Spike in Retail Sales Supports Dairy Demand
In the most serious and widespread heath crisis the world has seen since the 1918 influenza pandemic, restaurants are temporarily closed across much of the nation and in Europe. Some of that lost food demand has been picked up by increases in retail sales as concerned consumers stock up on staples, including milk, ice cream, butter, yogurt, cheese, and frozen foods, including cheese-laden entrees such as frozen pizza. However, it will be weeks, if not months, until analysts know whether the current spike in retail sales will be enough to offset vast losses at foodservice, with restaurants and bars now closed in a majority of states.
“From a consumption standpoint, the nation’s response to Covid-19 mimics preparation for a hurricane or winter storm, while restaurant traffic echoes a severe economic downturn,” says Sarina Sharp, analyst with the Daily Dairy Report. “Both comparisons suggest stronger sales at retail, especially for fluid milk and frozen foods. Fluid milk sales have been on a steep downtrend for the past nine years, but year-over-year demand actually improved in both 2009 and 2010, when consumers were on a tight budget and eating more meals at home.”
With restaurants either restricted or closed in most states, the National restaurant association estimates that the industry will lose $225 billion, about 25% of its annual revenue, if it remains shuttered for three months to help stem the spread of Covid-19. More than 30 states have also closed schools and universities, sending students of all ages home for anywhere between two weeks and the rest of the academic school year. “School closures are likely to negatively impact fluid milk demand, but so far this has been more than offset by very strong at-home consumption,” Sharp notes. “Numerous grocery chains project increases of 50% for fluid milk, and sales of milks with extended shelf-lives are also likely to be especially strong.”
About 8% of annual milk sales are served by the nation’s schools, and nearly 22 million schoolchildren depend on free or price-reduced school lunches, according to the School Nutrition Association. Because many of these low-income students receive most of their daily nutrition from school meal programs, efforts are being made to provide them with much-needed nutrition. Several states have requested waivers under USDA’s Summer Food Service Programs, which allow schools faced with an unexpected closure to continue to provide meals to low-income students. To receive federal funding, these meals must contain milk, and schools across the country have set up grab-and-go meal stations for these students.
“While U.S. dairy exports slowed noticeably during the global recession in 2008 and 2009, domestic dairy consumption was more resilient,” notes Sharp. Domestic butter sales were up 6.1% year-over-year in 2008 and 0.5% in 2009. Milk powder consumption rose 4.9% in 2008 and 29.8% in 2009. “It’s likely that inexpensive nonfat dry milk and skim milk powder found its way into more ingredient lists for packaged foods in 2008 and 2009,” Sharp says. But in later years, “some of these long-lived products languished on shelves, as domestic disappearance for these products slumped 13.2% in 2010.”
According to Sara Dorland, analyst with the Daily Dairy Report and managing partner at Ceres Dairy Risk Management, milk powder prices have suffered more than any other dairy product category during the ongoing Covid-19 pandemic because powders are primarily export products. “Their supply chains are most complicated by international freight, which has been entangled in a backup at Chinese ports since February, and global consumption has become difficult to predict,” Dorland says.
For dairy markets to hold up, Dorland says that “dairy demand at retail would need to offset the entirety of foodservice and exports to keep dairy markets on track, and that could be a tall order despite the recent run.” In a typical year, she adds that U.S. exports account for more than half of annual milk powder production. “Higher fluid consumption would be a small dent by comparison,” she says. Moreover, it appears demand is drying up for Italian cheeses and cream-based products once destined for foodservice. “Demand for these products appears to have slowed to a crawl, which could send milk back to commodity processors,” Dorland says.
Sharp notes that domestic consumption of American cheese improved in both 2008 and 2009, which could also occur during the Covid-19 pandemic. “This year, sliced cheese sales could accelerate earlier than usual, as grilling season is likely off to a blazing start due to mild weather and social distancing,” she says. However, Sharp cautions that sales of cheeses other than American, mostly Mozzarella and Italian-style cheeses, retreated in 2008, likely due to diminished pizza demand. Today, unless the economic fallout deepens, consumption patterns during the Covid-19 pandemic could favor pizza sales, with takeout and delivery now the only restaurant option in many states.