Leite: Coronavirus increases uncertainty and could put pressure on prices in May

Ongoing research by Cepea (Center for Advanced Studies in Applied Economics), Esalq/USP, indicates that, in the Brazilian Average, the value of milk to the producer in May (collection from the previous month) may be pressured as a result of the uncertainties generated by coronavirus crisis in the derivatives market in April.

After registering intense demand in March – and the consequent rise in prices that month, when the coronavirus began to spread in Brazil – negotiations involving dairy derivatives weakened during April in the Brazilian market. April marked the first full month of confronting the pandemic and a new dynamic of consumption among the population. 

In addition to the provision of food services (important dairy distribution channels) being hampered by the worsening of the pandemic, there was also a decrease in the frequency of purchases by consumers and a reduction in the income of many families. These factors had a negative impact on the demand for various derivatives in April, especially refrigerated products (perishables), which have greater added value for industries.

Cheese consumption was the most affected and the difficulty in ensuring liquidity had a negative impact on the production of this dairy product in April. As a consequence, there was an increase in the supply of raw milk on the spot market (negotiation between industries) in April. In Minas Gerais, the average price fell by 7.3% in the first and 11.7% in the second half of April, respectively.

The negative perspectives on consumption in the medium and long term and the increase in uncertainty in April reduced industry investment in inventories, even more so at a time when raw materials are valued, due to supply conditions. It is important to remember that the price in the field is formed after fortnightly negotiations on spot milk and the sale of dairy products. 

Thus, the time lag between production and marketing of derivatives causes a delay of one month in the transfer of market conditions to the producer. Due to this dynamic of price formation in the field, spot and derivative prices in April will influence the values of milk collected in that month, which will be paid to the producer in May.

June 

Dairy production is in a moment of transition to the off-season in the Southeast and Midwest. In the South, the drought hampers activity and compromises the quantity and quality of silage production for the coming months. 

Cepea research shows that, after falling by 0.8% in the first half of May, spot milk prices in Minas Gerais registered a significant increase of 29% in the second half of this month, due to the reduction in production.

On average this month, the spot price in May was 6.7% above that of April, in nominal terms. Thus, the decrease in milk supply in the field could maintain or even increase producer prices in June.

Source: DATA

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