The rising prices of milk and dairy products are causing concern over the ability to pass on those increases through the supply chain to consumers, Ben Laine, a dairy analyst with Rabobank, said.
Different sectors of the supply chain absorb changes in prices in different ways. But at the end of the day, it comes down to the consumer, he said.
With much of the world recovering from, in the midst of, or on the verge of some degree of recession, there’s concern over consumers’ willingness to accept or withstand higher prices, he said.
“We’ve seen that in other parts of the world, particularly South America,” he said.
While Brazil’s economy is coming back, Argentina is still suffering — and domestic consumption of dairy products there has continued to contract as the recession worsens, he said.
“It’s not as dire in the U.S. or Europe, but it’s still a concern,” he said.
In the U.S., domestic dairy commercial disappearance slowed in the third quarter of 2019 to just 0.5% after a robust 3.5% increase in the first half of the year, Rabobank analysts reported in their latest Dairy Quarterly report.
“Softening domestic demand is attributed to rising retail and food service prices. Looking forward, U.S. dairy demand will continue to grow but at lower rates as higher prices and a weaker economy … impact consumer spending,” they said.
A weaker economic outlook is based on a heightened probability of a recession in the second half of 2020, they said.
At the farm level, U.S. producers are hesitant to expand production despite higher milk prices, Laine said. He thinks most producers are leaning toward seeing if the higher prices are going to be sustainable, he said.
But U.S. milk production is showing signs of life after months of stagnation. Milk production was up 1.3% year over year in September and October, and producers added 5,000 cows to the national herd in each of those months, the analysts said.
“This is the beginning of a return to more normal year-on-year milk production growth of 1.3% to 1.5%,” they said.
Additional growth in milk production will vary region to region, Laine said.
Expansion in some areas will depend on whether there’s a buyer for more milk. Another factor is feed quality due to late plantings and early snow. Even if feed is available, poor quality feed will affect production per cow, he said.
It will also depend on producers’ financial situation. After several years of low prices, they might need to get things back in order and take care of deferred maintenance, he said.
“The outlook for milk production growth depends on whether those additional dollars go toward expanding production or repairing balance sheets. Our industry sources suggest the latter,” the analysts said.