Guest article Mark Voorbergen: "What will Corona do to milk prices in the remainder of 2020?"

Everyone involved in the dairy sector – including myself - is trying to get their head around the impact on milk and dairy commodity prices going forward. The challenge is that there is no comparison with past events and the timing and speed towards market normalization are in the hands of politicians. The best that I can do for now is try to structure all of the demand events that are directly or indirectly caused by the COVID-19 outbreak. Subsequently I will try to share some thoughts about the most likely scenario going forward.

Corona is causing a multitude of market disruptions

When structuring all of the Corona-related market events it makes sense to categorize them into 3 parts:

1. Short term:

These are all of the current developments that are mainly about production capacity challenges due to the mismatch between retail demand and out-of-home consumption at a time that EU milk supply is near its peak. I would also categorize all of the supply chain challenges in exports and the delayed buying decisions and order cancellations under the “short term” category

2. Mid term:

These are all of the demand developments caused by the shift from out-of-home consumption to home consumption. These will last until the process of normalisation of the society starts again. The way things look at the moment is that this phase may last anything between 2 and 6 months, although the final stages of getting back to normal for restaurants and outdoor events could take even longer.

3. Long term:

This part of the demand side concerns the impact of the economic recession that will inevitably follow on unemployment rates, consumer spending and eventually dairy consumption.

In terms of the milk price for the full year 2020 category 2 and 3 are most important, but at the moment of writing this article commodity prices are mainly dictated by the events categorized under 1.

The figure below aims to add a timeline to most – but not all – essential market events.

How will markets develop going forward in 2020

In Q2 of 2020 milk prices will be dominated by the net impact of declining out-of-home consumption and increasing home consumption of dairy. For the EU the net impact on demand will be slightly negative instead of the usual 0.5% demand growth, if we assume a gradual transition towards normal in the second half of 2020. There are arguments to assume that quarantine may even increase overall dairy demand as consumers have very little to indulge in apart from food. However, the 10-15% of waste that traditionally takes place in out-of-home consumption is avoided. Hence, a small negative for the number of months that most out-of-home outlets will be closed. In the US the negative impact will be bigger as almost 50% of dairy consumption takes place out-of-home. Children are not expected to drink as much milk as they normally do at school where they benefit from the school milk programs and milk, cream, butter and cheese sales through foodservice channels will suffer.

In H2 of 2020 we will see the macro economic impact of higher unemployment rates, low oil revenues and diminished consumer confidence on overall dairy consumption. When people are unemployed, especially in in less affluent markets, they trade in their glass of milk for a glass of tap water and out-of-home consumption continues to suffer. No longer because of quarantine but because of lack of consumer spending. 

So what will all of this do to milk prices in 2020?

The problem is that most of the important farm management decisions in the EU and the US were taken early in 2020 when milk prices were still “OK”, with the prospect of even some improvement. Therefore I think it will be difficult to avoid a supply growth rate of around 1.5%, even though some milk processors are considering supply moderation programs. A supply growth rate of 1.5% is far from impressive under normal market circumstances, but under the assumption of moderately negative demand growth in the Western world, a lot of milk will have trouble finding a “home” in the remainder of 2020. This is generally bad news for milk prices, but the milk price impact for individual processors will be quite different depending on the relative exposure to the out-of-home market and the availability of financial buffers to partly absorb the challenges in the market.

About the author: Mark Voorbergen is the founder and owner of the consulting company Voorbergen Consultancy. He advises dairy companies on markets, strategy and finance. In 2015 he also founded Dairyntel, an international market research company, with two other partners.