US dairy - facing  a difficult environment

US dairy - facing a difficult environment

Our columnist Victor Martino looks at the problems facing the ailing US dairy industry and at its prospects for turning things around.

The recent bankruptcy filings by two of America's largest dairy processors, Dean Foods and Borden, have led me to the conclusion that the traditional dairy processing industry in the US is broken.

Dean Foods, the largest traditional dairy processor in the US with nearly US$8bn in annual revenue in its most recent fiscal year, posted a loss of $327m. Most of its assets are set to be acquired, pending regulatory approval, by Dairy Farmers of America (DFA), which has seen its sales drop by more than $1bn in the last two years. 

Dean Foods is the largest customer of DFA, which is a cooperative of more than 14,000 dairy farmers. Dean Foods is too big to fail when it comes to DFA and its dairy farmer-owners because without it they might not be able to sell the milk they produce. It's therefore largely an acquisition based on self preservation for DFA. 

Dean Foods' $8bn in revenue will certainly grow DFA's top line and give its dairy farmer-owners a customer for a while but Dean's $300m+ loss is going to be a burden on the cooperative.

Borden, the once iconic 150-year-old dairy processor, is trying to turn itself around but its brand is staid and boring, and in my analysis its chances of achieving a turnaround without some sort of radical transformation are very slim.

Decreased consumer demand for milk and the failure on the part of traditional dairy processors to recognise this long-term trend and act on it by shifting from a commodity mindset to a brand marketing mindset and strategy are the main reasons for this broken system.

Fluid milk consumption in the US has been on the decline for more than two decades. In 1996 Americans were drinking, on average, about 24 gallons of milk a year, according to the US Department of Agriculture (USDA). Today, that number is down to around 16 gallons.

Much of this can be attributed to the fact that over this same period consumer beverage options have grown enormously. Bottled water is the top-selling beverage in the US today, which is something few predicted two decades ago, and the explosion of plant-based milk alternatives such as almond, soy, oat and others, which now comprise about 14% of the total milk category according to Nielson data, has contributed significantly to the souring of dairy milk sales.  

But traditional processors also share the blame for continuing for too long to market milk as a commodity rather than putting a greater emphasis on product innovation, brand building and marketing.

However, there is a brighter side to dairy that offers much opportunity, which is that per-capita dairy consumption in the US is actually up, according to USDA, increasing from 539 pounds per person per year in 1975 to around 646 pounds per person in 2019. 

Americans are consuming more yogurt, butter and cheese than they did 40 years ago, which is why the dairy category has grown overall despite the dramatic drop in fluid milk consumption.

These three categories have been where most of the innovation has been in dairy in the last two decades. Yogurt styles and brands have exploded, butter has improved - although US brands failed to see Ireland's Kerrygold, now the second largest-selling brand in the US after Land O Lakes, sneak up on them - and cheese, from processed pizza topping styles to speciality and premium brands, continues to grow in sales.

Unfortunately, yogurt, butter and cheese - toss in ice cream too, which has flat sales growth overall these days - aren't in my analysis going to be enough to keep the traditional dairy processing industry in high or even medium clover because there's simply too much milk (supply) and not enough consumer demand for it.

Milk production was up to 218bn pounds in 2018 in the US, a 1% increase over 2017, according to the annual Milk Production Report released by the USDA in 2019. Overall, national milk production has increased 15% in the past decade, the data shows. And according to the most recent milk production report released in January, milk production in 2019 was just ahead of 2018.

In other words, dairy farmers keep increasing production - it's not their fault really because there's no incentive for them to not do so under the government's milk pricing system. Therefore, when the prices paid to dairy farmers are low, they milk more cows to have more milk to sell. When prices are high, they do the same to make up for what was lost when things were bad. Many describe it as a vicious cycle.

The struggling dairy processing industry is taking its toll on dairy farmers. There were 595 Chapter 12 family farm bankruptcies reported in 2019, up by nearly 100 from 2018, according to the American Farm Bureau Federation (AFBF). The majority of these filings were in dairy states such as Wisconsin, which led the nation in filings with 12. 

Wisconsin, which has the most dairy cows in the US and is the number two milk-producing state after California, lost a whopping 818 dairy farms in 2019, a full 10% of its total, according to AFBF and USDA data.

Minnesota, South Dakota and Ohio, all big dairy states, were also at the top of the chapter 12 filing list. 

California, the nation's top milk-producing state is faring a bit better than the Midwest dairy states are when it comes to dairy farm failures. However, two-plus decades of decreasing consumer demand for milk has taken its toll on the state's dairy farmers. In the 20-year period between 1997 and 2017 California lost 1,267 dairy farms, according to USDA data.

Overall, from 2017 to 2019, nearly 10% of US dairy farms went out of business, according to USDA.

So this gets us back to the broken traditional dairy processing industry. In the main it hasn't been the force behind the growth of yogurt, cheese and butter, the three categories that are responsible for the overall growth in dairy. 

The drivers of this growth instead have been innovative branded food companies such as Chobani and other upstarts in yogurt, Organic Valley and a score of smaller start-up and emerging brands in milk, as well as one of the biggest brand builders in the beverage space, Coca-Cola with Fairlife. 

The same is largely the case in butter - the innovation is coming from emerging brands rather than from traditional processors, with the exception of Land O Lakes, which under the leadership of CEO Beth Ford is demonstrating that big dairy can be innovative.

The traditional dairy processing industry in the US has become anachronistic in this era of creative category and brand disruption in consumer packaged goods. Change is needed. Innovation and brand building not commodity thinking are keys to growing dairy. Without these two elements the industry will continue to struggle from the farm to the grocery shelf.

just-food columnist Victor Martino is a California-based strategic marketing and business development consultant, analyst, entrepreneur and writer, specialising in the food and grocery industry. He is available for consultation at: victormartino415@gmail.com and https://twitter.com/VictorMartino01.