Inflationary ripples disrupt dairy as ingredient shortages and cost input hikes challenge sector

08 Nov 2022 --- Reflecting far-reaching inflationary shocks across global food, dairy is seeing its fair share of price hikes. FoodIngredientsFirst dives into the market dynamics impacting the dairy sector which include diminished demand for branded products in Europe and lower cattle numbers in the US, alongside the overall rise in feed cost.

“Inflation is hitting all product groups, mainly due to the higher cost of milk which for all products is a substantial part of the total cost,” Thomas Carstensen, senior vice president in Global Trading & Planning, at Arla Foods, tells FoodIngredientsFirst.

“The farmers have been hit with higher feed cost due to less availability (war in Ukraine), higher energy cost and also a significantly higher cost on fertilizer, which is heavy depending on energy in the production and less availability.”

In October, the FAO Dairy Price Index was recorded at 18.7 points (15.4%) above its value a year ago.

On top of that, Carstensen flags the impact of higher transport costs. “[This is] not yet due to cost-driven factors but as a result of COVID-19 measurements across the world that have led to long waiting time in front of Asian and North American ports taking capacity out of the shipping lines.”

“Collectively all these activities have led to shortages of ingredients, high cost on packing material, out-of-stock situations and higher prices.”

Prices abate slightly in October
Last month, international prices of all dairy products covered by the FAO Dairy Price Index fell, down 2.5 points (1.7%) from September, marking the fourth consecutive monthly decline. Nevertheless, it remained 18.7 points (15.4%) above its value a year ago.

Lower-than-anticipated purchases by China and lackluster demand for spot supplies as most importing countries were well covered for their immediate needs, together with the impact of the weaker Euro against the US dollar, underpinned the drop in world dairy prices.

Market uncertainty about the direction of demand for dairy products, due to soaring inflation and economic downturns, also pressured international dairy prices down.

Nonetheless, demand for some dairy products in other countries in Asia increased, containing potential larger declines in dairy prices.

Sector productivity review
When asked whether inflation means less products on the markets, Carstensen notes: “I guess the more correct assumption is that in order to deliver the same amount of products prices need to go up to cover the cost.”

“So if all costs can be met in the market, then the same amount of products will be available over time. However that’s seldom the case due to time lack, disruption, shortages etc. So essentially, inflation is due to less availability and higher demand than availability – over time we will reach a new balance. It is too early to estimate when – and at which level – we will find this new balance.”

“We are still looking into a more or less ‘status quo’ production outlook, with less growth versus the past,” he continues. “On the other hand we still see a world where the population is growing and an increasing demand for food and dairy products, which indicates that we have not yet found the balance.”

In Danone’s recent third quarter earnings review, the French dairy giant highlighted it only transferred two-thirds of its inflation to the retail channel. In Danone’s recent third quarter earnings call, Juergen Esser, chief financial, technology and data officer highlighted that the French dairy giant only transferred two-thirds of its inflation to the retail channel. 

“The reality is that one-third of this inflation, we are able to compensate internally by record levels of productivity. And this is what we want to leverage moving forward. This is obviously becoming an even stronger weapon at the moment. Inflation will plateau or even go down,” he says.

“If and when we will need to raise prices in order to protect and develop our financial algorithm for the future, which is our ambition, we will do that,” he stresses. “We continue to do it in a responsible manner, and we will do it even if it may cost us, in a very short term, a little bit of volume.”

“We will continue to actively manage our portfolio. And this is true also for dairy in Europe carving out products and SKUs, which are not rotating, which are not profitable, which are not competitive and boosting what works.”

European outlook
The EU, in particular, is responsible for approximately 10-15% of global milk production, Carstensen highlights.

Alice O’Donovan, legal and policy advisor at the European Association of Dairy Trade Eucolait, tells FoodIngredientsFirst that shifts in consumer spending are already being recorded within the bloc.

“We have heard from our members in different EU Member States that there is already evidence of consumers watching their expenditure, e.g. increased switch from branded products to private label goods,” she comments.

“It does not necessarily follow that inflation will mean less product on the market, however there may be higher demand for more competitively priced products and slightly lower demand for luxuries.”

O’Donovan does not expect the rise in prices to abate as we approach the end of 2022.

“Inflation has certainly been felt in all Member States,” she stresses. “The highest consumer inflation rates in September were seen in Estonia, Lithuania and Latvia (25.2%, 22.5% and 22.4% respectively).”

In the organic sector, several US dairies expect a severe financial loss at an average of US$250,000 this year.US market overview
A combination of continued lower US dairy cow numbers, milk production and record-high milk and retail dairy prices is beginning to show signs of impacting domestic dairy product consumption at retail and also foodservice.

However, because retail price inflation is occurring for all food and beverages, and across the entire economy, it is unclear how or whether this will play out differently than if higher dairy product prices were an exception in an overall non-inflationary economy.

According to statistics by Dairy Management Inc. (DMI) and the National Milk Producers Foundation (NMPF), March and April set consecutive all-time highs for the monthly average milk price in the US.

The average price of a gallon of milk was US$4.181 in September, compared to US$4.194 in August – down 0.3%, according to data published by the US Labor Department’s Bureau of Labor Statistics (BLS).

Averaging the BLS’s monthly pricing data for milk — fresh, whole and fortified, a gallon was US$3.55 in 2021 versus US$3.32 in 2020, marking a 6.9% increase.

In the organic sector, several US dairies expect a severe financial loss at an average of US$250,000 this year, as flagged by the Western Organic Dairy Farming Crisis Coalition. The group warns this is threatening the viability of the organic dairy farming sector in the future, with some farmers having had no choice but to shut down their businesses this year.

Further financial loss is expected in 2023 if the compounded impacts of drought and inflation sustain.

By Benjamin Ferrer