There are a few different ways that I have tried to look at the situation and estimate what kind of impact COVID-19 will have on dairy prices in 2020. The first way is simply looking at the estimated impact that the virus is expected to have on global economic growth and then feed the lower GDP forecasts through the model and look at the impact on prices. The OECD released updated economic forecasts. In their best-case scenario, COVID-19 is going to knock 0.5% off global GDP in 2020, which is consistent with the impact we’ve seen from other global viral outbreaks (after adjusting for the widespread nature of the COVID-19 outbreak). Under a worst-case scenario, global economic growth ends up being 1.5% lower than it would have been without the virus. While I can think of scenarios that would knock more than 1.5% off global GDP, let’s use a reduction of 0.5 to 1.5% as a reasonable range. If I feed the lower GDP numbers through the models it would knock about 3% to 18% off dairy prices during 2020.
Focus on China
Another way to look at the potential impact is to focus on China, make some assumptions about how much dairy consumption has dropped due to the outbreak and lockdowns and feed the lower Chinese imports into the model. The problem is, I have no idea what to assume for reduced consumption inside of China, but I plugged in a 2.5% drop and a 5% drop for the year. The reduced Chinese consumption reduced the forecasted global dairy prices by 4 to 9%. But if Chinese consumers aren’t drinking the milk, what is happening with it? We believe some is being dumped due to logistics problems, but at least some of the surplus milk is making it to dairy plants and is likely being dried. That will reduce Chinese import demand later this year. If I let the inventory impacts feed through the model, the dairy prices for 2020 fall by something in the 20-30% range.
So, we can come up with an estimated impact of somewhere between 3 and 30%. Given the price declines that we’ve seen so far, I think the likely impact is going to be in the 5 to 15% range. Now that is a 5-15% decline in average New Zealand prices for the calendar year. The initial drop in prices will likely be twice as big as the average decline, so we could be looking at a 10-30% drop in dairy prices short-term before the virus is contained, consumers return to normal patterns, and global economic activity improves.
The impact to prices in the US depends on what dairy product you look at. The US relies on exports to clear about half of our nonfat dry milk and whey product production. Prices for those milk powders will mirror the drop on the world market. The US is currently exporting very little butter, so it is hard to argue for much of a direct impact on US butter prices unless consumers in the US change their consumption patterns in response to news of the virus or an actual outbreak of the virus. The impact on US cheese markets is somewhere in the middle. US cheese prices have been running above the world market since June of 2019, so our exports have been softening and we haven’t been dependent on the export market to keep the cheese market supported. But milk production growth is improving, which will likely lead to more cheese production and possibly more dependence on exports in 2020. Right now, it doesn’t look like US cheese will fall by the same percentage as the milk powders, but we’ll likely see some bearish impact on cheese too.
Nate Donnay is the Director of Dairy Market Insight at INTL FCStone Financial Inc. – FCM Division and has been applying his interest in large complicated systems and statistical analysis to the international and U.S. dairy markets since 2005. As a consultant, he has worked with clients at all levels of the dairy marketing chain from the farm level up to processors and packaged foods companies, food distributors and restaurants as well as connected industries like banks, private equity groups, government agencies, and industry associations. Through ongoing reports or one-off client specific projects, he helps them understand the short and long-term trends and the underlying relationships driving the market and what that means to their businesses.
