Food & Beverage Industry Update
The dairy product production industry has experienced a stable demand for its diverse range of products despite facing challenges such as high rates of inflation and declines in disposable income. However, it is crucial to note that this stability might be susceptible to fluctuations, particularly if inflation outpaces wage growth. In such a scenario, there is a possibility of a decline in demand for dairy products. Dairy products have become an integral part of the American diet, establishing a stable and consistent demand, contributing to the industry’s resilience, and further bolstering its market stability. Key players influencing this market include Dairy Farmers of America, Land O’Lakes, Nestle, and California Dairies.
The current surge in inflation, coupled with other contributing factors, has led to a notable increase in the cost of everyday items; dairy product production is also facing the impact of these rising costs. This increase in expenses poses challenges for both industry players and consumers alike. The primary concern for most producers lies not in variable consumer demand, but rather in the fluctuating pricing dynamics of the dairy market. The variable pricing of dairy products presents a significant challenge on producers, often requiring careful market analysis and management strategies.
Products & Services Segmentation¹
Dairy product production experienced slightly unstable revenue generation due to the amplified fluctuating feed and milk costs due to COVID-19. The industry exhibits high capital intensity, primarily attributed to the extensive use of heavy machinery and equipment for product generation and storage. Key external drivers of dairy product production include demand from dairy wholesaling, supermarkets, and grocery stores, as well as per capita dairy consumption¹. These factors significantly influence the industry’s production levels and overall market performance.
Dairy Product Production Revenue¹
2015-2028
Personal Consumption Expenditures (PCE) for nondurables have shown an upward trend, rising from a low of $2,664B in April 2020 to a peak of $3,845B in June 2022. However, since May 2022, expenditures have remained relatively stagnant, hovering around $3,800B.
Personal Consumption Expenditures: Nondurable Goods²
January 2019 - May 2023
Potential For Increasing Competition
Due to the lingering economic impacts of the COVID-19 pandemic, there is a possibility of a slower-than-normal increase in demand for dairy products, as consumers adopt cautious spending approaches. This anticipated constraint in demand creates an environment of heightened competition within the industry. The industry faces rising costs in raw materials, fixed expenses, and labor, which can lead to higher production costs for dairy operators.
While they may pass some of these increased costs onto consumers, significant cost hikes could pose challenges. The wide availability of dairy products allows consumers to choose from numerous options, leading to easy brand-switching for the cheapest product at the point of sale. This consumer behavior intensifies competition in the industry, emphasizing the significance (or insignificance) of brand loyalty, the importance of product innovation, and the continued focus on product differentiation for dairy producers.
Growing Demand For Healthy Diets
Recent cultural shifts have driven an upsurge in the demand for healthy products, with consumers prioritizing health and wellness. This has led to increased popularity of reduced sugar, plant-based, and organic ingredient products over other more affordable and reputable options in the market. Plant-based dairy alternative products such as almond milk, soy milk, and oat milk have witnessed a notable rise in popularity and consumer preference. To remain competitive, companies within the industry are expanding their product portfolios to include these plant-based options and should consider offering “healthier” dairy products or plant-based alternatives.
The recent cultural shift has led consumers to be more environmentally and ethically conscious about food production practices. Brands disregarding these concerns may face reduced support. Consequently, the industry is expected to witness growth in sustainability initiatives, such as improved animal care procedures and eco-friendly packaging, impacting supply chains as participants strive for more transparency in their practices.
Local Dairy Benefitting From Increasing Import Costs
Fluctuating exchange rates and an appreciating U.S. dollar result in increased import costs, making domestic production and sourcing more favorable for the dairy product production industry. Various government policies, including tariffs or trade agreements, can influence the cost of dairy product imports. Price increases resulting from such measures could reduce the competitiveness of foreign dairy production companies in the U.S. markets. Fluctuations in supply chain issues, shipping fares, and fuel prices can result in higher importation costs for dairy products. If these costs become significant, it may discourage importation, making locally sourced alternatives more appealing to consumers.
Regulation & Policy
The dairy product production industry is subject to strict regulations at both state and federal levels. These regulations heavily emphasize food safety, environmental standards, proper product labeling, and worker safety, reflecting the careful and consistent oversight.
The U.S. government has implemented four main programs to support milk prices and foster the milk production market:
Milk marketing laws, enforced by federal and state governments, aim to maintain sufficient milk supply for consumer demand at fair prices by promoting organized milk sales. Federal authorities establish minimum pricing for manufactured dairy food products each month, which may vary based on The Dairy Product Price Support Program. Milk processing plants are subject to rigorous rules and procedures governing design, sanitization, handling, and pasteurization. However, certain legitimate exclusions exist, such as allowing raw milk purchasing in specific jurisdictions and maturing processes for certain cheeses.
Recent M&A Activity³
