Americans still love their dairy products. That much is hard to deny, as per capita consumption has grown 22% over the last 45 years or so. In fact, recent figures show a year-over-year increase of 12 pounds per person between 2020 and 2021, with people now consuming 667 pounds of milk, cheese, yogurt, ice cream, butter, and other dairy products annually.
The upshot? Americans are eating more dairy than drinking it.
Changing consumer demand has naturally led to changes in dairy processing investments. Much of the growth and expansion in manufacturing capacity has shifted more toward cheese, butter, milk powders, whey protein powders, and so on, while bottling capacity for fluid milk is moving in the other direction. It’s on a decline as the industry realigns processing assets to meet the growing consumer demand.
The Rising Price of Butter
The change in consumer demand for dairy has also increased the competition for one particular product: butter — and butterfat, of course. The industry responded in kind, increasing production to upwards of 9.07 billion pounds in 2021. But such drastic shifts in demand are still affecting the available butterfat supply and are contributing to record-high butter prices. The last year has seen butter prices remain elevated, putting pressure on the margins for dairy processors.
Butter and butterfat shortages are partly due to the increasing costs associated with on-farm milk production. Complicating matters further are plant operating costs increasing and labor shortages, which are causing additional disruptions to existing supply chain issues. At some butter plants, total output has fallen up to 20% due to their inability to find workers.
Beyond that, the demand for cream is on the rise. Consumers are now consuming butterfat in the form of cheese, ice cream, and other dairy products more than ever before. The move from fluid milk to other dairy products has increased the competition for butterfat, tightening already strained supplies. And none of this even takes into account the export of dairy, with the U.S. now exporting more butter than it’s importing. With global butter prices being what they are, U.S. butter is in high demand, as it can be seen as a bargain on the export market.
All in all, you’re looking at a perfect storm for rising demand (and rising prices) for higher-fat dairy products. Butter and higher butterfat dairy products are often topping the list.
Taking Proactive Measures to Market Changes
At current price levels, it’s only natural for dairy processors to seek out ways to optimize plant production and manage inventories to minimize excess. This often leads to the question of how to best prepare for the potential impact of the rising costs of processing and producing dairy products. The following are the best places to start:
1. Maintain a solid working capital position.
A solid working capital position has long been essential to maintaining liquidity and profitability. It’s also essential to the coverage of cash flow. That much hasn’t changed. In fact, it’s now key to navigating your business through this environment of high milk prices. Pore over those books to ensure you’re not only able to pay farmers but can also increase your operational flexibility. Such efforts allow you to carry additional inventory to weather supply chain distributions and position your company for future growth.
2. Invest in the right dairy processing assets.
Being in the dairy industry, you probably know underinvestment in processing assets can be problematic for not just operations but long-term success. With dairy cows producing milk 24/7, maintaining your current assets isn’t enough. Research the options available and reinvest in dairy processing technology to operate at an enhanced level.
3. Diversify for success.
Diversification can be the best defense against rising dairy prices, especially with the dairy market growing more volatile in the past five years when compared to decades prior. Rather than planning for markets to return to “normal,” diversify and expand your customer base. Do the same with your supplier base and product portfolio. Such efforts should provide some stability to your bottom line.
Dairy consumption has always been on the move. Each year seems to usher in a new dietary trend that changes what sorts of dairy products consumers choose to eat. Though no one has a crystal ball to see into the future, there are ways processors can prepare by diversifying the product portfolio, investing in the right technology, and keeping an eye on working capital. It can provide the flexibility you need to navigate market changes.
Amanda Durow is vice president – dairy specialist for CoBank, supporting dairy processing companies, dairy farmers, agribusinesses, and grain/farm supply cooperatives. Amanda also serves as chair of CoBank’s dairy processing and production center of excellence. Amanda has a BS in animal science – dairy industry and MBA in finance from the University of Minnesota. Amanda and her husband are fifth generation dairy and crop farmers.
Editor's Note: The views expressed in this article are those of the author and not necessarily those of Dairy Foods or its parent, BNP Media.