What lies ahead for the dairy industry?
“The sector is finally showing some rebound after several years of losing money and consolidation,” said Robert Fox, Director and Senior Relationship Manager in the Food and Agribusiness group of Bank of the West. “Finally things are starting to look better.”
But the industry is still grappling with changes, including:
- Industry consolidation
- Prices, consumption on the rise
- Non-dairy alternatives
The Lesson of Dean and Borden
In the U.S., consumer tastes for fluid milk have diverged from overall dairy trends.
Over the past two decades, per-capita demand for all dairy products has increased at about 0.5 percent annually. But consumption of fluid milk and ice cream have fallen significantly—putting pressure on fluid milk processor profits.
Profit margins have also been squeezed by a surge of private label milk. In recent years, grocery store chains like Kroger and Albertsons have built their own dairy processing plants, as has retail giant Walmart. In early 2019, Amazon expanded the offerings of its private label Happy Belly to include milk sold through Amazon Fresh.
The most public displays of pressure within the industry came recently when Dean Foods Co., the largest U.S. milk company, and Borden Dairy Co. each filed for bankruptcy protection. Dean Foods, which produces the leading white-milk and flavored-milk brands, DairyPure and TruMoo, said it was saddled with nearly $1 billion in debt as of its filing in late 2019. Borden said it needed to restructure more than $250 million of debt, blaming its financial difficulties, in part, on falling consumption and private-label producers.
Despite the drop in demand, producer prices for fluid milk have been rising.
After years of steady consumer prices, “consumer inflation in the dairy segment has reappeared,” observed Fox, whose group’s loan portfolio to the industry exceeded $7 billion at the end of 2018. “So that’ll bring another pressure point to the consumer and could really level off demand.” Fox said that expectations are for dairy production prices to remain strong, but not necessarily at levels reached in late 2019.
After years of pressure from a global oversupply, this rise in price has been sorely needed as farmers in general continue to lose money. In fact, the milk price for farmers in the U.S. remains stubbornly below the cost of production everywhere in the U.S., except California.
Even with the passage of the 2018 Farm Bill, which provided some relief, the number of dairy farms is expected to shrink. With 75,000 farms in the U.S. with dairy cows in 2006, fewer than 38,000 existed by 2018.
Some relief arrived over the past year, though, as the wholesale price of milk jumped more than 30 percent. But those prices are already beginning to retreat slightly.
Another factor pressuring the industry is a consumer shift to more plant-based, protein-rich drinks, and an array of substitute butters.
This consumer shift has been occurring for several years. A survey by Mintel found that in just the five years through 2017, non-dairy milk sales in the U.S. had jumped 61 percent, with pecan and quinoa milk joining almond, soy, and coconut as popular alternatives.
And recently, Whole Foods Market predicted in its annual forecast of food trends that it expected in 2020 to witness an increased use of grains and mung beans, in addition to soy, to “mimic the creamy textures of yogurts and other dairy products.” The grocery store chain said new butters, made from a growing list of nuts and seeds, including watermelon seeds, cashews, and almonds, would be increasingly popular substitutes for the traditional dairy product.
While consumption of dairy butter and cheese continues to grow, these other products could have a significant impact. Other new trends within the dairy market, Fox said, included:
- An expanded range of flavored milks
- More exotic yogurts, including new ingredients such as aloe
- A mix of plant-based drinks added to dairy milk
- Ultra-filtered milk with higher protein and lower natural sugars
These changing tastes, driven in part by health concerns and the ecological impact of dairy farming, when combined with the traditional challenges of global supply and demand, are but some of the factors shaping the industry’s mood for 2020, Fox explained.
“Most farmers will need to see higher prices over a longer period to begin feeling optimistic again,” he said. “I think 2020 will be a year for the industry to take a step back and recover. People are just kind of biding their time and catching their breath after many years of low prices and weak demand.”