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CORONAVIRUS WORRIES: The uncertainty surrounding the coronavirus outbreak and its potential economic effects is starting to affect the global dairy trade.

Coronavirus fears bring uncertainty to dairy market

Dairy Notes: The all-milk price lowered 40 cents to $18.85 per cwt, which is still higher than the 2019 price.

There’s a lot going on around the world that’s affecting agriculture and dairy.

New trade deals have been signed, Dairy Farmers of America (DFA) has put in a bid to purchase a substantial portion of Dean Foods and the outbreak of coronavirus is spreading globally.

As of this writing, 75,748 cases of coronavirus have been confirmed, most of them in China. The number of infected individuals grows by the day, and a good deal of information regarding coronavirus is available on the World Health Organization website.

It’s no surprise that the coronavirus outbreak is influencing dairy prices around the world. The most recent Global Dairy Trade auction headline index fell 2.9%. Whole milk powder fell 2.6% and anhydrous milkfat fell 5.5%, but cheddar cheese was up 5.3%. GDT is regarded as the leader in global dairy trading. 

The uncertainty surrounding the coronavirus outbreak has derailed hopes for early exports to China under the new Phase 1 trade agreement. 

Drastic efforts are being made in China to control the spread of the virus. There has been a significant impact on food and restaurant businesses that market dairy and other agricultural goods there. Burger King has closed half its China locations, and other chains such as McDonald’s, Pizza Hut, KFC and Dairy Queen have shut down at least 30% of their outlets.       

China is the world’s largest importer of dairy products. The list includes milk powder, liquid milk, cheese and yogurt, with milk powder comprising the biggest share of imports. In 2018, milk powder imports accounted for nearly 70% of dairy imports to China. This includes significant amounts of infant formula.

One reason China imports large quantities of infant formula is because its consumers lack confidence in the safety of its domestic product. In recent years, China has imported significant amounts of powder from Australia and New Zealand. Now that the U.S.-China trade war is over, there is much hope that we will become an even greater supplier of dairy products to China.

Opinions on how long the outbreak will last and how this will affect agricultural trade are mixed.  Some dairy experts and global bank economists think the impact of the virus will be short-lived while others are not so optimistic. World health officials believe that genetic engineers will have a vaccine sometime soon. There are reports that a potential vaccine has been developed in the U.S. and trials are moving to the animal testing phase.   

Milk production increasing

Last year was a period of price recovery in the U.S. and in other countries around the world. Several years of low milk prices brought milk production and surplus stocks into better balance.  Class prices rose steadily throughout 2019, peaked near the end of the year and fell post-holidays, which brought lower prices.

Market jitters surrounding the coronavirus and its potential effects on the Phase 1 China trade deal have also dampened prices early in the year. Most industry observers and the USDA still feel that 2020 milk prices will surpass those of 2019, and this is reflected in monthly forecasts.   

The USDA’s January’s milk production report shows production up 1.2% in the top 24 states compared to January of last year. Production per cow is up 21 pounds over last year and the number of animals is up 16,000 head.

This increase in production is notable considering that 2019 milk production was up only 0.4% from 2018. The USDA report also shows that total annual milk production has increased 13% from 2010. Production per cow has increased 10.6% since 2010 and averaged 23,391 pounds in 2019. 

The average number of milk cows on U.S. farms was 9.34 million head in 2019, down 0.7% from 2018. So, we did indeed witness some herd contraction last year. But since 2010, the average annual number of milk cows has grown 2.3%, according to USDA. 

In the Northeast, January milk production was down in Pennsylvania and Vermont and up in New York. Production in Pennsylvania fell 1.7% while Vermont production fell 0.8%. Milk production in New York was up 2.2%.

Prices decreasing

USDA adjusts its dairy forecasts monthly based on several factors, including the World Agricultural Supply and Demand Estimates and the Livestock, Dairy and Poultry Outlook. 

These latest reports indicate the all-milk price forecast for 2020 has been lowered to $18.85 per cwt, 40 cents lower than last month’s forecast but still higher than the 2019 all-milk price of $18.60.

Based on recent price weakness and lower expectations for cheese and butter demand, 2020 price forecasts for these two products have been reduced. The dry whey price forecast has been raised slightly and the nonfat dry milk price forecast is unchanged.

The 2020 export forecast on a skim-solids milk-equivalent basis has been raised due to higher expected exports of nonfat dry milk and skim milk powder.

USDA is estimating a 1.7% growth in U.S. milk production in 2020. Domestic commercial use is expected to grow both on a milkfat and skim solids basis and is attributed to the robust economy. 

While fluid milk sales are down, consumption of other dairy products are growing. Should the coronavirus situation get under control and recent trade deals with China, Japan, Mexico and Canada materialize as planned, dairy prices could go much higher, and traditionally USDA is conservative in its estimates.      

DFA and Dean Foods

DFA and Dean Foods have reached an agreement for the nation’s largest dairy cooperative to purchase a substantial portion of Dean’s assets.

Currently, Dean’s owns 57 plants and facilities in 31 states. Reports indicate that DFA will purchase all of Dean’s Northeast plants. This would make sense because of these plants’ proximity to the highly populated Northeast, DFA’s already developed Northeast infrastructure and the high quality of milk in this region.   

The deal remains subject to approvals, including from the Bankruptcy Court overseeing Dean's Chapter 11 reorganization and the U.S. Department of Justice. Other interested buyers can submit competing bids through March 31. The entire process is expected to take up to six months to complete. 

The proposed deal has been met with mixed reactions. Some believe that DFA’s control of over 60% of the nation’s bottled fluid milk supply would be excessive. Others feel that it is a natural fit and would provide DFA a better position to negotiate contracts with large retail accounts. 

Latta is a political and economic consultant for Northeast Dairy Foods Association Inc.
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