U.S. Dairy Industry 2019: Challenges and Opportunities
The United States produced about 217.5 billion pounds of milk for human consumption in 2018, making it the largest dairy producer in the world. However, according to a 2019 McKinsey report, the U.S. dairy market depicts a grim picture. From 2015 to 2018, top dairy products experienced declining sales, pricing pressure from retailers, and reducing margins for dairy producers.
The global dairy sector is currently going through a period of turbulence. Dairy producers face a myriad of challenges including climate change, trade actions, geopolitical conditions, as they navigate low
milk prices and shrinking margins. According to Rabobank’s re cent research, in the first quarter of 2019, U.S. dairy production and exports were down compared to Q1 2018, particularly in the midwestern states. In contrast, while milk production has seen an increase on a global level over the last several years, there has been a slump in milk retail sales.
The Oversupply Challenge
National milk production is increasing faster than the processing capacity. Another challenge facing the dairy industry is total per capita consumption of fluid milk has been steadily falling for some time because of competition from other beverages and because the share of the nation’s total population who are children continues to decline.
Margin Challenge
Consolidation in the retail sector, means a few retailer and super chains have considerable buying power. This trend combined with the growth of budget retailers and store label products, translates to increasing pressure on already thin margins.
Pricing Challenge
Prices for milk and dairy products are volatile and change on a weekly and monthly basis based on a number of supply and demand factors as well as U.S. government policies. Milk prices at the farm level are determined fundamentally by wholesale commodity prices for cheese, butter, non-fat dry milk, and dry whey in combination with U.S. government’s milk marketing orders and interaction with the federal dairy price support program.
Prices for milk and dairy products are driven mainly by changing market conditions and less by government intervention. Milk prices begin with the supply of milk and the allocation of these milk components to the production of fresh and storable dairy products. The interaction of the production of these products with market demand determines wholesale prices for cheese, butter, non-fat dry milk, and dry whey. These wholesale prices then determine what processors pay farmers for milk used to make various dairy products. These costs also influence what consumers pay for various dairy products.
Price Volatility
The U.S. dairy market price volatility in recent years is just not due to domestic dairy market factors or broader domestic economic conditions. In fact, U.S. dairy market price changes in recent years are almost entirely due to volatility in world dairy market prices. Increased participation in export markets has made the U.S. industry subject to international price swings, which bring higher prices at times and lower prices at times.
Causes of Price Volatility
- Dairy (and other food) commodities are inelastic in terms of price demand. This means that a modest scarcity of product causes a major increase in prices and vice versa.
- Supply response in terms of increased production of dairy products is slow following a change in price. This is due to the nature of the production cycle in dairy farming which is prolonged when compared with other production cycles e.g. pigs.
- There is an increasing integration of global commodity markets with financial markets which is likely to have some effect in increasing speculation in food commodity markets.
- Increased globalization of dairy commodity trade and increased price transparency e.g. Global dairy trade auctions.
Taking the above factors into consideration, it is reasonable to assume that the current trend in price volatility in dairy markets is likely to continue.
Opportunities
Changing consumer preferences, expanding global markets including China and India, increasing population growth in these markets, and shift towards ‘healthy food options’ among others have made dairy producers sit up and take notice of the rising demand for dairy and dairy products. As the global demand for dairy and dairy products soars, the U.S. dairy industry is rising up to the challenge.
Today, dairy producers need fast, accurate, and reliable solutions —manual operations can no longer suffice. Combined with automated equipment and advanced software solutions, producers can help address important aspects of the dairy industry, including:
- New product introduction based on consumer insights.
- Accurate forecasting for all product lines.
- Optimum product mix, for higher margins and improving market share
A clear understanding of the dynamic environment and a continued focus on a winning approach can translate into significant growth margins for U.S. dairy producers.
To grab a pulse of the competitive market and expand their market share, dairy producers need to invest in high- quality data and analytics tools. Using the insights derived from these tools, dairy producers can make well- informed and strategic decisions with respect to production, promotion, pricing, and new product introduction.
A price optimization solution can help solve the dairy industry’s simple to complex pricing challenges, as well as provide actionable and real-time actionable insights which can help increase profit margins significantly.
A good pricing solution can help dairy producers:
- Perform Quick Cost and Price Change Analysis: Quickly see the impact of cost and price change at an aggregate corporate level and for each customer
- Make Efficient Price Updates: Easily and accurately update pricing, by customer, on a weekly/monthly basis thereby reducing overall risk
- Improve Speed of Price Distribution: Through automation of pricing updates sent to customers on a weekly and monthly basis
- Optimize Pricing: List price, standard discounts, deal price and margins for every customer through cutting- edge price optimization and commodity price forecasting models
Summary
Innovation, be it in product introduction or process improvement is an important lever in the food industry as a means of driving margins. Digitization, improved price management and new product introduction can be most effective ways to arrest and improve declining margins.
