April 10, 2020

Covid-19 Leaves Trail of Dumped Milk and Supply Disruptions

 |  By: Fran Howard

Covid-19 has left a wide swath of destruction in its path. Out of all the agricultural markets, Class IV products have been hit particularly hard.

“Among the major agricultural commodities, only lean hogs have suffered a steeper decline than Class IV futures,” says Sarina Sharp, analyst with the Daily Dairy Report. “Rising inventories and slowing exports have dragged down milk powder prices over the last two months.” 

Inventories were already weighing on butter values in February and early March but declines in the butter prices accelerated in late March. Over the past several weeks, CME spot butter prices have sunk more than 50 cents to 10-year lows.

“The dairy supply chain is in shambles,” notes Sharp. While some processors are running at full capacity, others are operating below capacity or have closed due to a lack of orders or an absent workforce. “Hundreds of loads of milk are being poured down the drain or into manure lagoons,” Sharp says. “In the past, when oversupply forced the industry to dump milk, processors would often discard the skim and salvage the cream. But today, even cream cannot find a home.”

As the majority of bottlers continue to keep the nation’s grocery store shelves supplied, more surplus cream has become available. At the same time, she notes that the shuttering of restaurants and schools across the country has nearly halted the flow of butter, cream, sour cream, processed cheese, ice cream, and other high-fat products through foodservice channels.

Cream is typically traded as a multiple of the butter price and cream multiples have reached levels not seen in decades, according to Sharp. “A high cream multiple signals that cream is scarce, and butter churning typically slows accordingly,” she says. “During periods of low multiples, churns run hard to convert inexpensive cream into butter for storage.”

While cream multiples have averaged near 1.25 in the East and Central regions and 1.14 in the West since 2018, Sharp notes that last week multiples dropped well below par in all three regions. “At current values, churns are likely running hard and piling up product, which suggests that the butter market could be burdened with oversupply long after consumers return to their pre-Covid way of life,” Sharp notes.

Industry sources estimate that with foodservice basically shutdown, there’s about 10% more milk than can be processed right now. For weeks, many dairy cooperatives have asked producers to cut production or have penalized them for overproduction. This week, the National Milk Producers Federation and the International Dairy Foods Association submitted a joint proposal to USDA designed to help producers deal with the market impact of Covid-19. The proposal includes a temporary supply management plan as well as a proposal to reimburse producers for dumped milk. 

The supply management plan would pay producers $3/cwt. if they cut their output by 10 percent from March 2020 production during the six months from April to September. Payment would be suspended if the average of the Class III and IV prices were to exceed $16/cwt. in any given month. The proposed Milk Disposal Reimbursement program would compensate producers at the lowest current class price for milk dumped due to supply chain issues.