The entire U.S. dairy industry is now deep in crisis mode, seeking ways to contain the price and supply chain damage brought about by COVID-19 and wondering when and how it might eventually emerge from the current emergency, according to the latest “Dairy Market Report” from Dairy Management Inc. (DMI) and the National Milk Producers Federation (NMPF).

“The coronavirus has so suddenly transformed the global marketplace that U.S. dairy statistics, which, by their nature, look backward, resemble glimpses from a vanished world,” noted Peter Vitaliano, vice president of economic policy and market research for NMPF.

These factors, he said, compound a dairy market where domestic commercial use in all products during the first months of 2020 was already weakening, although U.S. dairy exports were strong.

In the U.S. Department of Agriculture’s latest “Livestock, Dairy & Poultry Outlook,” USDA economist Jerry Cessna said the dramatic decline in demand for dairy products has shocked milk processing channels. He relayed that farm milk production had been steady to increasing, with mostly mild weather in all regions, and that cheese, butter and dry product inventories had all been growing.

At the onset of COVID-19 outbreaks in the U.S., foodservice demand for cheese became extremely weak, and butter makers were looking outside their localities for additional storage. While demand for fluid milk was strong just as the virus emerged in the U.S., it slowed in the following weeks.

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“This overwhelming imbalance between supply and demand has caused considerable handling problems,” he said. “Many loads of milk from various parts of the country are not being processed under these conditions. Such milk is often spread on fields as fertilizer, added to manure lagoons or fed to animals.”

Prior to the emergence of COVID-19, the “Dairy Market Report” pointed out that the national dairy cow herd was entering into another cycle of expansion, setting the stage for what could have been 2-3% year-over-year increases in milk production. Vitaliano also noted that butter and nonfat dry milk stocks were building, leading to weakening prices, but cheese was still holding up, relatively speaking. The Dairy Margin Coverage program's margin in February was also still over $10/cwt. -- above the level necessary to trigger federal assistance. In late March and early April, however, as it became clearer that total demand for U.S.-produced milk and dairy products would suffer serious losses, Vitaliano said cheese prices collapsed in the CME cash markets, while butter and nonfat dry milk cash prices continued to erode.

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While the overall impact of COVID-19 remains unknown, the report did note that U.S. dairy exports showed important gains during the December through February period. Almost all of the high-volume dry skim ingredient exports showed double-digit volume gains over a year earlier. The exception was dry whey, which Vitaliano said finally snapped a 17-month string of China-driven annual losses in February, to register a slight gain for the period. Butter, milkfat and American-type cheese exports were down by double digits, but exports of all other cheese were almost flat. In total, exports as a percentage of U.S. milk solids production increased by a respectable 1.7% from a year ago during the period.

Regarding prices, Vitaliano said Federal Milk Marketing Order prices for March revealed the effects of the COVID-19 just starting to show up in the monthly dairy price statistics. Still, butter prices had already been weakening since late last summer and were more than 50 cents/lb. below a year ago. Nonfat dry milk prices, on the other hand, had been improving steadily through February, when developing weakness in world markets reversed this trend. Cheese prices were still above year-ago levels but had started to weaken.

Vitaliano reported that Class I, III and IV prices were all lower in March than a month earlier, particularly the butter and powder-driven Class IV price. March retail cheddar cheese and butter prices were down from a month earlier, while fluid milk at retail was actually higher for the month and year.

According to the report, USDA’s April dairy outlook -- the first forecast to incorporate market impacts of the COVID-19 pandemic -- projected a starkly lower 2020 average milk price than it had just a month earlier. USDA’s April forecast of the 2020 U.S. all-milk price was $14.35/cwt., almost $4 below its March estimate of $18.25/cwt. At the same time, CME dairy futures were indicating a 2020 all-milk average price in the range of $16.35-16.45/cwt.

“The futures indications for this year’s prices had dropped fairly steadily through March but bottomed out at around $16 at the end of the month and even rebounded a bit since then, even in the face of the late-March/early-April CME cash market meltdown,” he said.

USDA’s April forecast held its estimate of 2020 annual milk marketed unchanged from a month earlier, at 221.2 billion lb., but Vitaliano said a new footnote indicated that this estimate included milk that would not be processed.

“This would be milk that was dumped but for which producers would receive some level of compensation, which would be consistent with its low estimate of average milk prices for the year,” he added.

Dairy industry leaders shift focus

COVID-19 caused a very large imbalance in the dairy supply as foodservice basically ground to a screeching halt, retail sales spiked on consumer food hoarding, schools were closed and food banks were running out of products. As such, dairy industry leaders recently announced a shift in efforts. Industry leaders reported working around the clock to reallocate supply where it is needed the most. Further, four emergency action teams were established to solve problems, and staff had realigned to address the most pressing needs.

“There is not one answer in terms of what the [dairy] checkoff can do," DMI chief executive officer Tom Gallagher said. "We have to try a ton of different things, and hopefully, that will add up.”

U.S. Dairy Export Council CEO and president Tom Vilsack said the pandemic “has been a gut punch to commodity prices across the board for American agriculture, but probably most significant for the dairy industry and dairy farmers.”

Due to the extraordinary challenges, DMI leaders outlined a shift in business that they say will help farmers weather the growing challenges, including ensuring access to school meals, helping food banks meet growing need and working with domestic and international partners to realign the supply of dairy products to those in need.