Trade Wars + Over Supply + Dairy Alternatives - How will the US Dairy Industry fare in 2019?
Dairy Industry 2019
Trade Wars + Over Supply + Dairy Alternatives
How will the US Dairy Industry fare in 2019?
The year is starting with some optimistic tones after the EU was able to move all but 5000MT of its Intervention Inventories (mostly sold at feed prices) and the US was able to export much of its Nonfat Dry milk inventories leaving the world better situated for 2019.
With a better balance on supply and a rise in demand Market prices are on the rise. Milk prices paid to Farmers are expected to be a little bit better than last year (Class III averaged $14.60 and is expected to increase ~$1.00 to ~ $15.60), but there remain issues to contend with before getting overly optimistic.
The industry is leaving behind, what some considered, the worst dairy crisis in history. In 2018 we witnessed:
- Excessive Farm bankruptcies (Midwest saw an increase of 19%)
- Near Record high Nonfat Dry Milk Inventories (reaching better than 260 Million LBS – Now down to 125 Million LBS)
- Record high Cheese inventories (Still at 1.4 Billion LBS)
- Better than 140 Million LBS of raw milk were dumped
- Near record high cow culling
- Dairy Co-Ops drop farms from contracts.
Some of the issues that created the disaster remain today:
- Trade wars continue to hurt the industry and new world Trade agreements are being written without the US. The USA has isolated itself
- Too much Milk - Production in the US needs to adjust to current demands (Millions of LBS of fluid were dumped in 2018 and the same may happen this year)
- Dairy Alternatives; including milks, yogurts, ice creams, cheeses, butters, are in high demand and growing faster than dairy demand.
On the plus side
- World Production is slowing and is only expected to increase 1%
- World demand is expected to grow 1 – 2%
The most concerning issue today is resolve of the Trade wars with
Canada, Mexico, China and Japan
Canada and Mexico
Replacing NAFTA and US Tariffs on Aluminum and Steel are affecting the dairy trade.
- Mexico is battling the US Steel and Aluminum tariff with their own retaliatory Cheese tariff and Cheese exports were down 10% in 2018. Unless the tariff is lifted, we can count on a continued drop in cheese exports.
- Despite not having a firm trade agreement with Mexico overall Exports to Mexico were strong last year. However; new Free Trade Agreements between Mexico, the EU, New Zealand and Australia could have a negative impact on future sales as these competitors work closer with Mexico.
- The New USMCA (expected to replace NAFTA) trade agreement is not yet in effect and still requires a final vote from both Countries but US dairy Farmers are happy with the plan because it will allow the US to export more dairy into Canada. Canadian Farmers are not happy at all and continue to push to stop the new agreement.
- Meanwhile; Canada’s new “Food Guide” (Soon to be released) all but eliminates dairy from the diet. It suggests that drinking “one” pint of milk a day is healthy, but that’s about it! It eliminates eating cheese and yogurts. The Guide replaces dairy with Plant based Proteins, Nuts and water. WOW!!!
It’s a political battle between these two powerhouses and no one is winning.
- Chinas 25% retaliatory Tariff on US Dairy is hurting our market but Regardless of what China is losing in the trade deals they are not doing without dairy. They are simply doing with less dairy from the US.
- Sales from the EU to China have increased nearly 35% over the past couple years. China has been able to supplement any loss, not only through the EU, but through other countries including Belarus, Argentina, and Ukraine.
- US exports to China were down ~ 36% for the second half of 2018 and Cheese exports were down as much as 63%. Even if we come to terms with China, we don’t know how much business we will regain.
- Japan imports a great amount of cheese and the US has helped support that demand, but new trade agreements excluding the US can change that.
- If the US can work a new deal with Japan than Cheese exports could increase substantially but if not exports to Japan could drop as much as 80%. The challenge is that the US pulled out of the Trans Pacific Partnership (TPP) and has nothing new to replace it.
- With the US out, a new Free Trade Agreement known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) has been formed between Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, Peru, New Zealand, Singapore and Vietnam. Trade will continue without the US.
- Japan has also signed a new agreement with the EU referred to as the Japan-EU Economic Partnership Agreement (JEEPA) and it includes new Dairy trade deals.
- Analysts are Not optimistic about a new Trade Agreement between the US and Japan happening very soon.
World demand is expected to increase 1 – 2 % in 2019 and World production is slowing to an increase ~1% which will be helpful in maintaining better balance in Supply and Demand, but the US production forecast is for an increase of 1 – 2%.
Currently there is a record high 1.4 Billion LBS of Cheese in inventory and sales are down. Cheese production has slowed which means:
- more fluid milk in the market
- less whey in the market
Whey protein supply has tightened, and prices are continuing to rise.
Meanwhile; Cheese production is not the only fluid milk user that has slowed. Yogurt production is also down leaving even more fluid milk available. Where will it go?
- One bit of assistance is coming from the reversal of the Health regulation put in place by the Obama administration for removing flavored milks and whole milk from schools. These milks will be going back to the school systems.
Meanwhile; Nonfat Dry Milk has been enjoying better numbers since the EU was able to reduce its Intervention inventories and the US was able to reduce its inventories leaving the industry better balanced between supply and demand. The price average for 2018 was ~ $0.80/LBS with a low ~ $0.70/LBS and now Nonfat Dry Milk price has been hanging around $1.00/LBS, but this may be short lived if things don’t change.
We are heading into Spring Flush when cows produce the most milk and we’ll have to see what production strength we experience and where product will move.
The industry strength remains in Butter as demand stays strong and pricing hangs around $2.25/LBS.
Fighting the “Dairy Alternative” battle
Big name Athletes, Millennials’, and Generation Z are on board with “Dairy Free” and Plant Based Alternatives. These groups represent the “Now” and the “Future”.
The reasons consumers claim they are leaving or cutting back on dairy vary but include:
- Health – Milk is seen as an Inflammatory, it is being linked to different cancers, Skin Conditions and Digestive issues.
- Environment – Green House Gases (some studies suggest cows produce more emissions than automobiles), water usage, land usage
- Clean Label – Anti Biotics, Hormones, GMO Feeds
- Animal Cruelty – Questionable Care of animals on large commercial farms
- Allergens – Lactose intolerance
NOTE: These concerns are not shared in all markets around the world but are strongest in Europe and the US.
Several studies show that 50% of US consumers are now buying both “Plant Based” and “Dairy” products. While the Vegan push is on the rise it does not mean consumers are becoming “Vegan” but they are incorporating more plant based foods and beverages into their diets and consuming less dairy.
Statistics show that while “Fluid” Dairy consumption continues to drop it’s not the only dairy product losing ground. Since the 1970’s fluid consumption has dropped nearly 50% but for many years, fluid found strength in the growing demands for Yogurt, Ice Cream and Cheese. However; Yogurt sales have dropped 3.5% since 2015, Ice Cream sales dropped 1 – 2% for two consecutive years but is expected to increase slightly this year (up less than 1%), Processed cheese sales are down 4.1%, and dropping. Whey Protein demand is strong but losing market space to Plant Proteins.
Plant Based and Vegan rage!!
The Plant Based and Vegan markets are growing rapidly, and Rabobank, one of the largest financial institutes involved in Agriculture, says it is not going away.
The expected “Domestic” Compound Annual Growth Rate (CAGR) between now and 2025 is 11.2% and the “Global” CAGR is expected to be 16.27% while Domestic demand for Dairy in 2019 is ~ 2 – 4% and the expected Global CAGR Demand between now and 2025 is 4 - 5%.
Studies suggest that 50% of dairy consumers are now incorporating plant based and or vegan products into their diets. The growth in demand has grabbed the attention and investments of some of the largest Companies in the world including some Dairy Companies.
- Dean Foods (Largest Fluid dairy Supplier in the Country) – Owns the majority share of Good Karma Foods and they produce Flax milk and Flax Yogurt.
- Elmhurst Dairy (Now known simply as Elmhurst) out of NY quit the dairy Industry completely and is now producing Plant Based Beverages.
- Danone – Owns So Delicious; a Coconut based Yogurt
- Lactalis – Owns Stoney Field and they recently launched a Coconut based Yogurt
- Ben and Jerry’s Ice Cream – Now offers 11 different Non-Dairy Ice Cream Flavors
- General Mills – Invested in Kite Hill (Dairy Alternative Cream Cheeses and Almond Yogurts)
- Chobani – launched a Coconut based Drink and a Coconut based Yogurt
- Nestle’s – Owns Sweet Earth and has launched a line of Plant Based Pizza
- Campbells Soup – Owns Bolt House Brands and they launched a Plant Based Milk made from Pea Protein
- Pepsi – Owns Health Warrior and they launched a Plant Protein Powder mix.
COMING TO MARKET SOON; A new competitor with a scientific twist:
Perfect Day Foods and ADM have teamed up to provide a “Cow Free” Milk.
Perfect Day has been able to duplicate cow milk without the cow. Using a unique fermentation process they are successfully producing whey and casein as if from a cow. This milk is marketed as:
- Tasting just like the real deal
If this is as good as they claim this can change the industry completely.
Aside from Big Companies jumping on the Dairy Alternative Band Wagon Big Name Athletes are leaving Dairy behind and claiming their successes are due to diet. A few of the best known “Dairy Free” and or Vegan Athletes are:
- Tom Brady
- Drew Brees
- Aaron Rogers
- Russel Wilson
- The Williams Sisters
- Arnold Schwarzenegger
Tom Brady’s success is influencing other athletes, not only in the NFL, but in each of the major league sports, to change their diets and eat more like Tom. Tom Brady eats mostly Vegan, but is said to occasionally eat salmon or chicken. NO DAIRY…. NO RED MEAT!!! He is opening a chain of Vegan Pizzerias in Massachusetts and has his own line of Vegan foods.
If you google “Vegan” and “Dairy Free” Athletes, you’ll find the lists are impressive. Also; Google Vegan and Dairy Free Celebrities.
The “Dairy Alternative” industry is getting a great deal of support from a lot of money including Dairy Giants and the largest Food Brands in the world. The Dairy Industry can’t ignore this growth and it needs to confront the issues that consumers are most concerned about.
We hope you find this report helpful
Please contact us with any questions and comments
Paul J. Knox
Monument, Co 80132