Dairy outlook: COVID-19 lockdowns impact cheese and butter

Global dairy markets continue to experience deep impacts from COVID-19 due to lockdowns in many major countries, disrupting trade and shutting large segments of the food market to consumers. Maxum Foods predicts the lockdowns will have profound impact on the upstream supply chain, causing changes in product mix in response to major shifts in product demand — mainly due to weaker cheese demand — to avoid large production of mozzarella and processed cheese. The short surge in retail sales, as consumers shifted to eating at home, has eased.

In the US, Cornell University agricultural economist Andrew Novakovic is warning that small dairy farms and small processors are facing dire economic straits — given the foodservice industry disruptions and export demand destruction.

“I think what we’ll find is that small farms and small processors are going to take a big hit,” Novakovic said.

“Unfortunately, we are just coming into the big cheese and butter producing season and moving on the downside for fluid milk. Smaller specialty cheese plants are closing because their customer base is so heavily skewed to foodservice. The plants that make the base cheese that ultimately ends up as processed cheese are similarly in tough straits but not totally shut. Cheddar plants are full, but are shifting more staff to ‘converters’, who take big blocks of cheese and turn it into the little packages one buys in a grocery store. Those ‘cut and wrap’ companies are running overtime.

“Fluid milk plants had a big surge after all the panic buying but the industry is guessing it will settle down to an increase in sales of 10–15%. That being said, beverage milk sales tend to decline as the weather warms up, so this positive bump will diminish over time,” Novakovic concluded.

The Maxum Foods analysis of the global dairy commodities market is as follows:

Skim milk powder

Skim milk powder prices have fallen with the expected rapid stock build — initially as a result of slowing of global trade with restrictions on freight and logistics. The risk has escalated with the expected increase in SMP and NFDM production as major producers avoid production of cheese exposed to foodservice markets which have been decimated by COVID-19 lockdowns.

Whole milk powder

European spot prices rose in March after softening in February as global markets continued to be disrupted by the spread of COVID-19. NZ values dropped under US$3000/t mid-March and continued to fall through the month. NZ shipped prices rose, widening the gap to South American shipped values. WMP prices cannot remain immune from falling protein and fat values. The weaker global economic outlook — especially with the uncertainty ahead for oil-producing countries — is likely to see further preference for full fat milk powder, which may improve share in more traditional WMP markets.

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Cheese

Global cheese markets are likely to be heavily impacted by the sudden loss of sales into foodservice. The US industry is most exposed with almost 50% of cheese sales reliant on foodservice outlets. Global cheese trade had a long sustained run of growth from Q4-2018 into early 2020 and grew 7% in the 3 months to January.

Butter

Butterfat markets have weakened with the risks to demand for butter, AMF and cream from the shutting of foodservice channels in major markets. Butter markets in the EU and Oceania were delicately poised prior to the impact of major lockdowns in March 2020. Prices had steadied in EU wholesale markets as demand improved and export markets (only about 10% of EU output) surged.

Whey

Commodity whey prices have been caught in the impacts of COVID-19 on the wider dairy complex, which continues to be weighed by the contraction of demand for commodity whey in the Chinese and other Asian animal feed markets. US dry whey output increased 10% in the 6 months to January as producers scaled back WPC output and demand for dry whey improved, including some switching from milk protein use with steadily rising prices.