Approximate Net Recovery on Cost
- U.S. milk production for October 2017 increased 1.4% over 2016 (USDA)
- The USDA forecasts that Class III milk prices in 2018 could average as low as $15.50; however, milk production is forecasted to increase 1.8% in 2018
Pricing fluctuations continue: Over the past five years, the price of raw milk has been highly volatile and this trend will likely continue. The price of milk rose 19.4 percent in 2014 to a period high; however, prices dropped almost 29 percent in 2015, causing revenue to decline accordingly. In 2016, an oversupply of dairy products caused a further decline of 5.5 percent. Although milk pricing has trended up for 2017, year-over-year for September, the Consumer Price Index (CPI-U) for dairy and related products declined 0.1 percent. Despite increases for cheese (1.0), ice cream (0.5) and other dairy products (1.2), a decline in milk (whole and other) of 2.6 percent drove the flat trend overall. While the industry benefits from the increasing popularity of yogurt and cheese products in the United States, fluid milk consumption has declined.
Health trends drive change: More frequently, consumers are seeking healthy options such as foods with higher protein and less sugar, as well as “clean label” foods made with organic, non-GMO ingredients. Chicago-based fairlife recently introduced fairlife SuperKids, a line of milk with added protein in whole, 2%, fat-free, and chocolate varieties. Long-time organic dairy producer Organic Valley extended its Organic Fuel RTD line to include low-sugar organic whey protein.
Many brands have followed the clean label trend; 2017 has seen a record number of dairies to transition to organic milk production, according to a report from Colorado-based CoBank. Millennials are invested in simple, fresh foods that have been minimally processed, which has driven a change in marketing to enhance the appeal of these products. The appearance of these products can be as important in marketing as an organic certification. Some brands are producing milk in small batches and using premium packaging, including glass containers, to give products a locally sourced appearance.
The FDA is considering an update to its guidelines on healthy food, as its current rules may be based on outdated science. The National Milk Producers Federation is lobbying the FDA in hopes of labeling more dairy foods healthy, given that the FDA’s caution to strictly limit fat intake is now widely considered to be misguided. To the extent that guidelines change, consumer perceptions and preferences may follow suit, driving changes in consumption and product revenue.
Flavored milk offerings expand: In line with the clean label trend, major industry player Dean Foods has reformulated its TruMoo flavored milk line using only non-GMO ingredients. Organic Valley added “Sweet cream” to its line of flavored half and half. In 2017, The Farmer’s Cow added raspberry white chocolate its line of limited-edition flavored milks in a 32-ounce collectible glass bottle. WhiteWave Foods also added a new flavor, Sweet & Creamy, to its International Delight Simply Pure line of clean-label flavored coffee creamers. Signaling a demand in popularity with consumers, other companies have introduced additional limited edition milk flavors including blueberry, pumpkin pie, banana, root beer, salted caramel, and orange cream.
In the summer of 2017, the U.S. Congress mandated that the USDA allow states to grant wavers to public schools allowing for the reintroduction low-fat flavored milk in cafeterias. While this theoretically expands the market for flavored milks, many schools have already contracted with milk suppliers for the 2017-2018 school year, limiting swift adoption of the waver program.
Canadian tariffs and import quotas challenged: U.S. dairy industry groups are pushing for Canadian trade officials to eliminate dairy import tariffs and quotas that make American products less competitive. During negotiations to update the North American Free Trade Agreement (NAFTA), the U.S. Dairy Export Council and other organizations noted that Canada’s supply management pricing increases the cost of dairy trade and hinders U.S. milk powder exports, according to information from DairyReporter.com. Dairy producers are also concerned that tariffs are artificially lowering world dairy market prices. In the meantime, the U.S. and Mexico formed the U.S.-Mexico Dairy Alliance in August 2017 in an effort to promote their trade relationship and unite in opposition to Canada’s trade policy. A possible restructuring of NAFTA is creating uncertainties for U.S. dairy producers that export to Canada and Mexico. To the extent that trade policy changes are realized, companies may need to quickly adapt to remain competitive.
Butter may warrant special analysis: Butter is a seasonal product. Prices almost always go up in the fall and winter, related to holiday cooking and baking. While sales volumes may be moderately impacted, rising market prices for butter can more greatly impact sales dollars. A lot of creameries will start building supply in anticipation of fall demand. Discuss with your appraiser whether a high-low analysis to account for seasonality makes sense for companies in this sector.
Private label products may warrant modifications to exit strategies: Many dairy products are manufactured under a private label. Lenders should beware that manufacturers may not be permitted to sell private label product unless it’s repackaged. While in certain instances, repackaging may be possible, it will incur extra time and expense in a liquidation.
Perishability: Due to the perishability of dairy products, the age and integrity of the goods is critical to recovery value. Product that is at or near its sell-by date will have a lower gross recovery value than fresher product. Most customers seek delivery of fresh products to stores or distribution centers within days of packaging, maximizing salability. The short shelf life of fresh product necessitates rapid turnover in finished inventory levels as part of normal course business to avoid losses.
If milk is an asset you do lend against, pay close attention to how the appraiser modifies the exit strategy to accommodate its perishability. Depending on the product, there may be a couple of weeks or possibly just days to sell it. Also beware of the strict regulations governing the sale, pricing, and production of milk.