A pandemic, by definition, affects the entire world. COVID19 has affected us all in our personal, family, working and farming lives. While farming and food production have been declared essential sectors from the word go, and have been protected from much of the lockdown provisions in recognition of the importance to populations of a solid food supply chain, the closing of the restaurant trade has been hugely disruptive for markets, product prices, and even milk production.
The short-term bout of “panic buying” has eased in most markets, and has only partially offset the losses from food services. That said, new trends for home cooking and home baking in particular while lock downs are imposed and schools are off, are having interesting impacts on the sales of flour, eggs, buttermilk, butter, among other products.
Irish dairy farmers have been rattled by social media videos of farmers spilling milk in the US, Canada, and very close to home in the UK.
The Irish dairy sector is generally less exposed to the food services sector than the dairy industry in many larger countries like the US, the UK, France or Germany – though some of our milk purchasers have developed good businesses in those areas, too.
However, the Irish sector is not insulated from those international trends either. Milk and dairy products that would have normally been utilised by restaurants, cafes and school/college canteens are now floating about without a home and creating price pressure. A good example of that is the pressure on butter prices from surplus cream which would normally have gone to restaurants and cafes, and which, within two week, took €700/t off spot butter prices (to a current, just above intervention level of €2500/t).
There is very real, and legitimate concern that the pandemic could stress critical human resources in Irish plants and a vivid awareness of just how much contingency planning and hard work is going into ensuring every litre of milk is collected and processed over the nervous peak milk weeks of May.
However, Irish co-ops trade prudently, and it is clear they have undoubtedly sold at least some of the spring milk forward at a time before COVID19 when the outlook was for a very good year for dairy. Yet, far too early some co-ops have started cutting milk prices by far too much – up to 2c/l.
No doubt, there are difficult times in the months ahead as it will take time for sufficient “normality” to creep back in as lockdowns are eased in Asia, Europe, the US and beyond, economic activity returns, and restaurants and cafes are reopened.
There are also concerns that there will be longer-term economic damage done to the purchasing power of consumers who may have lost their job, temporarily or permanently.
Clearly, there are rocky times ahead for the dairy sector, with concerns over milk prices well placed, at least for the medium term.
But people need to eat, and the fundamentals which govern demographics and food demand trends remain before and after the pandemic.
In a number of SE Asian countries and in China, where the pandemic had a head start and drastic lockdown measures resulted in an earlier return to higher levels of economic activity, restaurants have begun to re-open. Food imports into China have been prioritised, and Bord Bia who have reactivated their offices there report a return to activity – even if it would be an exaggeration to call it back to “normal”.
It is understood that parents had stockpiled infant formula at the beginning of the pandemic, and are now seeking to replenish their stocks with imported product, which is only starting to come back in. This should be good news for Irish producers, and even if indirectly, for Irish milk/powder demand.
The lockdowns in Asia had blocked containers and reefers at ports, reducing availability and increasing costs. The resumption of activity in ports means these are now starting to shift and move, though the cost remains high.
Market price and processing capacity problems will impact supply volumes
The COVID 19 impact on dairy markets is due to the shock on demand rather than one of oversupply. Nonetheless, a global fall in milk prices and stresses on processing capacity – which have led to some very regrettable, but unavoidable spillage in some countries, including the UK, and to some measures to reduce production being envisaged in some EU countries – will impact volumes this year.
Added to this, feed ingredients, many sourced from China, are expected to be more problematic to obtain in the short term, increasing costs and reducing availability. This should also impact margins and volumes from higher cost milk producing countries.
Hence, a supply correction is very likely during 2020, which will offset some of the demand induced imbalance – in time.
Futures markets suggest higher prices for the last quarter
This week, the European futures markets at EEX saw smallish volumes of SMP (approx. 1600t) trade for €2000 or just over for the period of September to December 2020.
Also this week, around 1500 t of butter were traded at prices of around €2950/t, for physical exchange between October and December 2020.
These compare, respectively, with spot prices last week of €1887 (food grade SMP), and €2583, in both cases the average of Dutch, German and French spots.
It is also worth comparing them with the current average EU MMO price (12th April 2020), which has been falling since early February for SMP, mostly due to the impact of COVID19.
As many expect intervention price levels to be reached soon, at least for SMP, traders in the EEX are clearly expressing a more optimistic view of powder markets than spots and current trade suggest, and an improvement on butter prices also.
Sources: IEGVu, EEX, EU MMO
So, a rocky road ahead, with economic impacts potentially lingering past the end of the pandemic, if the IMF is to be believed. However, with very high levels of intervention by governments to support industry and the economy in most Western countries, we could also see a relatively prompt recovery. Time will tell.
Meanwhile, IFA is seeking market supports through APS for butter, SMP and cheese, and financial supports to sustain farmers’ cash flow at lower costs and keep them liquid through a difficult period for farmgate prices.
Human health is always paramount, so stay safe!