Dairy Processing - July/August 2022 - 64

COMMODITIES OUTLOOK
Need versus
want
A drop in dairy prices could be more
muted than in past recessions.
by Nate Donnay | nate.donnay@stonex.com
T
he dairy markets have pivoted from being concerned
about the terrible supply situation to being concerned
about the deteriorating demand environment that
could characterize the next 12 months.
In the food and agricultural industries we like to comfort
ourselves by saying something like, " even in a recession,
people still need to eat. " But classifying what counts as a need
versus a want can be more complicated than it seems. People
don't need to eat at a restaurant. They don't need to eat
aged Cheddar, premium ice cream or butter when there are
plentiful and cheaper alternatives. Most consumers also have
a choice about where they shop for their groceries. They don't
need to shop at Whole Foods during a recession; they can go
to Aldi. We don't always see a drop in total dairy consumption
during recessions, but where we consume food, and how
much we are willing to spend often shifts during recessions
and it could help or hurt dairy processors depending on what
types of products they are producing and what channels they
are selling those products through.
The best part about US recessions is that they are
relatively rare. We've only had three recessions in the past
30 years with the most recent being the pandemic induced
recession that lasted two months in 2020. So, if we exclude
the strange pandemic recession, we only have two other
recessions during the past 30 years that we can glean some
insights from. That isn't a large sample size.
MARKET SEVERITY
When looking at the year-over-year growth for inflation and
population adjusted sales at grocery stores, full service and
limited service restaurants, it becomes clear how severe the
Great Recession of 2008/2009 was. It lasted about 50% longer
and was 70% deeper than the average recession and that is
clearly shown in a much bigger drop in food sales than during
the 2001 recession.
When measured how sensitive sales through these different
64 JUL-AUG 2022 | DAIRYPROCESSING.COM
channels are to changes in GDP, grocery store sales are the
least sensitive, followed by limited service restaurants, with
the most sensitive being full service restaurants. That makes
intuitive sense. For every 1% change in GDP, we should
expect to see grocery store sales change by 0.34%. During an
average recession we typically see GDP drop by 2.2% from
peak to trough. So if we go through something like an average
recession we would expect to see per capita inflation adjusted
grocery store sales drop 0.75%, limited service restaurant sales
fall 1.1% and full service sales drop 1.4%.
But that only covers domestic demand. Exports have been
an increasingly important part of the overall demand structure
for US dairy. In our global demand model, the sensitivity
between imports and GDP is high. Every 1% change in GDP
for major importing countries drives a 1.1% change in demand,
so we should expect some headwinds for exports if economic
growth slows globally, as well.
DAIRY PRICES
What most of our customers are interested in is what impact
can we expect to see on dairy prices. As mentioned at the
start, milk production has been terrible, and not just in
the US, but globally. Taken as a bloc, the EU27+UK is the
largest producer and exporter of cow milk in the world. They
produce about 58% more than the US Dairy farmers in the
region are dealing with increased input costs like feed, energy
and other materials, but the weak milk production is also
being blamed on sustainability concerns.
While the exact details are still being sorted out, the
EU is attempting to hit a target of no net greenhouse gas
emissions by 2050. Some of the brunt will fall on agriculture
with restrictions on the number of cows in each country a
possibility. The specific laws and regulations are still being
developed, but farmers are reluctant to invest or expand given
the uncertainties around government policy moving forward.
Milk production in New Zealand, the second largest
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