More than $7 billion worth of new dairy processing facilities will be opening their doors in the coming years. Most of these plants will be making cheese, whey, and extended shelf-life milk. What that new processing capacity means is that there will be 50 million to 60 million pounds of new milk demand per day in the next year or two, estimated dairy market analyst Mike McCully.
“There’s been nothing like this before,” he said of the historic amount of recent investment in dairy processing. During the Global Dairy Summit at World Dairy Expo, he expressed that there is a lot of optimism in dairy right now.
More processing capacity is welcome news for an industry that has grown its production about 10% in the last decade. While areas like the Southeast have declined in production and even California has stopped growing, places like Texas, Kansas, western New York, and the I-29 corridor around South Dakota have seen an influx of farms.
There are market challenges with new facilities, too, McCully recognized. With this much new capacity becoming available, farmers and others in the industry are asking where that 50 million pounds per day will come from. For the most part, McCully said these plants are going up in places where there was already a milk surplus. No company is investing hundreds of thousands of dollars to put up a plant without doing their market research. In these areas, there will be competition the dairy industry does not typically see.
“We’re going to be in an environment now where plants are chasing milk,” said McCully, noting it is usually the other way around.
That is likely going to mean new facilities taking milk from existing plants. Instead of asking where the milk will come from, McCully said, “The more relevant question is who’s not going to get the milk.”
The most likely product to be affected, according to McCully, is nonfat dry milk powder as cheese and fluid milk production picks up. He predicted that butter production could also suffer as more milkfat is directed to cheese.
So, just like dairy farms have been consolidating for the last few decades, it is likely that some consolidation will occur at the plant level. For the most part, these new facilities are being spearheaded by private companies or groups of farms with significant milk supplies, not cooperatives, and McCully predicted that trend will continue.
What will cooperatives have to do to stay competitive? Of course, they have an advantage if they already have money invested into processing plants. However, McCully said some of these facilities are aging and don’t have much productive life left in them. There is the opportunity to update, retrofit, or move to making different products, and some co-ops have embraced making these types of investments. But if it is not desirable or possible to invest in their facilities, challenges will remain. As is generally true in business, not everyone will be a winner.
Yet, the window of opportunity is open for the U.S. as a whole. Global demand for dairy is up while the world’s two largest exporters, Oceania and the European Union, are seeing flat or declining production. McCully described that we must find a way to add value to our products just as well as we can make more of them to take advantage of this dynamic.
