Dairy weathers unexpected price drop, trade deal implications

There are signs that the dairy market is recovering and butter stocks are low which could support prices

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Dairy farms in Canada are likely to return to profitability in 2021, after absorbing a hit to profits from the impact of COVID-19.

Sebastien Pouliot, principal agricultural economist at Farm Credit Canada (FCC), says that COVID-19 hit what could have been a decent year for dairy farmers.

Why it matters: Dairy farms are a large part of Ontario agriculture economy and the health of dairy farms affects demand for agriculture services and crops.

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FCC produced a new dairy update a few months ago, once COVID-19 hit. It showed that Eastern Canadian dairy farm margins would move back into negative territory through most of 2020, after positive margins in late 2019 and early this year.

FCC expects dairy farm margins to be negative by about 50 cents per hectolitre through much of 2021, showing more profitability by October 2021. While 2021 looks to be negative, the losses won’t be as large as the 2020 pandemic period.

“The year started out pretty well,” said Pouliot, during a presentation at Canada’s Digital Farm Show.

There was a one per cent quota increase and an almost two per cent increase in the price of milk early in the year. Higher American prices for milk were supporting the price of non-fat dairy products.

Dairy farm revenue has dropped through most of 2020.
photo: FCC

Then came the wonky effects of COVID-19 on the market. Early in the pandemic, consumer hoarding prompted a quick addition of an incentive day of extra milk production. But that didn’t last long, as a severe drop in demand for food service dairy products due to the closing of restaurants and other food outlets occurred.

By the end of March extra milk production credit days were ended and by the end of May a two per cent quota cut was implemented. A drop in the price of non-fat dry milk in the United States, which sets part of the Canadian prices, also meant lower milk prices paid to farmers.

Farmers had to take numerous measures to manage the sudden cut in quota. They could have culled cows, but the beef market was also strained at the time and a lack of Ontario processing capacity made that a money-losing option.

As a result, a lot of farmers dried off cows early. That included Alanna Coneybeare, part of a dairy sector panel at the Dairy Producers’ Brunch at Canada’s Digital Farm Show.

The cows who were dried off early are now calving, says veterinarian Reg Clinton, of the Kirkton Veterinary Clinic, and some are doing well and other are not, often due to greater crowding of cows in dry cow facilities. Coneybeare says her cows are showing no ill effects of their longer-than-expected rest period.

Milk demand, price improving in late 2020

The partial re-opening of schools and food services has meant more incentive days added for dairy farmers in August, September, October and November, bringing milk production closer to normal. Milk production was down from 2019 in March and April, but back closer to a year ago by June.

Butter stocks are actually lower in 2020 compared to 2019 and that should help maintain the price of dairy products going forward.

Lower butter stocks in 2020 should support quota or price growth.
photo: FCC

Ontario gross farm revenue on dairy farms was rising at the end of 2019 and in fact hit $78 per hectolitre in late 2019. Prices for 2020 started well, but dropped when the pandemic hit. Revenue usually declines with lower demand for dairy products in the summer, but the pandemic forced the price lower earlier in 2020 than usual. By July the price was close to $68 per hectolitre. Price should begin to improve later in the year, says Pouliot. American milk price has already started to improve from pandemic lows and Pouliot expects that rise to continue.

Milk and dairy products have had lower grocery store price inflation during the pandemic than other sources of protein.

“Fresh milk and dairy products have remained very competitive,” he says.

Interest rates dropped significantly from 2019 after the COVID-19 pandemic hit. They are now about as low as they can go with central bank rates at a quarter of a per cent in Canada and essentially zero in the United States.

The actual rates paid by businesses have also dropped. The weekly effective business interest rate is now below 2.5 per cent in Canada down from a recent high of almost four per cent in late 2018.

“If you are going to the bank to renew your loan, or get a new loan, you will get a lower interest rate than a few months ago,” he said.

That doesn’t necessarily mean it’s a good time to start a new area of business or expand, if price and demand continue to be lower due to the pandemic.

About the author

Editor

John Greig

John Greig has spent his career in agriculture journalism and communications. He lives on a farm near Ailsa Craig, Ontario. Contact John at jgreig[email protected] or follow him on Twitter @jgreig

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