Q&A: Ben Laine, dairy analyst with Rabo AgriFinance

The U.S. dairy industry continues to grapple with the ripple effects of the COVID-19 pandemic and the market's reaction to unprecedented uncertainties. Ben Laine, dairy analyst with Rabo AgriFinance, discusses what has occurred over the past several months, what producers might expect in the coming months, and the need for dynamic risk management strategies.

SF: The industry has been through a very turbulent time. What are you seeing now and what might lie ahead?

BL: We had been on a 12-month streak of increasing cow numbers in the national herd. Over the past three months, we started to see numbers decline, which is a result of continued margin pressures. We've had a lot of government support through 2020, and the reopening of schools has helped the price picture. Going forward there is still a good supply of milk, which will put pressure on prices.

SF: Are there regional variances in the number of cows and overall milk supply?

BL: In an era of base programs and restrictions on milk production, the geography of the dairy sector depends on where willing milk buyers can be found. Increases in regional milk herds will primarily be driven by the development and expansion of cheese manufacturing in the next few years, mostly in a central band of the U.S. Add to that the challenges in states such as California with drought and water issues. There were pressures on cow numbers on both coasts, even before COVID. More and more we see areas in the middle of the country where cow numbers are increasing. These areas are benefitting as cheese plants start to go online.

SF: What has the pandemic taught us?

BL: In big-picture terms, the pandemic has raised overall awareness that these types of market uncertainties can happen. It's the sort of thing you would never have seen coming, and there is no way we could have seen the market disruptions the pandemic caused. Now that we've been through it, we don't expect anything like this to happen quite the same way again.

For the producer, the pandemic was a good reminder that unknowns are still out there, and it puts a focus on managing risk. Preparing for volatility and beefing up risk management programs are critical. Some emergency federal programs and formulas did have negative consequences and hindered some risk management efforts, but that will hopefully trigger discussions on how to rethink some programs.

There were producers last year who had their risk management programs work against them. We need to stress that 2020 was an anomaly. We shouldn't base our risk management strategies on 2020. Keep a steady management plan and stay the course.

Over the past decade we've built up a handful of tools you can use to help lock in milk prices. We need to look at these programs as tools in the toolbox. Not every tool works for every producer. The key is to develop a plan that matches your needs and your risk tolerance. Logistical challenges also taught us that our well-oiled marketing machine can be disrupted.

In addition, the pandemic taught us we need to be more flexible. When the pandemic started, it showed that the dairy market isn't very flexible. We need to be prepared for a little more flexibility than we've had in the past.

SF: The pandemic must have made your job difficult. What challenges did you face?

BL: It was challenging not only from a producer standpoint, but also from an economic standpoint. We simply did not have any data to draw from. We never could have predicted something so widespread as the shutdowns and the impact on the market. There was no reference point. Now that we've weathered the storm, we have better information on the market demand, how much demand goes into food service, and how sensitive that market can be.
The pandemic also gave consumers an appreciation for their food supply. I think they took for granted there was always going to be pretty much any kind of food they wanted, available and affordable all the time. That idea got shaken up and gave consumers a little more appreciation for the complexity of the food marketing system and how much work goes into supplying milk to the nation.

SF: How are the labor and employment issues challenging the dairy industry?

BL: Farm labor issues have been present for a number of years, but they're becoming even more critical now. What's changed is that it's not just on the farm, but also includes the truck to get the milk to the plant, and then the workers in the plant to run all the shifts, and ultimately, the workers at the restaurant to serve the food. Labor issues are spilling across all aspects of the supply chain, and it's going to continue to pressure the market. It will also push the market toward more innovation and labor-saving technologies. That will spur additional modernization and upgrades at the farm level.