skip to main content

Examining the Drivers of U.S. Dairy Prices for 2021

Examining the Drivers of U.S. Dairy Prices for 2021

Even in an industry accustomed to the impact of government policy, it was a wild year in the U.S. dairy market.

About 40% of net farm income in the U.S. came from government payments in 2020, according to data from the U.S. Department of Agriculture (USDA). Government funding – and in particular, the size and timing of government payments to dairy producers in response to COVID-19 and purchases of surplus products – has driven a sizable amount of volatility in the dairy market.

Considering that the COVID-19 pandemic began with widely viewed news reports of dairy farmers dumping milk that could not find a way through shuttered foodservice channels, those payments and purchases have been a lifeline for producers. But they have also created uncertainty for end dairy users regarding when and how to lock in prices.

The question on the minds of those dairy users now is: What’s next? With a new U.S. administration taking over this month and vaccines giving us the first glimpse of the end of the pandemic, what will drive prices in 2021?

Understanding this landscape will be essential for building a dairy price risk management strategy. Here are a few underlying factors to keep in mind.

Government action is likely to support prices

The biggest question is what comes next from Washington, D.C.

First is COVID-19 stimulus. The most recent bill passed late in December includes billions of dollars for farm payments. The Democratic Party generally views dairy as an important constituency – especially small- and medium-sized dairy farms. So, Congress and the USDA could well look to continue supporting the dairy sector with this funding.

Direct purchases for food programs also had a significant impact on prices last year, and the latest bill includes billions in additional funding for these programs, too. A Democratic administration is likely to maintain or increase support for dairy, as it is viewed as a healthy protein and a core element of nutrition programs.

More up in the air are the ad hoc government payments that have risen considerably the last few years. When and to what extent the new administration winds those down remains to be seen. And it’s unknown whether Congress will pass further COVID-19 relief.

In total, it is likely that government support for the dairy sector – in the form of both direct payments and purchases – could very well help keep prices higher in 2021.

A post-pandemic breakout?

The other big question mark for U.S. dairy market participants is the speed at which we move through the pandemic and see the confidence of both policymakers and consumers rebound. This will be an especially important factor in foodservice, as well as other channels like school lunch programs as districts resume in-person learning.

In fact, we may even see a release of pent-up demand, as people make up for a lost year by dining out more often, traveling, going to sporting events, and more. If this happens, demand for dairy products could spike. This, combined with likely continued government support, indicates that prices could remain strong throughout 2021.

But it’s hard to predict the timing of government purchases, or exactly when we’ll reach an inflection point where most consumers are again comfortable eating in a restaurant. And spreads among different classes of dairy products could continue to fluctuate. Depending on your specific needs as a dairy user, you may want to consider a hedging solution that provides protection if prices move up as well as the option to participate if prices go down in the short term.

Managing price risk in 2021

Uncertainty in 2020 has caused changes in the way producers and consumers think about risk management. Companies that remain profitable and return value to shareholders during times of market volatility consistently follow these four commodity price risk management habits.

  1. Plan: Focus on your company’s needs, budget margin goals and risk tolerance.
  2. Diversify: Don’t put all your eggs in one basket. Utilize futures and options from the exchange, as well as swaps and tailored products. And consider leaving a portion of your portfolio unpriced.
  3. Advocate and educate: Review internal company policies to ensure pricing decisions and positions are in alignment. Advocate and educate within your organization to ensure you have the tools you need to be effective.
  4. Choose wisely: Select your counterparty carefully. The best partners look to understand your business, challenge your thought process and offer solutions that align to your company objectives.

No matter what your needs, Cargill Risk Management can work with you to define a strategy that’s tailored to your situation so that when the unexpected arises, you have the protection and confidence you need to run your business. Contact us today.

These materials have been prepared by personnel in the Sales and Trading Departments of Cargill Risk Management, a business unit of Cargill, Incorporated based on publicly available sources, and is not the product of any Research Department. These materials are not research reports and are not intended as such. These materials are for the general information of our customers and are a “solicitation” only as that term is used within CFTC Rules 1.71 and 23.605, as promulgated under the U.S. Commodity Exchange Act. These materials are provided for informational purposes only and are not otherwise intended as an offer to sell, or the solicitation of an offer to purchase, any swap, security or other financial instrument. These materials contain preliminary information that is subject to change and that is not intended to be complete or to constitute all of the information necessary to evaluate the consequences of entering into a swap transaction and/ or investing in any securities or other financial instruments described herein. These materials also include information obtained from sources believed to be reliable, but Cargill Risk Management does not warrant their completeness or accuracy. In no event shall Cargill Risk Management be liable for any use by any party of, for any decision made or action taken by any party in reliance upon, or for any inaccuracies or errors in, or omissions from, the information contained in these materials and such information may not be relied upon by you in evaluating the merits of participating in any transaction. All projections, forecasts and estimates of returns and other “forward-looking” information not purely historical in nature are based on assumptions, which are unlikely to be consistent with, and may differ materially from, actual events or conditions. Such forward-looking information only illustrates hypothetical results under certain assumptions. Actual results will vary, and the variations may be material. Nothing herein should be construed as an investment recommendation or as legal, tax, investment or accounting advice. Cargill Risk Management is a provisionally registered Swap Dealer and operates under “Order of Limited Purpose Designations for Cargill, Incorporated and an Affiliate.”