Now that the effects of the pandemic are largely behind us, dairy operators find themselves in an interesting situation. Markets are usually driven by either supply or demand, but right now, they’re being driven by both, and that has implications on how you navigate dairy and commodity prices.
Trying to parse what’s being driven by supply or demand requires understanding the macroeconomic factors you should include in your management dashboard. How might these factors impact your price risk management plan? What would cause a management discussion or management action?
Here are some of the macroeconomic factors we’re paying attention to.
Demand side
What's driving the demand side of things? China, for starters. China has been importing a lot of pork as well as all types of agricultural commodities, including corn and soybeans, as the country rebuilds its swine herd. China also experienced weather problems last year that left it a bit short in supply. There’s also the fact that China’s economy was the first to reopen after the COVID-19 outbreak, which accelerated demand. Finally, China buys a lot of dairy products because baby pigs consume large amounts of whey.
Also on the demand side is the fact that the U.S. economy is in the midst of reopening. That means restaurants are expanding capacity and public events are taking place again. It's not just retail channels that are taking all of the demand – other markets and venues, such as bars, restaurants and stadiums, are as well. This requires filling up a pipeline that had been pretty dry.
Meanwhile, climate change and sustainability initiatives are driving demand for renewable fuels. Vegetable-based oils have been in high demand because they’re being converted into biodiesel to meet green energy requirements. These types of initiatives are more on the cusp of being a significant demand driver, but there are a lot of projects being discussed regarding renewable natural gas in the dairy sector, regenerative agriculture, carbon banks and carbon sequestration. It remains to be seen what the economics of all this looks like or what practices will be acceptable, but it’s clear that sustainability is another demand driver.
Supply side
The big story here is the weather. Last year, China experienced excessive moisture and flooding that reduced its yields. South America has been dry all year, and the situation is growing more dire. The U.S. had pretty good yields last year. The drought in the western U.S., however, is rapidly moving east, setting the stage for what could be a challenging growing season this year.
Wild cards
Along with the macroeconomic trends currently in effect, it’s wise to stay on top of issues that could impact your operation in the near future. Geopolitics, for example, may enter the equation as increasing food prices across the globe are creating tension, with the potential to boil over into conflict. Also, the U.S. dollar is trending lower, which aids exports, including many agricultural products, putting upward pressure on commodity prices. This can be positive for dairy exports and negative for dairy farm margins as feed costs increase due to export competition for grains and oilseeds.
The fear right now is that every commodity has experienced a rapid ascent in prices, and, historically, when we've seen that, the subsequent decline is painful. That’s why paying attention to the macroeconomic factors that could impact your operation – from weather conditions in Brazil to exports to China – can help you stay a step ahead when it comes to price risk management.
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Note: The opinions, estimates and projections, if any, contained in this article are those of the authors. BMO Harris Bank endeavors to ensure that the contents have been compiled or derived from sources it believes to be reliable and which it believes contain information and opinions which are accurate and complete. However, the authors and BMO Harris Bank take no responsibility for any errors or omissions and accept no liability whatsoever for any loss (whether direct or consequential) arising from any use of or reliance on this article or its contents. This article is for informational purposes only.
