With apologies to English singer-songwriter Adele, a look back at 2021 could be characterized by a line in her song titled “Hello,” reflecting dairy’s current relationship with past conditions and times.
With the COVID-19 pandemic dominating nearly every aspect of our personal and professional dairy lives in 2020, this year has provided at least a partial recovery from the headaches and other symptoms felt a year earlier.
So, hello, from the other side.
First and foremost, the partial move to the other side of the pandemic has resulted in a return to face-to-face meetings and gatherings after more than a year of living virtually. World Dairy Expo came back, as did many dairy cooperative annual meetings and producer educational opportunities. Even masks couldn’t hide the smiles of dairy friends.
2021 by the numbers
Despite the amazing resiliency that surfaced last year, dairy wasn’t able to fully vaccinate itself against the ongoing management and financial symptoms of the pandemic, despite some pretty strong USDA financial boosters.
Coming out of the initial market shock of the COVID-19 pandemic, the numbers of cows in the U.S. dairy herd started to build in the second half of 2020 and continued through the first half of 2021. Peaking in May, cow numbers topped 9.5 million head, the highest number dating back to the fourth quarter of 1994, a span of 27 years.
With lower milk prices and higher feed costs adding financial stressors, the pace of cull cow slaughter picked up in June and surpassed year-earlier weekly totals through the end of the year. By October (the latest estimates available at Progressive Dairy’s deadline), U.S. cow numbers had dropped by about 107,000 from the May 2021 peak and were the lowest in more than a year.
The higher slaughter numbers, however, don’t account for the full decline in cow numbers. Another factor may be less availability of dairy replacement heifers as more producers breed at least a portion of their herd to beef sires.
Erick Metzger, general manager of National All-Jersey Inc., notes National Association of Animal Breeders (NAAB) data shows a substantial jump in domestic beef semen sales beginning in 2018, up 59% from 2017. Sales in 2018 would affect calves born in 2019, which would impact heifers entering milking herds in 2021.
That trend could continue. NAAB data for 2019 and 2020 indicates an even greater increase in domestic beef semen sales; 2020 sales were up 78% compared with 2018, with some of the increase used in dairy cattle. U.S. dairy cow numbers could face constraints in the number of available replacement heifers for years to come.
Weak margins and unintended consequences
At $7.14 per hundredweight (cwt), the U.S. average dairy farmer income over feed cost margin calculated under the Dairy Margin Coverage (DMC) program hit an eight-month low in January 2021. Unfortunately, that turned out to be a high point for most of the year. Average monthly alfalfa hay, corn and soybean meal prices each moved to seven-year highs at some point in the year. The DMC margin fell below $7 per cwt for eight consecutive months through September, hitting $5.25 per cwt in August, a record low under DMC or its predecessor, the Margin Protection Program for Dairy (MPP-Dairy), dating back to 2014. (October DMC margin was announced after Progressive Dairy’s deadline.)
Those weak margins translated into hefty indemnity payments for those insured under DMC. Through Nov. 1, total DMC payments had topped $1 billion, averaging $56,726 per enrolled dairy operation, with a quarter of the year yet to go.
In total, the National Milk Producers Federation (NMPF) estimates federal pandemic-related financial assistance since the start of the pandemic will hit $6 billion. That aid, coinciding with other programs and policy changes, yielded some unintended consequences.
Seeking to feed the hungry, the USDA purchased a lot of dairy products to fill food boxes, with an emphasis on cheese. Without those purchases, milk prices paid to dairy farmers would have been disastrous. With those purchases, milk marketing became disorderly and milk prices paid to dairy farmers were volatile and unequally distributed.
In the second half of 2020, cheese-related Class III milk prices rose to six-year highs; butter-related Class IV prices dipped to multiyear lows. That affected milk pooling through the Federal Milk Marketing Order (FMMO) system, with large volumes (and accompanying values) of Class III milk “depooled” through the first half of 2021. Resulting negative producer price differentials (PPDs) had a direct impact on individual producer milk payments and also limited their ability to optimize risk management tools.
Producers who supplied a higher proportion of their milk to the fluid market were especially hard hit, thanks in large part to a change in the way Class I milk prices were calculated. The change, created in the 2018 Farm Bill and implemented in May 2019, calculated the Class I price based an “average of” advanced Class III and Class IV skim milk prices, plus 74 cents, instead of the “higher of” formula previously used. Initially designed to be revenue-neutral for dairy farmers, it was anything but. NMPF estimated the total impact to be at least $750 million in lost producer income.
The USDA’s Pandemic Market Volatility Assistance Program (PMVAP) was implemented to address those losses. That, too, wasn’t without controversy, over both milk production caps that limited payments and the total outlay of $350 million, covering less than half of NMPF’s estimated losses.
The full impact of those market disruptions has yet to play out. There have been numerous calls for FMMO and other policy reforms, although no official action has been taken as 2021 enters its final month. Addressing delegates at the organization’s 2021 annual meeting, Jaime Castaneda, NMPF executive vice president for policy development and strategy, said NMPF would seek dairy policy reforms through two channels: the 2023 Farm Bill and Federal Milk Marketing Order (FMMO) hearing process.
Dairy consumption affected
Rippling through the supply chain, the pandemic influenced how and where dairy products were purchased and consumed, as tracked by the International Dairy Deli Bakery Association (IDDBA). Prior to the pandemic, it was generally recognized the movement of dairy products was evenly split between retail (grocery stores) and food service (restaurants, schools and other institutions). Travel restrictions, school and restaurant closures and event cancellations pushed a higher percentage of dairy product sales away from food service and through the retail supply chain.
Thanks to vaccination programs, the food service channel began to reopen in the first half of 2021, with consumption patterns looking more like pre-pandemic “normal” by mid-year. Actually, by June, overall dairy sales were even stronger than 2019, as more dairy was consumed through both food service and at home.
As we move into the fourth quarter of 2021, the split between food service versus retail channels hasn’t completely returned to the other side, in part due to rising inflation and heightened concern over COVID-19 variants. In addition to health concerns that are keeping more people at home, the cost of eating out is rising even faster than retail food prices, again placing more emphasis on home-prepared meals and boosting dairy product sales through retail grocery stores. However, while total value of retail sales is up, unit and total volume sales aren’t tracking on the same incline.
One area where dairy organizations stepped to the forefront during the pandemic was in working with nonprofit organizations in the delivery of milk and other dairy products to food pantries and individuals in need. An outgrowth of those relationships is the Dairy Donation Program, which aims to create partnerships between dairy organizations and nonprofits to facilitate more dairy product donations. Among remaining issues is how organizations are reimbursed for donations and costs by the USDA. In addition to paying for the full cost of the raw milk, the program also covers processing costs and transportation costs, using current or updated make allowances for FMMO milk classes.
Exports a bright spot
Domestic fluid milk consumption continued its decades-long decline this year, but offsetting that was a shining light for dairy in 2021 – exports. Average export unit values have climbed steadily in 2021, due to both strengthening dairy prices and a higher percentage of U.S. dairy exports coming from higher-value products.
At Progressive Dairy’s deadline, 2021 calendar-year export data was available only through September. However, looking at fiscal year (October 2020 – September 2021) numbers, the U.S. Department of Commerce estimated the value of U.S. dairy product at about $7.39 billion, up 13% from fiscal year 2020 and about equal with the previous record high of $7.4 billion in fiscal year 2014.
Based on latest available monthly estimates, September export volumes were up across all major dairy product categories, representing more than 18% of all milk solids produced in the U.S. during the month. The news on the value side was even stronger, up nearly 28% from the same month a year earlier.
The bright export picture isn’t without its clouds. Logistical logjams on land and sea, caused by labor shortages, difficulties securing trucks and cargo space and high freight rates threaten long-term export opportunities.
Politics and regulation
Compared to a year earlier, 2021 is on the other side of the political spectrum, with Democrats controlling the White House, the House of Representatives and (narrowly) the U.S. Senate. That’s affected federal spending and regulatory oversight by several agencies with direct and indirect connections to dairy. Some regulations put in place through executive order by the previous administration are already undergoing surgery.
We haven’t even touched on the topics of sustainability and climate change. See you on the other side of 2022 to see what transpires.
