New forecasts for strong production, uncertain demand, high stocks, weaker prices and higher feed costs paint an “unsettled” outlook for the U.S. dairy sector in 2021, according to a new USDA report.

“Entering 2021, the situation facing the dairy sector is ‘unsettled’ at best,” according to a report released Friday by Shayle Shagam, an analyst with USDA’s World Agricultural Outlook Board. “The sector faces uncertainty as to the timing and path of a return to normalcy of demand or what ‘normal’ will even look like.”

Domestic demand took a blow last year when hotel and restaurants shut down during the worst months of the COVID-19 outbreak, but USDA purchasing programs, some strong sources of demand at the retail level and resilient international demand provided some relief.

“Moving into 2021, the domestic demand situation remains in a state of flux. Restaurant reopenings have occurred in some areas, but restrictions remain in many areas and some loosened restrictions have been subsequently tightened,” Shagam said. “Although the impacts of COVID-19 on the economy in general and on dairy demand specifically are expected to diminish over the course of the year, the timing of restriction removals and any government programs remain uncertain.”

The sector also heads into 2021 with low prices and a higher cost of doing business as feed prices are expected to be higher than they’ve been in seven years.

Milk production this year is now forecast to reach 227.4 billion pounds, about a 2% increase from 2020 and stocks of most dairy products – except a few types of whey – are high coming out of a tough 2020 in which many farmers were forced to dump milk.

“Much of the increase occurred during the second quarter as the sector was unable to pivot as rapidly to COVID-19 related dairy market supply chain disruptions,” Shagam said. “Although stocks declined as the sector adjusted, by the end of the year stocks had increased again. Fat basis stocks at the end of 2020 were about 15% higher at 15.6 billion pounds. This is the highest level since 1992.”

International trade was a surprisingly positive sector for the industry in 2020, and exports are expected to continue to strengthen this year, according to the new USDA analysis.

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“In 2020, exports grew as U.S prices were competitive with other exporters for most major of products. Butter and milkfat exports were almost 6% percent higher with increases to a number of countries,” Shagam said in the report.

U.S. exports of skim milk powder and nonfat dry milk rose 16% in 2020, “reflecting increased sales to several Asian countries, and whey and whey product exports, principally to China, were 25% higher.”

Those whey exports to China are expected to continue strong into 2021thanks to the country’s efforts to rebuild it its swine herd after African swine fever forced the Chinese to kill off much of its pigs.

Overall, U.S. dairy exports this year are expected to be even better than 2020, Shagam concluded, noting that in 2021 “exports on a fat-basis are expected to reach 10.1 billion pounds; about 8% above 2020 and on a skim-solids basis, exports are forecast to be about 48.9 billion pounds, more than 3% above 2020.”

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