The world is emerging from the COVID-19 pandemic, and that’s good news for dairy demand.
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An economist at the University of Minnesota warns of a potential oversupply of milk. Sierra Dawn McClain/Capital Press File
Marin Bozic
University of Minnesota

 Global economic growth is forecast at 6% year over year in 2021 and 4.4% in 2022. In the U.S., that growth rate is expected to be 6.4% this year followed by 3.5% in 2022.

“In general, growth both domestically and internationally is good for demand for ag exports from the United States and dairy exports in particular,” Marin Bozic, an economist with the University of Minnesota, said in a webinar sponsored by Northwest Farm Credit Services.

In addition, U.S. foodservice demand is returning, and aggressive government stimulus in the U.S. in 2020 increased personal income, he said.

Not surprisingly, that government stimulus has resulted in more milk production, he said.

“We’ve actually been seeing some quite impressive, and I should maybe even say concerning, growth rates in 2021,” he said.

U.S. milk production is showing growth rates of 3% year over year, and that is not sustainable unless the growth is export-driven, he said.

“The number of (dairy) cows in the United States is the highest it has been since 1994 … and we don’t see the stopping signs yet,” he said.

“I think that a lesson learned from the previous two decades is that you don’t get away from consequences of rapid herd growth,” he said.

Despite economic growth, the increase in foodservice demand and all the recovery, dairy farmers’ bullishness is concerning, he said.

“People are expanding. They are well positioned to expand financially, and we usually end up, you know, eating our shoe 12 to 24 months later whenever we have such booming optimism in the industry,” he said.

In this case, feed costs will curb milk production from what it would be otherwise. But there’s still likely to be oversupply given the herd size and protection for smaller producers under the Dairy Margin Coverage program.

He’s expecting the program to pay between $2 and $3 per hundredweight this year on milk protected at the $9.50 per hundredweight margin, he said.

That means dairies with about 200 cows or less, whose annual milk production qualifies for lower program premiums, can be very profitable because they’re not buying all their feed on the open market, he said.

That entire channel that was a relief valve in previous times of oversupply won’t be under pressure to exit if there’s oversupply and milk prices decline,” he said.

So it’s the dairies with 500 cows or more that are going to have to carry the burden, he said.

“The good news is that we still have exports,” he said.

Oversupply would lower U.S. product prices, and a good part of the oversupply burden would be borne by U.S. competitors, he said.

“So we’ll be able to export our oversupply, if you will, to some extent — but I wouldn’t bet my farm on it,” he said.

Larger dairies that can only protect a small portion of their milk under Dairy Margin Coverage need to have a risk-management plan in place, he said.

“The traditional relief valve will not be there or at least it will be muted this time around,” he said.

Last month, 14 of our dairy farms in Maine, as well as dozens of dairy farms across northern New England, got an unexpected and disappointing notice from Danone of North America saying that they were discontinuing their contracts with our organic dairy farmers in Maine, New Hampshire, Vermont and elsewhere.

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