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Blog: As US dairy continues to diversify away from fluid milk – what is the long-term market outlook?
08 June 2020
US dairy consumption patterns continue to evolve over time as
new consumer trends and products alter the landscape. The US dairy
industry continues to see overall mostly rising domestic per-capita
dairy consumption, but a few big winners have carried most of the
gains. Cheese remains the largest growth engine for the US
industry, particularly the "other cheese" category, which
compromises Italian style cheese such as Mozzarella. US butter
demand has shifted higher in the past decade as US consumers have
shifted away from margarine. Yogurt has posted strong consumption
gains in the past two decades but has started to level off more
recently. Whey and full fat ice cream consumption growth in the US
has declined in the past two decades. The US dairy industry
continues to diversify away from fluid milk, as the proliferation
of many other beverages has eaten away at market share in the last
30 years.
Dairy Processors Continue to Diversify Away from Fluid
Milk
US per-capita fluid milk consumption continues to decline,
despite efforts to revive sales through advertisement campaigns and
other industry initiatives to promote new, fluid milk products.
Per-capita annual fluid milk consumption in the US has fallen by
35% since 1990 to around 142 pounds of fluid milk estimated in
2019. The increasing competition from other beverages such as
sports drinks, juices, flavored waters, sodas, teas, has hurt fluid
milk sales in the past 30 years. In addition, lower breakfast
cereal consumption more recently, which traditionally promotes
fluid milk consumption, has been a problematic factor.
Ten-Year Outlook for Dairy Product Segment
Trends
The US dairy industry will continue to view adding cheese
production capacity as a safe bet. The next decade likely will
favor a continuation of cheese and butter consumption growth
trends. Cheese remains the primary engine for further growth,
particularly mozzarella and Italian style cheeses. Most new dairy
processing capacity in the US that has been built in recent years
has been for cheese production. Higher pizza consumption and
growing overall cheese usage at fast food and sit-down restaurants
has pushed US annual per capita total cheese consumption to over
38.5 pounds in 2019, up 57% since 1990.
US pizza and "fast casual" restaurants have done a great job in
the past decade at championing mobile ordering options and that has
driven strong sales in that sector, which has been a boon for US
cheese consumption, particularly mozzarella. Mozzarella has the
greatest growth potential compared with "American style" cheeses
like cheddar.
Supply chains have shifted to accommodate greater cheese and
butter production capacity by creating a price incentive for dairy
producers to optimize milk components for higher milk fat content.
The average US dairy milk fat production percentage steadily has
risen from around 3.66% in 2010 to above 3.89% for 2018. US
butterfat and cheese prices have garnered a stronger premium
relative to other dairy products such as dry milk powders in the
past decade, spurring a response in butterfat component production
levels.
US per-capita butter consumption has risen to 5.9 pounds, up 37%
from 1990, and butter consumption still has upside potential as it
continues to benefit from consumers warming to the idea that fat is
not harmful in moderation. Butter continues to benefit as margarine
loses popularity. Fluid milk consumption turning around from its
long downtrend seems unlikely, but the rate of decline should start
to flatten.
It remains an era with too many other beverage choices for milk
to gain traction. Also, the proliferation or greater awareness
around "lactose intolerance" has hurt fluid milk consumption. In
the long-term, higher rates of away-from-home eating are favorable
catalysts for cheese and butter consumption growth as consumers
tend to eat more dairy products, particularly cheese, when going
out to eat. This leads IHS Markit to the outlook that US dairy
processors and supply chains will continue to invest in cheese
processing capacity in the next decade as consumer trends remain
favorable for steady growth.
The US dairy industry seems to be focusing efforts on other
research and development in other dairy product categories after
several failed attempts to revive sales of fluid milk. "Greek
style" yogurt has been a big winner and a focus on working with
restaurants to incorporate more cheese into menu items has been
successful. This has helped cheese consumption to steadily rise and
that more than offset losses for fluid milk consumption.
Several high-profile fluid milk company bankruptcies in the past
few years highlight the need for diversification towards other
dairy products. Fluid milk supply chains have shifted, with
retailers becoming more integrated in the process. Several large
retailers in the US have decided to create their own milk bottling
plants in order to save costs and use them as a tool in some cases
as loss leader to drive traffic into the store. Retailers have
created marketing agreements directly with dairy producers instead
of going through third-party bottlers, pocketing some of the cost
difference as they integrate supply. Most milk cooperatives and
processors see the long-term downtrend in consumption and shifting
supply chain at the retail level as major financial headwinds.