Mike McCully is owner of The McCully Group LLC, Granger, Indiana, and contributes this column for Cheese Market News®.
Aside from the devil and his new girlfriend in the match.com commercial, there were very few people who were sad to see the end of 2020. A new year brings hope and promise, even more so this year with the COVID vaccine and a return to normal pre-COVID life. 2021 will also see a new U.S. president and narrow majorities in both the House and Senate. It is too soon to tell what new policies and regulations will come out of Washington. The optimist in me hopes there can be some bipartisan progress made on areas of shared concern. However, the pessimist in me can see two years of bickering with little substantial policy changes being made.
As the U.S. and world moves from a COVID to post-COVID world, there will be many impacts, both large and small, and new challenges not envisioned today. In general, people will want to get back out and enjoy life, eating at restaurants, going to ballgames, museums and movie theaters, and spending time with family and friends. For dairy, this should be positive as foodservice demand should return to normal levels, although it may be 2022 before a full recovery is seen, particularly for higher-end restaurants. On the downside, as consumers shift to more out-of-home dining once again, they will shop less frequently at grocery stores, so retail dairy demand is expected to drop back to pre-COVID levels. This means modest growth in cheese and butter, and declines in fluid milk. Getting kids back to school will help offset some of that loss, so hopefully, overall dairy demand will look a lot like it did pre-COVID.
For dairy and food companies, this shift in consumer demand from retail back to foodservice will require some advance planning. If the shift is gradual, then most companies will be able to slowly transition volume out of retail products back to foodservice products. But if there is a rapid shift where the country opens back up suddenly, the challenge will be to get enough products in the right packaging quickly. In short, it would be the mirror image of the problems encountered by the food supply chain last spring. Assuming there is widespread vaccine usage by mid-year, food companies should plan to start the transition in their demand in the second quarter.
Financial markets have already largely priced in a post-COVID recovery, so there is some risk to the downside, especially if harmful economic policies start to evolve from Washington. There are also some watch-outs in the global economy. For now, it appears Brexit hasn’t created any large-scale disruption, although there will be plenty of small problems to work through in the coming months. There is also a question of what the global economy looks like in a post-COVID world. High unemployment, business closures, huge government debt, an easy monetary policy and other factors will have long-term impacts on the economies of many countries.
For commodity markets, including dairy, prices in 2021 have seen some inflationary impact as traders start to price in post-COVID demand. As a backdrop, low interest rates and a weak U.S. dollar are supportive of higher commodity prices. My latest forecasts for dairy prices were increased given the recent news of another round of USDA Food Box purchases. But this will lead to higher prices and more milk, so the market will eventually have to deal with that. 2020 proved how difficult it can be to forecast dairy prices, and 2021 will likely hold some surprises, so it’s worth spending time to plan for different scenarios.
2021 will also likely feature a number of government dairy policy activities. The recently passed stimulus bill provides another round of support to agriculture and food programs. There is definitely a need for additional support to various feeding programs, but the question will be what form those take and what impact will they have on dairy markets. The Food Box program in 2020 was both very successful in getting food to people that needed it and very disruptive to the cheese market. It looks like this will continue in early 2021 with additional measures such as the Dairy Donation program yet to be defined.
Some age-old questions around milk pricing will likely get more attention in 2021. The uproar about negative producer price differentials (PPDs), depooling, the Class I price formula and other issues are symptoms of a larger problem. The federal milk marketing order system was designed to regulate Class I milk in local markets. Quite simply, it was not designed to regulate a national, and increasingly global, marketplace where the amount of Class I milk is not the dominant use of milk anymore. Unfortunately, given the complexity of milk pricing, and various vested interests, even small changes are difficult to make. However, one change that is on the horizon is an update to make allowances. Updated cost data should be available in early 2021, which could trigger the start of the process to have a national hearing to make changes to the current make allowances.
Finally, discussions around the next farm bill should start in 2021, but with a number of new faces in key positions in Washington. Both the Senate and House agricultural committees have new chairmen, along with a new administration with a Secretary of Agriculture that is both experienced in the role and knowledgeable in dairy. Will U.S. dairy policy get a fresh look, or will other issues take precedent and dairy remains with the status quo? Given the incoming administration’s priorities, it is likely dairy, and agriculture in general, will look to play a bigger role in addressing climate change.
In a post-COVID world, we will be able to travel once again, going to meetings and conferences, visiting employees, suppliers and customers, and maybe reducing our time spent on Zoom calls. When asked, most in the dairy industry say the people are the best part of it. The industry proved that as it worked through COVID and will adjust again as we move back to a “normal” world. I think all of us look forward to seeing each other in person, grabbing a beer or dinner, playing a round of golf and working to make the dairy industry better.
The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.