On the financial side of handling the plummeting prices and disruptions to what was previously expected to be a better year for dairy, Dr. David Kohl, Virginia Tech, talked about the Coronavirus pandemic’s impact and how to manage it during a Center for Dairy Excellence industry call last week.
“What is different about this is that it hit everyone in the world and how sudden it was. It created demand destruction, and it has affected consumer behavior.”
Kohl said 70% of the U.S. economy is driven by consumption, and 40% of that consumption economy is tied to airlines, hotels, restaurants, recreation and the sports world. “Now that 70% of the U.S. economy has been knocked down to 30%,” he said. “We are not going to just flip that switch.”
He sees the “consumption economy” coming back to just 75% of its prior strength in the restaurant, hospitality and foodservice sectors, “because people are changing their behavior.
“We also export a lot of dairy, but we will see a move from globalization to ‘selective’ globalization,” said Kohl. “This black swan will turn into an angry bird with agriculture as the point dog for extreme volatility.”
Kohl stressed three entities need to work together: producers, government, and agribusinesses/lenders. “Lenders will have to think about interest-only and principle deferments because producers will need good sound financials to get through this.”
Kohl said it is too early to tell what effect COVID-19 will truly have on exports. “The value of the dollar vs. other currencies is still strong. The economic health of countries we export to is important, watch for how the middle class is doing in those countries.”
Overall, Kohl sees the economic recovery being more of a Nike-shaped swoosh than a v-shaped bounce-back. As recovery takes shape, the foodservice and export demand will come back but not in a big way, he said, and not immediately.
He gave this advice as a financial expert, ag economist and part owner of a creamery:
- Monitor cash-flow month-to-month and compare actual to projected to see where you stand.
- Document losses so we can send a message about them to congressional delegations about what we need.
- Meet with lender and accountant and go over the financials.
- Communicate, be flexible and adapt.
- Be real careful of knee-jerk reactions — that goes for farmers, lenders, and the government.
- Follow protocols for the virus and know what your protocols are.
- Never equate self-worth to net-worth.
- Keep re-assessing your goals.
- Reach out. Remember, you are not in this alone.
Kohl also sees opportunities for the future. “I have been outspoken on this. There is too much consolidation and concentration in our industry — whether it is dairy or beef,” said Dr. David Kohl, Virginia Tech professor emeritus as a Center for Dairy Excellence industry call guest last Thursday, April 23.
“We have to look at our supply chains and the vulnerability of them, the vulnerability of having too much power in the control of two few in the food and agriculture industry.
“America was built on small business and entrepreneurship. Even as small processors, we can go bankrupt very quickly, but this is where we also have great opportunity in the future,” Kohl suggested.
Participating on industry teleconferences and webinars over the past few weeks of the Coronavirus pandemic, Dr. Kohl has voiced his observations about how COVID-19 is changing consumer behavior and exposing food supply-chain vulnerabilities.
Some of his insights offer a systemic reality-check, but also present some forward-looking opportunities.
“We had a run-up in demand the first couple weeks of this thing. In general, it is still stronger, but we are also seeing people want local, and they want transparency,” Kohl reported. “People want to know where it comes from, how it is processed and to know the producer.”
He described the supply chain disruptions in dairy over the past several weeks as being attributed to large processing entities built on serving restaurants, universities, schools and other institutional foodservice, and catering to a segment of the international market – bulk products or tiny table sample products — not retail family-sized.
On the other side of that spectrum… “We are feeling this movement back to local, and it’s getting stronger,” said Kohl, adding that creamery home-delivery, for example, is taking off. “People want delivery.”
The other thing Kohl sees in consumer behavior is a return to “emotional food,” something some would call “comfort food.”
Consumers are not only following the science and realizing the healthfulness of dairy fat, they are gravitating toward natural, local and emotional food that brings comfort. Dairy can fit that mode very well if the consolidated supply chain can loosen the grip, open up, and welcome opportunities for local and regional models of processing and marketing.
Kohl said he sees it in the big trends and at the creamery — demand is growing for products like whole milk and ice cream — emotional comfort food.
— By Sherry Bunting, Farmshine, May 1, 2020