Spilt Milk: How Shifts in Consumer Behavior are Impacting Latin America’s Dairy Sector
As people around the world find themselves in different stages of lockdown or liberation, our focus is shifting from the health implications of the coronavirus to the indelible impact the pandemic has had, and will have, on our economies. Forecasting the economic ramifications of COVID-19 is an enormously complicated task. Indeed, even top analysts from the most prestigious institutions are revising their forecasts on a weekly basis.
In the context of so much uncertainty, I find it helpful to think more granularly. By breaking the situation down to focus on a specific sector, and the overarching factors affecting that sector, we can arrive at actionable conclusions to consider during our business planning and decision making.
In today’s post I want to use this framework to zero in on dairy in Latin America. As in virtually every other major supply region, shifts caused or exacerbated by the coronavirus pandemic have affected supply, demand, and the overall competitiveness of dairy industries across Latin America. Cutting through all the noise, I believe that the most fundamental thing to understand with respect to Latin America’s dairy industry is how shifting consumer purchasing behavior is impacting the balance between milk supply and demand in region.
The Times They Are A-Changing
All it takes is a visit to your neighborhood supermarket to understand that consumer food buying behaviors have changed dramatically in recent weeks. Foodservice sales have effectively evaporated; consumers are visiting retail outlets less frequently and making larger purchases at a time; and, many consumers are opting to buy groceries online and have them delivered directly to their homes. Even while the adage ‘people will always need to eat’ is being validated in the time of coronavirus, these changes in behavior translate directly to a difference in the products that people are demanding.
Almost universally, stay at home orders have increased demand for fluid milk and especially ultra-high temperature processed (UHT) milk with its longer shelf life. Across Latin America, processors and retailers indicate that UHT demand is up by double digits. Where price controls are not enforced, UHT prices have also risen as processors and retailers capitalize on this wave of strong demand. Retail consumption of powdered milk is up as well, as consumers search for non-perishable and economic options to feed their families.
On the other hand, cheese demand has declined markedly across the region. Cheese consumption is disproportionately linked to foodservice channels, and especially pizzerias. While some of this consumption has been sustained through delivery models, it is but a fraction of what was required in pre-coronavirus times. Dairy dessert products, such as the emblematic dulce de leche, have also seen demand falter as orders from pastry shops and restaurants have dried up. Other products have had mixed performance and are tied to an individual population’s consumption habits. As an example, yogurt sales are up in Argentina but are down in Mexico.
Scrambling to Adapt
In reaction to these shifts, processors are doing all they can to push raw milk away from less popular products like cheese and into higher demand products, such as UHT milk. Unfortunately, this is easier said than done as processing capabilities cannot necessarily accommodate this new portfolio strategy. Furthermore, even though there have been very few cases of dairy processing facilities shutting down due to COVID-19 outbreaks, processors are dealing with higher absenteeism and new sanitary requirements which are slowing down production processes and lowering capacity.
Despite processors’ best efforts, these behavior shifts by consumers are ultimately resulting in an oversupply of milk. The issue is more pronounced in areas where a larger portion of the milk supply is funneled into an informal market, typical of countries with less developed industries. Informal or artisanal processors are often oriented toward cheesemaking and have fewer tools and resources at their disposal to compensate for these challenges. However, even the more formalized milk markets in the region are struggling.
The oversupply is made worse by the fact that generally good weather conditions have supported year over year gains in milk production in most parts of region. Even as dry weather threatened output in the first months of the year, many countries including Argentina, Uruguay, Chile, Mexico, and Colombia are seeing output growth. Until now, a saving grace for Southern Hemisphere producers has been that they are experiencing the lowest point of production in their milk production cycle. But unfortunately, that means that volumes will expand seasonally in the coming months.
Where It Stops Nobody Knows!
As supply outpaces demand, dairy producers across Latin America will see their farmgate prices for milk come under pressure. Prices for spot milk have already dropped dramatically and it is expected that the impact will be felt for contracted milk in the coming weeks and months. Dairy farmers will experience margin pressure from both sides. As top line prices decrease, operating costs are rising. These are fueled by dollar denominated inputs such as feed, which have become more expensive as the value of local currencies declines next to a very strong dollar. This combination of factors will force some dairymen out of business and ultimately help the sector to rebalance itself.
In the meantime, the question remains of what to do with the excess raw milk. Though some producers have undoubtedly been forced to dump their milk, in a region that suffers from food insecurity, milk dumping is very unpalatable. Instead, I expect that processors will use much of this excess milk to manufacture milk powders which will go into storage in an attempt to wait out the pandemic. Countries, and particularly the region’s exporters, will try to sell this product offshore or use it as food aid. However, with most of the classic export destinations also suffering from weak currencies or feeling the burn from the oil market fallout, export prospects are likely to be limited.
Conclusion
The coronavirus pandemic has forced us to take a close look at our supply chains and better understand the links between supply and demand. The situation is serious for Latin America’s dairy sector, and I suspect the recovery will be drawn out and painful. But if there is a silver lining, I believe it is that we have been given an unusually clear opportunity to see how consumer behavior reverberates back into the milking parlor and out across the globe.