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February 17, 2020

The Bright Future Ahead For A Changing Dairy Industry

 |  By: Tom Bailey

With great change comes great opportunity. And there is no doubt about it, there is change afoot for dairy. This change is particularly relevant to the $12 billion U.S. fluid milk market, which has seen two bankruptcies in recent months after decades of declining sales. Over the last 10 years alone, U.S. sales have fallen at a compound annual growth rate (CAGR) of 2% in volume terms. Annual per capita demand of milk has fallen by 4 gallons per person, sitting at around 15 gallons in 2018.

And no, milk sales are not declining because everyone is drinking alternative milks. Per capita consumption of alternative milks have grown from 0.5 to 1 gallon per capita over that same time, clearly not enough to account for the 4 gallon drop in milk. Some have replaced milk with Oatly in coffees or shakes, but I challenge you to find someone who drinks a glass of alternative milk with their breakfast. The truth is many Americans have simply shifted to drinking more water and eating rather than drinking nutrients. Per capita demand for bottled water has grown by 6 gallons over the last 10 years.   

The challenges milk currently faces are somewhat existential. It will take innovation, development and more customer focus to reveal opportunities for growth and higher margins. This all takes money, but it seems to be happening. Plant investments and mergers and acquisitions (M&A) activity in fluid milk are on the rise as consolidators buy stragglers, new plants are being built, and new premium and differentiated milk products are launched, many of which – A2, fairlife, Oberweis, Battenkill Creamery to name a few – are doing exceptionally well.  

The ink is still wet on the U.S.-China phase one deal, but it looks promising for dairy, specifically fluid milk. The agreement lays some groundwork which looks to align U.S. and Chinese standards of milk, eliminate grey areas that currently exist and open doors for U.S. milk. The timing couldn’t be better. At $19 billion and growing, the Chinese milk market is much larger than the $12 billion U.S. market. China’s dairy industry is only about 75% self-sufficient, and as demand grows, this gap will likely widen as less efficient milk production in China struggles to maintain pace with demand growth. 

The U.S.’s growing surplus of milk could find a nice home in China. There are some U.S. milks already being sold there, but their market share is just a sliver of what is sold by European and Oceania companies, which are well established in China. It will take time and energy for U.S. players to establish themselves in China, but there appears to be promise for milk if negotiations continue in their current direction. 

Yes, there is change in the U.S. milk industry. But a promising futures lies ahead. In order to capitalize on the opportunities as they continue to change and evolve, U.S. milk processors should aggressively seek a role in driving the changes at home and abroad.