Walking the tightrope: Dairy markets in 2022 and beyond

Posted on July 21, 2022 in Dairy Performance
“One of the things we do especially well in the dairy industry is volatility,” said Phil Plourd, president of Blimling and Associates, Inc. and host of The Dairy Download podcast, during his presentation at the Vita Plus Midwest Dairy Conference.

Overall, Plourd said the outlook for U.S. dairy is mostly positive. Domestic per capita cheese and butter consumption continue to rise, yogurt consumption increased for many years and has now plateaued, and ice cream consumption has been strong for the last couple of years.

Fluid milk consumption continues its decades-long decline, but Plourd pointed out consumers have numerous more beverage choices than they did in the previous century. Consumption of milk’s “best friend,” cold cereal, has also been on a decline.

“Let’s go sell more cheese,” Plourd said.

General farm finances are in an “OK place,” according to Plourd, as 2022 sales should be at record-high levels and debt-to-equity ratios are “not that scary.” Nonetheless, Plourd said “mood is deteriorating” as farmers look at domestic and global market conditions and the volatility they can create. Plourd highlighted five critical factors that will impact dairy producers.

1. U.S. milk production
Milk production growth has been negative seven of the last eight months, Plourd reported, but $25-per-hundredweight milk historically has been enough to get farms to produce more milk. Prospective margins are good as milk futures are going up at a pace faster than grain. However, growth prospects are constrained as dairy replacement heifer numbers are down. This, coupled with base and excess programs, makes the prospect of milk production growth “less robust.”

2. Cost of production
At the time of his presentation on June 15, Plourd said corn prices were at their highest level since 2013 and Russia’s invasion of Ukraine has created massive and lasting problems for the global grain markets.

“We’re not just saying things are tight today,” Plourd said. “They’re going to be tight tomorrow.”

Although many U.S. corn growers faced a late spring, they caught up fast, planting more than 60% of the corn crop in just three weeks, and emergence was a bit ahead of the average. Plourd said different regions of the U.S. will always be “too something” – too wet, too dry, too cool, too hot – in any given year. High fertilizer prices will also impact cost of production.

3. Global price landscape
Milk production is down in major European production centers – including Netherlands, Germany and France – and analysts do not expect a fast-turnaround. Plourd said this is significant as the European industry is larger than the U.S. and much larger than New Zealand, which is also experiencing a production slump. The global prices of dairy products are increasing. The small price difference between U.S. and European products could limit interest in U.S. exports.

“The next six months are not as good as the last six months from an export perspective because our price is going up,” Plourd said.

Also affecting exports are ocean-going freight rates, which are down but still nearly three times higher than in 2020, and port disruptions, which have improved, but are still not normal.

4. Price impact on domestic demand
The price of butter in the grocery store has gone up by more than $1 since Thanksgiving and Christmas. Subsequently, retail demand is down by more than 3% year-to-date. Plourd said retail cheese prices are also higher, but not as dramatic.

5. Fragile economy and consumer environment
“A negative economic environment is not constructive,” Plourd said, reporting that a University of Michigan report shows consumer sentiment at its lowest level since the survey began in 1978. This could impact restaurant spending and possibly dairy demand.

Plourd said inflation is a major concern for U.S. consumers, especially energy’s direct and indirect impacts on consumer prices. At the time of his presentation, Plourd said the average U.S. household was spending $129 per week on gasoline, which was up $51 from the same period in 2021 and up $82 compared 2020.

“We’re burning through the COVID money,” Plourd said, as personal savings have decreased. However, that doesn’t necessarily mean consumers are giving up anything as credit is increasing “at a pace not seen in years.” Consumers are still in a better debt position than they were before the pandemic, but Plourd said these conditions are not sustainable.

Finally, the COVID-19 pandemic significantly affected consumer behavior and is likely to have lasting effects, predicted Plourd. Fearing empty grocery store shelves, many consumers hoarded food and may still be working through those stocks. Although its growth has slowed, the “direct-ship and delivery/pick-up grocery business continues to hold at levels well above the pre-pandemic norm.”

Restaurant activity increased as pandemic restrictions lifted, but it appears to have plateaued in the last couple of months. Plourd said he also thinks the “work from anywhere” trend could have significant impacts on the restaurant industry as downtown lunch hotspots are less busy with fewer office workers in the area.

Click here to download Plourd’s PowerPoint presentation from the Vita Plus Midwest Dairy Conference.

Category: Business and economics
Dairy Performance