Substantial reduction in food service demand has been offset by increased retail purchases, processor action to limit supply and government stimulus packages. Anne Lee reports.
While life on the farm maintained some sense of normality during New Zealand’s Covid-19 lockdown period, the sharp sting of market disruption the virus injected globally is likely to leave a swathe of lingering side effects – not the least of which is the dreaded market uncertainty.
It’s sent Kiwi dairy farmers, already bruised by the not so gentle prods from bankers earlier this year, flocking towards risk management tools such as Fonterra’s Fixed Milk price (oversubscribed at every monthly offering since March) and has seen an uptick in interest in NZX’s Milk Price Futures.
Fonterra’s gapingly-wide opening forecast milk price range for the 2020-2021 season of $5.40 – $6.90/kg milk solids (MS) is a stark indicator of just how uncertain market conditions are for the coming year.
NZX has been running a series of webinars aimed at giving farmers more insight into the global market issues that could affect their milk price returns and the effects Covid-19 has had on banking sector outlooks for credit.
Later this month a panel of advisors will discuss how to formulate a hedging policy during a time of crisis.
In late May senior management representatives from three major global processors shared their views on the virus’s effects on supply chains and markets.
The panel participants were Fonterra central portfolio management director Bruce Turner, Arla senior vice president Thomas Carstensen, and Dairy Farmers of America president of risk management Ed Gallagher.
For the most part dairy processors hadn’t been significantly affected by social distancing requirements although some plants in some regions had faced reduction in staff availability due to illness, albeit on a temporary basis.
Turner said Fonterra’s management teams were taking notice of the virus in January and February, trying to make sense of what its effect could be and putting together plans for “what if” scenarios.
Fonterra has a range of plants from modern, lights-out powder plants where there’s limited need for close quarter contact by people to processing lines in other plants where people are standing side by side.
“Manufacturing had to be pretty nimble and figure out on the fly how to keep people safe but there was no significant effect on (the processing side of ) the business,” he said.
Gallagher said there had been an estimated 70-75% drop in food service sales in the US over the initial lockdown period with an increase in retail consumer products as people bought from supermarkets and prepared for staying at home.
Normally about half of dairy sales go to retail and half to food service.
There were bottlenecks initially as supermarkets and processors weren’t quite ready for the surge in demand for consumer products, he said.
“We had these goofy goings-on that would put a dagger in the heart of any dairyman where people could only buy one, two or three gallons of milk at a time – there was rationing of products.”
By the end of May retail sales were still up substantially and food service had begun to increase again so that it was about 40% down on normal trade.
“Net dairy demand is still down in total.”
US market stimulus packages with government and private purchases of dairy products for food aid, along with processor incentives to farmers to reduce supply, had reduced excess supply over demand.
Covid-19 had hit just as the US was coming into the flush of milk production.
There had been some milk dumping but, as co-operative’s own milk price disincentives on production came into play, dairy farmers cut feed rations back, reduced milking frequency and carried out culling so that milk excesses reduced and dumping stopped.
At the same time dairy products were being bought with donations and put into food pantries (foodbanks) adding a little to demand.
Then the United States Department of Agriculture put up US$360m to purchase dairy products for food pantries, stimulating demand.
Gallagher noted that June Class III milk (milk used for cheese manufacture) prices had returned to pre-Covid levels.
He said direct payments for producers timed for the end of June would help farmers’ situations and he expected there would be less inventory and “more rational milk production than there would otherwise have been.”
He predicted almost all of the 1.4% year-on-year growth in milk production for April would have been dumped.
Overall, he believed US actions would have been supportive of global milk prices in the long run.
Carstensen said in Europe there was little to no likelihood of intervention stocks of skim milk powder (SMP) or butter building up to significant levels.
By late May there were just 115t of SMP in intervention stocks even though total availability allowed for as much as 100,000t.
The 115t had come from the Czech Republic and he doubted any product would go into intervention from other European countries.
There were about 100,000t of butter in stock but that was typically needed anyway to meet Christmas demand.
CHANGES IN DEMAND PATTERN
Turner said the obvious change was the drop in food service dairy products such as UHT cream, particularly in China, but this had coincided with a spike in demand for consumer butter and cheese.
The least risk option for many companies was to convert milk destined for products where demand had dropped into more storable products such as SMP and whole milk powder, and the market did see companies do that, he said.
Some of the big players in China were forced to dry more milk to powder and, while inventories had grown, he expected they would be worked through quickly.
He said Fonterra’s team had done a great job at staying close to customers, understanding their challenges and feeding that information back so management could plan and evolve solutions quickly.
Carstensen said there were unlikely to be any permanent changes to product mixes coming out of Europe although, as in other regions, dairy that would have been destined for food service was diverted to consumer products such as butter.
Already the opening of restaurants in some countries such as Denmark in mid-May had seen a sharp reversal of the decline in products such as mozzarella.
Gallagher said while there had been a sharp drop in food service demand from March to the beginning of May, demand was rising just as sharply as lockdown restrictions began easing.
There hadn’t been any challenges for US exports of SMP apart from Mexico where lower oil prices, the effects of Covid-19 on the population, and the low value of the Peso had caused a drop in demand.
He’d been pleasantly surprised with Chinese demand and GDT auction prices.
“I’m a lot more optimistic than a month ago.”
