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Dairy farms count on food-service demand

Issue Date: April 21, 2021
By Ching Lee
Dairy farmer Case van Steyn interacts with one of his cows at his farm in Sacramento County. As more restaurants and other food-service venues reopen from pandemic-related lockdowns, demand for milk and other dairy products is expected to rise, but analysts say greater milk output from U.S. dairy farms could pressure market prices if demand slows.
Sacramento County dairy farmer Case van Steyn checks on the progress of a milk truck collecting milk from his farm.

Reopening of restaurants, schools and other commercial kitchens should boost demand for milk and other dairy products, but analysts say food-service sales will need to see marked improvement to absorb the larger supplies of milk flowing from dairy farms.

"We really need to see demand firing on all cylinders if milk production holds up," said Tiffany LaMendola, vice president of risk management for Blimling Management Services in Wisconsin, who also works as a dairy economist for Western United Dairies.

With the national milking herd at a 30-year high and a seasonal increase in production that typically occurs in the spring, milk is currently plentiful, she said. If supplies stay up and demand falters, dairy market prices could come under pressure, she added.

U.S. milk production rose more than 2% in 2020, according to the U.S. Department of Agriculture, which also predicted daily milk output per cow will increase nearly 1.7% this year. That would be the highest rate of growth since 2014.

"The problem is that, traditionally, demand only increases by 1% a year, and we've got twice as much (additional) milk as we have an outlet for," said Joel Karlin, a market analyst for Western Milling in Goshen.

Though dairy product sales to food service have picked up and retail sales remain robust, Americans' future buying habits are harder to pinpoint, LaMendola said, adding that she does not expect both food service and retail trends will hold.

"Some people are really, really tired of cooking and they're going to get back out and go back out to eat," she said. "But I've also heard some stories of people finding themselves in their kitchen and have enjoyed learning how to cook, and may keep that up."

Pointing out that more than half of dairy products such as butter, cream and certain types of cheeses are consumed away from home, Karlin said the key to sustaining growth in demand is the return of dining establishments and people eating out more. Some retail sales will "tail off," he said, but those losses will likely be offset by increased consumption at restaurants.

"People's income is up, their spending is up and, more importantly, their confidence is up," he said. "They have a desire and actually a fairly large stockpile of money that they've accumulated. I think that really bodes well for dairy demand going forward."

Karlin said he also thinks the dairy category has gotten "a little bit of its halo back" in the past year, as people have opted for more nutrient-dense foods during the pandemic and "consumed a lot more dairy products than they had in the past"—a trend he said he thinks will continue, at least for a while.

Another bright spot is a resurgence in dairy exports as other countries emerge from the pandemic, he said. Reduced trade tensions with Mexico and China, the nation's largest dairy importers, have been beneficial, he said. A lower-valued dollar and competitive prices also have helped. Even a 1% increase of milk going to foreign markets "can have a major impact on prices," he added.

One potential negative for demand arose from the discontinuation of the Farmers to Families Food Box program, which launched last year in response to market disruptions caused by pandemic lockdowns. USDA announced last week it would end the program after May, in favor of supporting more traditional food-aid programs.

The food box program has been an important outlet for dairy products, particularly cheese, LaMendola said, noting that government purchases under the program helped send cheese prices to record-high levels last year after markets crashed early in the pandemic.

Unlike other food assistance programs such as food stamps, Sacramento County dairy farmer Case van Steyn said he thinks the food box program is more beneficial to dairies because USDA requires a certain amount of dairy products be included in every box. This also benefits the people receiving the aid, he said, because of the enhanced nutritional value in those boxes.

With U.S. milk production continuing at its current pace and cancellation of the food box program, Kings County dairy farmer Joaquin Contente said he feels "even more uncomfortable" about where the economic outlook for dairies may be headed.

Contente said he would like to see all U.S. dairy processors and cooperatives impose supply management strategies, noting that some of them have had such programs in place since last year, to discourage dairy farmers from producing more than their base amount.

Van Steyn said the increased price of feed may affect milk output, with farmers needing to tighten their belts. He noted the lack of rain this year has resulted in "terrible" yields on his silage crops, and that he would need to buy more on the market. Because of reduced water supplies and farmers fallowing more fields, he said California acreage for forage crops such as alfalfa hay tends to drop, shortening supplies and raising the cost to feed livestock.

Though it's still early to know how the new U.S. corn crop will turn out, LaMendola said rising grain prices will certainly squeeze dairy farmers' margins. She said that will eventually slow milk production, as farmers are either forced by processors to cut back or need to because costs have risen.

Noting that culling rates ran light last year, she said it will be interesting to see if that is one option farmers use more this year to reduce their costs, particularly if higher cattle prices incentivize culling.

Higher feed prices could lead to some reduction in the nation's cow herd, Karlin said, but improved cow genetics and efficiencies on the farm have steadily increased milk production per cow, despite fluctuations in cow numbers.

By selling more of their less productive cows and replacing them with higher-quality animals, dairy farmers could in effect increase national milk output, Contente said. Even so, he said he does feel "the worst is behind us" from the pandemic—though he said he remains concerned about spikes in COVID-19 infections that could led states to lock down again.

"Whether it's through vaccinations or herd immunity, we're going to get past this, and we'll get back to some sort of normalcy," he said.

(Ching Lee is an assistant editor of Ag Alert. She may be contacted at clee@cfbf.com.)

Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item.




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