WCMA Notes: Dairy’s Ready for the Whistle

To borrow a hoops analogy: It’s the end of the first quarter and after the surprise attack on the global economy from the COVID-19 pandemic, the dairy industry has mounted a rally after the virus built a strong early lead.

Yes, it’s only the end of the first quarter.

The dairy industry can huddle during this break knowing that cheese prices have soared past pre-COVID levels, but butter is far from its 2020 peak in January. Milk prices will recover, and federal aid promises to steady returns for dairy farms.

But if this is a rousing finish to a tense first quarter, then the dairy industry has a key play to draw up on the sidelines: adjust your business production and sales and marketing models now with the assumption that this virus could lay low in the second quarter, but come back strong after the half.

This advice isn’t tethered to an assessment of this contagion’s future viability – it’s tethered to risk management – planning the best play to execute when the potential for business disruption is heightened.

Set aside politics and policy and simply add economic disruption and production disruption to your risk portfolio. Your business is always facing risks: a tight labor market, excess global supply, competitor discounting, consolidation among distributors. Now a health crisis can bring forced economic contraction and the potential for sequestered workers.  Make these business risks a permanent part of your business plan.

Foodservice, the injured supply chain that drove dairy to dump milk, is roaring back as the distribution pipeline for the restaurant industry refills.  But market tightness indicated in the astronomical rise of cheddar prices at the Chicago Mercantile Exchange won’t last long. Total restaurant sales in the U.S. remain 18 percent lower compared to last year, with quick service chains down 18 percent and full service sites off 42 percent (May 24 data).

Many cheese manufacturers reacted quickly to the sudden loss of foodservice customers this spring. Industrial sales for processed foods and exports offered some relief, but a majority of firms converted production to storable product (where possible) and filled cold storages across the country.

Now, with product moving again, it’s time to pursue options to diversify permanently into retail markets, snack foods markets and sales abroad. Granted, these are long-term strategies, but now is the time rethink your business plan.

Explore new production and packaging technologies that match new market channels. At a minimum, bulk cheese is not useful for food banks and government market support programs. But looking up the value chain, packaging for retail, consumer convenience, and even new safety-driven demands from the foodservice sector, will help cheesemakers diversify.

Even as foodservice sales return, year-over-year gains in grocery sales of cheese continue. Week of May 24 national cheese sales tracked 18 percent higher than the same week last year – and this year to date, Americans have purchased $1.5 billion more cheese in 2020 than in 2019 (up 17 percent).

If dairy retains this momentum as foodservice markets return, there will be room for diversification and new market players in the grocery store.

At the end of the first quarter, the risk from economic contraction is abating.  But the risk of production disruption – losses in your workforce – remains very real.

Dairy processors reacted with astonishing and valiant speed to institute workforce safety measures this spring. Sanitation and safety know-how, built on a foundation of decades of food safety knowledge, has served dairy manufacturers well. But this business risk is active and ongoing.

Maintain worker screening and take daily temperatures. Retain distancing policies, reduced shift sizes and separate teams with redundant skill sets. These practices are harder to maintain as customer orders improve but are more vital than ever to assure business recovery. Dairy’s skilled workforce is its greatest asset.

As dairy walks back on the court to take on a marketplace upended by COVID-19, new variables abound but some old questions are now resolved.

First, some variables: How will dairy exports fare in a slowly recovering global economy? Will dairy recovery dollars from USDA stimulate milk production? How quickly will restaurant sales recover? Will economic stresses reshape the dairy industry through mergers and acquisitions? Will the virulence of this virus subside or redouble in colder months to come?

This pandemic has multiplied business risk and added more variables to the equation of your success. But some former conundrums have been resolved.  For example: Is dairy a “mature” category with waning consumer interest?  Absolutely not. Can the dairy industry manage its milk supply without a burdensome government program? Absolutely yes. Is dairy a workplace leader in the food industry? Clearly yes. Has dairy’s long-term reputation for communication and cooperation among competitors faded into history? Decidedly not.

Dairy plays like a team.  And it’s ready for the whistle.