Holidays to boost dairy sales, but outlook unclear
Even though the price of butter jumped more than 26% in October compared to a year ago, analysts say they expect consumers will spend the extra money on the item when they do their holiday baking and cooking, boosting sales.
By Ching Lee
Milk prices already shattered records this year, and historical trends suggest they should end 2022 with a bang.
With all those sticks of butter going into cookies and pie crusts, cheese platters and glasses of eggnog being served during the holiday season, dairy consumption tends to spike during the last three months of the year. But soaring prices have also tempered demand, and analysts say it remains unclear how much impact that will have on holiday food spending.
While general inflation has risen about 8.5%—a 40-year high—food prices have jumped even higher this year, especially on dairy products. Butter leads the category, with prices up more than 26% in October compared to a year ago. Considering retail butter sales have been down for most of 2022, analysts say the higher prices have led consumers to pull back.
For this reason, elevated milk prices have been due mostly to flat national milk production and tighter supplies rather than increased sales, they noted.
Despite higher prices, movement of dairy products has been picking up in recent months. That’s an encouraging sign, said Bill Schiek, executive director of Dairy Institute of California, which represents milk processors and dairy product manufacturers.
Butter sales, for example, have been inching higher starting in October. This suggests that consumers decided to do without butter during the summer, but as holiday baking and entertaining began to ramp up in the fall, they were using real butter, said Mary Ledman, a global dairy strategist with Rabobank. More than 40% of the nation’s butter is typically consumed between September and December, she noted.
Schiek said he thinks dairy demand will end up being “pretty decent” for the holiday season, as people splurge on items such as butter and cheese to make their favorite recipes, boosting dairy sales.
“Will the boost be quite as big as it normally is? I don’t know,” he said, “but I think in general, most people are going to spend the extra bucks to enjoy the holiday.”
Even though domestic demand for dairy products has been stagnant or down slightly earlier in the year, export demand rose, driven largely by increased whey exports to China. Strong export sales, Ledman said, have kept U.S. stocks of dairy products “from getting burdensome and weighing on the markets.”
“I think that is really demonstrating the resilience of the dairy category through COVID and even into this inflationary period,” she said.
Joel Karlin, an economist and market analyst for Western Milling in Tulare County, said he thinks demand for dairy products is “about where it usually is” for the holidays. But beyond that, it’s “clouds on the horizon,” he said, as higher prices and fears of recession continue to restrain consumer spending.
He pointed to a recent Bank of America study that found consumers are increasingly seeking cheaper options when shopping for food. This would seem to weigh on dairy consumption, a large amount of which happens away from home at eating establishments, he said.
The rise in the price of foods such as cookies and cereal that are normally eaten with milk also has zapped milk usage, he pointed out. In addition, some long-running trends continue to cap dairy demand, including the ongoing decline in per capita milk consumption among younger people.
Ledman said she expects “some softening in farmgate milk prices” by early next year. Price moderations after the holidays are not unusual, she said, as there’s always a “New Year lull” before the Super Bowl, when sales of dairy products pick up again. But she said she doesn’t think milk prices to farmers will drop below $20 a hundredweight “for any significant period.”
Higher milk prices historically have led dairy farmers to buy more cows and produce more milk, creating an oversupply. They are “notorious for shooting themselves in the foot,” said Merced County dairy farmer Simon Vander Woude, who serves as board chairman of California Dairies Inc., the second largest dairy cooperative in the U.S.
But he said caps on how much milk farmers can deliver to co-ops and handlers have helped to manage supply. Higher feed costs and other inflationary pressures also have kept dairies from producing too much milk. Also, more dairies, including his own operation, now breed a portion of their herd to produce calves for beef production. These so-called “beef-on-dairy” programs have led to fewer heifers in the pipeline to replace the dairy herd, stabilizing milk production, he said.
“I don’t think we’re going to see a huge increase in milk supply due to breeding strategies and just economics,” Vander Woude said.
Tulare County dairy farmer Joey Fernandes said he continues to be “pleasantly surprised” by the robust dairy market, which he links to tight global supplies of milk. Even though the sales data indicate consumers are starting to trade down, he said they’re doing so by switching to more store brands versus buying branded products, but they’re not abandoning the dairy category.
“We’re holding on to share,” Fernandes said, adding that he’s “cautiously optimistic the market’s not going to fall out of bed because there’s not a glut out there on the market.”
With current strong prices, he said dairies will try to produce more milk, “but I don’t think there’s a real big expansion phase coming just because there’s too many obstacles.” For California dairy farmers at least, he said water is a limiting factor and “first and foremost on most people’s minds.”
“You’re talking about the largest concentration of cows in the country happen to be in the most deficit water region,” he said.
Schiek, the dairy institute director, agrees, calling water availability the “wild card,” as it would shorten the amount of feed crops farmers can grow, suppressing increases in milk production. Even though the U.S. Department of Agriculture projects lower milk prices next year, he said water shortages could reverse that outlook if feed gets tight.
Because of these challenges, Fernandes said he expects to see more consolidation in the industry—not fewer cows but fewer dairies.
“There’s always been consolidation,” he said. “But I think it will accelerate.”
(Ching Lee is an assistant editor of Ag Alert. She may be contacted at email@example.com.)