It has been just one year since the world shifted forever, with the number of changes seen over the past 12 months almost incomprehensible. Thankfully, more positive news seems to arrive on a weekly basis lately: The vaccine rollout is moving quickly, some pandemic restrictions are being lifted and the weather is improving with hopes increasing for a more normal summer in the U.S. In dairy markets, volatility has been muted versus the extremes seen in 2020 as a sense of normalcy creeps back into sentiment and fundamental drivers reclaim control.

In Washington, D.C., this week, Democrats passed one of the most expensive pieces of legislation in U.S. history. The $1.9 trillion American Rescue Plan Act of 2021 is the third round of stimulus that the government has approved in the past year. According to the New York Times, the bill not only addresses the COVID public health crisis but also is “ambitious anti-poverty” legislation.

Key components of the bill include direct stimulus checks, continued unemployment benefits, child tax credit expansion and an extension of the increased SNAP benefits.

Agriculture is a significant benefactor in the bill as well, with $10.4 billion in funding for various USDA programs. Key provisions include:

• $3.6 billion to fund “purchases and distribution of fresh dairy, produce and meat products for distribution to those in need through existing USDA purchase programs.”

• Money also is available for grants or loans to food processors, distributors, farmers markets, producers or others to respond to COVID.

• Loans and grants are available to “maintain and improve food and agricultural supply chain resiliency.”

• $5 billion in debt forgiveness, support and outreach to socially disadvantaged farmers

The spending contained in the stimulus package is vast and will touch nearly every sector of the American economy. According to the Organization for Economic Cooperation and Development, U.S. GDP will accelerate twice as fast as previously expected this year due to the stimulus package coupled with the rapid vaccine rollout. U.S. GDP is expected to expand 6.5% in 2021, up sharply from the 3.2% expansion forecast in December.

In addition to a third round of the direct stimulus checks (following payments in March and December 2020), the shift from child tax credit to advance payment will have profound effects on household incomes in families with children. Some projections show a 45% reduction in child poverty as a result of this policy shift. While lower-income households will benefit most from provisions in the bill, analysis shows all households on average will see increases in after-tax income.

With substantial amounts of cash being injected into the economy, concerns are increasing regarding inflation in the coming months. However, economists largely are mixed on their viewpoints of how this stimulus package will impact inflation. According to the New York Times, some Wall Street investors are increasingly concerned about inflationary risk, but there is little to suggest that inflation will reach dangerous rates. Inflation expectations have increased since the beginning of the pandemic but remain at 2%, according to the Federal Reserve Bank of St. Louis, exactly aligned with the Fed’s stated goals. The Fed has reaffirmed that interest rates will remain near 0% until the U.S. has achieved full employment with inflation above the 2% mark.

With significant financial stimulus being injected to jumpstart the economy, coupled with a seemingly quick vaccine rollout as a shot is available to every adult by late Q2, what do these factors mean for dairy markets in the coming months? Most Americans, especially lower-income households, will receive a significant amount of stimulus cash in the coming weeks, with the advance child tax credit payments continuing throughout the second half of this year. There are no restrictions on how to spend this money, with some likely moving into savings similar to the past two stimulus bills and some being spent immediately, driving consumer spending higher.

Assumptions that show the U.S. GDP will grow at more than double the previously expected rate lean bullish for dairy prices, especially in cheese. The continued increase in SNAP benefits and unemployment payments, plus stimulus checks, will be supportive to dairy demand at the retail level. Possibly more significant, the quick vaccine rollout coupled with stimulus check cash could drive a quick recovery in foodservice demand as well, as pent-up demand for dining at restaurants is able to be fulfilled. Finally, the $3.6 billion blank check for USDA to purchase and distribute food also will increase dairy demand; Ag Secretary Tom Vilsack and the Biden administration have broad authority in how to spend this money, with details currently unknown.

Inflationary trends, U.S. dollar strength and other macroeconomic factors could heavily influence dairy values throughout the second half of this year. Exports will be contingent on a combination of U.S. product values versus global dairy prices coupled with the value of the U.S. dollar. While most economists are ruling out the inflationary threat, HighGround is concerned about inflationary impacts in dairy markets as other commodity markets (grains, lumber, soybean oil) currently are seeing values race higher.

HighGround does not expect cheese market volatility like what was seen in 2020, nor is there any fundamental case for CME spot cheese prices to climb sharply higher than the $2-per-pound mark. However, with both the economy and consumer spending likely to expand at the quickest rate in years into the remainder of 2021, coupled with billions of additional dollars for USDA food purchases, the possibility of dairy markets getting overheated cannot be ruled out if demand or inflation drive sentiment into bullish territory.

Reprinted with permission from the Jan. 22, 2021, edition of CHEESE MARKET NEWS®; © Copyright 2021 Quarne Publishing LLC; (608) 288-9090;’

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