Retail is All We Got… and It Ain’t Looking That Hot

Retail sales of dairy products were a little disappointing in October. Sales were up from last year for all of the major dairy products, but the pace of growth slowed between September and October. Natural cheese sales slowed from 12.9% year-over-year growth in September to 8.7% in October on a volume basis. Butter sales growth fell from 24.5% to 13.6%. Fluid milk went from 1.6% to 1.2%. Don’t get me wrong, under normal circumstances these would be some very strong retail sales numbers for dairy. But with restaurant sales down, workplace cafeterias closed and the number of school lunches being served down, retail is the only channel where we are seeing sales growth in the domestic market. Well, that isn’t quite true, we’ve seen massive growth in purchases through government programs.

What has been making up for the lost foodservice/school consumption is government purchases. We don’t have exact numbers because the USDA has not released detailed data on what was included in the

food boxes, but roughly 1.4% of US milk production cleared through government programs (not including school lunch) during 2020. Most of that moved through the food box program where the government reimburses private companies for packaging various commodities into household sized boxes and delivering them to people in need. The USDA also directly purchased dairy products using money allocated in the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act as well as existing Section 32 funding. Only 0.2% of milk production was purchased with FFCRA/CARES, Trade Mitigation or Section 32 funds. There are some Section 32 purchases lined up for early 2021, but right now and more direct purchases will likely be made, but it will likely only add up to 0.1% of milk production or less unless new money is allocated. The food box program has nearly used up the $4 billion allocated to it. It’s possible the program will be extended into 2021, but no official announcements have been made yet.

Foodservice sales have rebounded better than I was expecting this year, but they are still running below last year. Sales at many quick serve restaurants have been running a little above last year thanks to drive through and take-away business, but sales at full service and fine dining restaurants remain weak. According to Blackbox Intelligence, foodservice sales went from 54% below year ago in April to just 8%

below last year in September and October. That is a pretty amazing rebound despite many restaurants still facing restrictions on seating capacity and consumers still worried about the pandemic. What is surprising has been how stable the foodservice/retail numbers have been since July. Even with the surge in covid cases in the southern US this summer there wasn’t much of an impact on the national retail or foodservice trends until you get to the significant slowdown in retail sales in October. Again, retail is the major bright spot, so it is concerning to see the slowdown.

With covid cases spiking in November and new social distancing restrictions being put into place we should see a little stronger retail sales and a little weaker foodservice sales, but honestly, I think our covid-consumption patterns are relatively locked in place now. We know we can safely order take-away from our favorite restaurants and we have our rotation of homemade meals firmly in place. There is a chance that dairy could gain or lose a little at retail if people grow tired of their homemade meal rotation, but that probably ends up pushing people more toward foodservice than different homemade meals. But with more and more schools moving to distance only learning and new stay-at-home orders being issued, consumption through schools and workplace cafeterias is probably going to be weakening in coming months.

When we net all the numbers together, domestic dairy sales in the US are down 0.9% on a volume basis this year. If you remove the government purchases, then sales are down closer to 2%. With the food box program possibly ending in December, new social distancing restrictions and a worrying slowdown in retail sales in October, dairy demand may be in for a tough winter.

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Editor’s note: Nate is the Director of Dairy Market Insight at StoneX Financial Inc. and has been applying his interest in large complicated systems and statistical analysis to the international and U.S. dairy markets since 2005. As a consultant, he has worked with clients at all levels of the dairy marketing chain from the farm level up to processors and packaged foods companies, food distributors and restaurants as well as connected industries like banks, private equity groups, government agencies, and industry associations. Through ongoing reports or one-off client specific projects, he helps them understand the short and long-term trends and the underlying relationships driving the market and what that means to their businesses. He may be reached at nate.donnay@stonex.com