago, dairy companies were looking at a healthy supply-demand balance in markets and the outlook for milk prices was quite optimistic.

Intervention

Fast forward to today and the picture is changed utterly. In Europe, butter and skimmed milk powder (SMP) prices will fall below intervention price levels by the end of this week, while spot prices for uncontracted milk in the UK have collapsed to 0p/l because nobody wants the milk (see Figure 1).

Dairy markets are also not helped by the cancellation of the European football championships that were scheduled to take place in June. Pizza consumption spikes during large football tournaments like this, which prompted huge forward-buying of mozzarella by food manufacturers and restaurant chains.

The cancellation of the tournament means Europe has stores full of mozzarella and demand for fresh mozzarella has plunged by 50% in the last two weeks.

In the US, one of the largest dairy markets in the world, dairy prices have collapsed to record lows

Mozzarella prices are now under serious downward pressure at €2,400 and falling. The knock-on from this is that milk will be processed into hard cheeses like cheddar or into butter and SMP, which will add further pressure to these products.

In the US, one of the largest dairy markets in the world, dairy prices have collapsed to record lows not seen since the financial crash in 2009.

Prices for US cheese traded on the Chicago Mercantile Exchange (CME) have plunged up to 40%, while butter prices have dived almost 30% (see Figure 2).

Sharper

Speaking to the Irish Farmers Journal this week, Ornua’s Joe Collins said the decline in global dairy markets is a lot sharper and a lot swifter than it was in 2009, when Irish milk prices fell below 20c/l for a time.

“It’s a very tough market out there at the minute. The price falls in the US over the last few days have been hard to believe.

It’s a very emotional thing to see farmers dumping milk

“Butter prices are down the equivalent of €1,000/t, while cheese prices are back €1,500/t in just a matter of days,” said Collins.

“Liquid milk is being hit really hard by the virus because it’s a fresh product. There’s now real pressure on that market. It’s a very emotional thing to see farmers dumping milk and it’s definitely shaping the market sentiment.”

Collins said it was hugely disappointing to see the EU’s special committee for agriculture offer no help to the European dairy industry during this crisis by not opening its private storage aid (PSA) scheme or introducing other measures.

Lucas Fuess, director of market intelligence at Highground Dairy in Chicago, described the rout in US dairy prices last week as a “tragic day” for farmers and dairy producers in the US.

Grocery store purchases of dairy are good but they just can’t account for the loss of foodservice

“Cheese and butter prices hit 2009 values and non-fat milk powder might not be far behind.

“All this is occurring just as milk peaks for the spring. The collapse in restaurant demand is really driving a lot of this. Grocery store purchases of dairy are good but they just can’t account for the loss of foodservice,” said Feuss.

Reasons to be positive

When you stand back and look at it, there can be no doubt it’s been a black week for the global dairy industry, with market prices collapsing and farmers in the US and the UK forced to dump unwanted milk.

The speed of the downturn has been the biggest factor as it has left no time for farmers or co-ops to adjust.

Kerrygold butter is seeing continued growth in sales in its key markets due to the spike in demand from supermarkets

Despite this, there are reasons for Irish dairy farmers to be optimistic that we can get through this.

Firstly, Ornua CEO John Jordan told the Irish Farmers Journal this week that Kerrygold butter is seeing continued growth in sales in its key markets due to the spike in demand from supermarkets.

“Consumption of butter and cheese through supermarkets is up 9% due to COVID. We’re selling 8.6m packets of Kerrygold a week across our core markets.

“Even with the 25% tariff introduced on Irish butter by the US last year we’re still seeing a spike in demand in that market,” said Jordan.

Last year, retail sales of Kerrygold butter surpassed €1bn for the first time. The iconic Irish butter brand accounts for about one-third of all product volume sold through Ornua and it delivered €18.5m of a premium to Irish farmers last year on top of the market price for butter.

If the Kerrygold brand can continue to deliver its premium back to farmers, it will help soften the impact on farmgate milk prices.

Despite the downturn in market prices, Irish dairy product is still being exported off the island and finding a home

Secondly, Ornua has committed to buy over €1bn worth of dairy products from our primary co-ops this year, meaning it will continue to provide a route to market for Irish dairy.

Despite the downturn in market prices, Irish dairy product is still being exported off the island and finding a home.

Dairy markets may be in decline but a guaranteed route to market is worth a lot in the current environment when we look at the situation in the UK and the US where farmers are forced to dump milk because there is no buyer for it.

Cashflow

Thirdly, Ornua provides Irish co-ops with a €350m facility known as reverse invoice discounting.

This service essentially allows Irish co-ops to sell their butter, cheese or milk powder to Ornua and be paid for the product within 14 days, regardless of whether Ornua has found a home for it or not.

During the difficult weeks or months ahead, this important facility will provide valuable cashflow to co-ops and guarantee farmers will be paid for milk.

In the US, the dairy industry has called on the USDA to set up a milk supply reduction scheme to incentivise farmers to cut milk supply by 10%

The fourth reason for some optimism is that milk supply is likely going to fall in response to the virus.

In the US, the dairy industry has called on the USDA to set up a milk supply reduction scheme to incentivise farmers to cut milk supply by 10%.

A similar scheme was established by the EU during the downturn of 2016 and could be rolled out again.

If activated, these schemes could take huge volumes of milk off the global market and help restore the supply-demand balance in dairy markets, which would boost prices again.

China is slowly beginning to restart its enormous economy

And finally, this week’s GDT auction in New Zealand provided some hope that market prices can bounce back once countries get to grips with the COVID-19 virus.

China is slowly beginning to restart its enormous economy and whole milk powder (WMP) prices increased 2% at this week’s GDT auction to $2,820/t (€2,590/t). This is the first rise in the WMP price since January, when the COVID-19 virus first began to take hold in China.

If economies in Europe and the US begin to restart in a couple of months’ time, the likelihood is that dairy markets will begin to find their feet again.