U.S. Dairy Industry Curdles Under Pressure: Part 1

Matthew Carr By Matthew Carr
Emerging Trends Strategist

Commodities

Sitting here, drinking my black coffee, I can’t remember the last time I added milk…

I can’t even remember the last time I purchased milk.

Across the U.S., the number of dairy farms has been cut in half since 2000.

Over the past decade, the number of dairy farms in Vermont has fallen 31.8%. Just this year, another dozen dairy farms have gone under in the state.

The reason the industry is eroding is quite simple: Farmers are getting paid less for milk than what it costs to produce it.

Dairy Glut Turns Sour

When I was growing up, milk was a staple at the breakfast and dinner table.

If you wanted strong bones, you needed to drink milk… at least that’s what we were told in the “Got Milk?” ads.

But unbeknownst to my younger self, there was a significant shift underway.

Over the past four decades, U.S. consumers have increasingly turned away from milk…

From 1975 to 2016, the amount of fluid milk the average American gulped down each year fell 37.7%.

Despite this trend, American milk production has actually increased 37% over the last 20 years.

This means the total value of the gross production of dairies has been on the rise. Because even though prices have been falling, the increase in production has pushed the total value higher. In fact, from 2010 to 2017, the total value of gross dairy production in the U.S. increased 8%.

This approach has led to a global dairy glut. And the oversupply in the U.S. has resulted in record amounts of milk being dumped.

Of course, if an entire industry is increasing production, overall production costs will rise too. Consequently, feed costs have jumped 36% and total costs have ballooned 24.7%.

Conversely, the price of milk is on a steep decline…

The price per hundredweight of milk is down 37% since March 2014. And prices are expected to decline this year and be flat in 2019.

With the retail price of milk around $3.25 per gallon, it’s lower now than it was a decade ago.

That means there are more U.S. dairies struggling and fighting to remain in business. And the pressure is on big milk buyers, processors and distributors, like Dean Foods (NYSE: DF).

Competition Curdles Outlook

Dean Foods recently canceled contracts with 100 dairy farmers in eight states.

And over the past year, the company’s shares have been in the toilet, losing nearly 50% of their value…

Not only are revenue and profits falling, but competition is fierce in the industry.

In fact, Walmart (NYSE: WMT) and Kroger (NYSE: KR) recently opened their own processing plants to reduce costs… driving prices down even further.

Amid all of this is the encroachment of milk alternatives.

I’m talking about almond, cashew, coconut, hemp, rice, soy and other “milks.”

Now, these still make up a very small portion of the total global dairy industry. In fact, they currently account for just 3% of the $600 billion worldwide dairy market.

But sales of these dairy alternatives have soared 61% over the past five years as milk sales have soured.

As Americans abandon a dinner table staple for the newest health fad, U.S. dairies will continue to crumble under the pressure.

Changing consumer tastes are the biggest threat to the dairy industry and will continue to be… at least until drinking milk comes back in vogue.

Good investing,

Matthew

P.S. There’s more to cover in the downfall of dairy… and it has everything to do with our neighbors to the north. Keep your eyes peeled for a follow-up about how Canada’s 240% tariffs are making times even tougher.