However, the dairy industry is experiencing significant uncertainty. Even before the Russia–Ukraine conflict, global dairy commodity prices were soaring due to a supply shortfall. Major export regions have been grappling with poor weather or margin erosion, resulting in a year-over-year deficit. The seven biggest dairy-producing regions, including the U.S., EU, New Zealand, Australia, Brazil, Argentina, and Uruguay, have seen record-high feed costs and weather-related issues directly impacting the profitability of dairy farmers. Global herds have contracted or are facing barriers to growth, making it harder for milk output to rebound after the current slump. If weakening commodity prices translate into lower farmgate prices in the coming quarters, it may result in a slower recovery.
Several key themes are driving headwinds and tailwinds for the industry:
- Commitment to Sustainability: The dairy industry was responsible for 3.4% of the world’s greenhouse gas (GHG) emissions in 2021, almost twice as much as the aviation industry. The industry must continue investing in responsible waste disposal, water, energy management, recyclable packaging, and renewable energy.
- Health and Wellness: Consumers are demanding “less fat” and “no artificial ingredients” as important characteristics in their dairy alternatives. Product innovation can help position dairy as a formidable competitor to non-dairy alternatives, highlighting the benefit of natural protein, nutrients, and vitamins.
- Inflation Pressure: Inflationary pressures are expected to trigger lower demand in rich and poor countries, as consumers are being hit by a global inflation wave that has not been seen since the 1970s.
The dairy industry continues to face increasing inflationary pressure due to three main factors:
- Labor Shortages: Dairy manufacturing and processing plants are operating, on average, with 11% of their target labor force unfilled. This, coupled with high employee attrition and high competition for hiring, is resulting in increased wage costs.
- Freight Challenges: Ocean and land freight prices increased in 2021 by up to 400% and 25%, respectively, across industries. This results in longer lead times and skyrocketing prices for simple, necessary goods.
- Input-Cost Escalation: Consequences of labor and freight disruptions include limited supply, stalled distribution, and cost elevation of hard and soft commodities, ranging from feed and chemicals to packaging materials and energy.
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