The Dairy Industry – Sector Watch 26 July 2019

Chris Sworder

The dairy market has a value of $674 billion, based on revenue generated by milk products globally. This is expected to grow annually by 4.7% CAGR by 2023. Despite the positive outlook for market size, North American and European margins are low and milk prices are stagnant due to a production surplus.

Attractiveness

Regional regulatory changes such as the EU dropping its Milk Quota system in 2015 have kept prices low and production high, while Africa and Asia are seeing growing supply shortages. Other drivers include increasing environmental concern over dairy’s contribution to methane emissions (cattle account for 25% of anthropogenic methane emissions in the US), animal welfare and increasing market share of milk alternatives, all pressuring the industry to adopt innovative practices.

Business Models

Efficiencies are being sought through the consolidation of dairy farms themselves. Larger herds have higher milk production, and between 2007 and 2017, herds of 1000+ grew from 29% to 50% in the US. Taking advantage of these economies of scale has allowed for increased capital expenditure on technology such as IoT, machine vision, and drone solutions to increase production efficiency and replace labor costs as farm sizes increase.

The advent of  low-price sensor technology has enabled IoT developers such as Stellapps to build improved monitoring of the quality and quantity of milk, storage facilities, and environmental factors on a service-based model. Individual animal monitoring start-ups such as Herddogg and Connecterra are giving increasingly granular data to the farmer through sale or lease of equipment combined with software-as-a-service. Cainthus is using a machine vision technology and high-resolution cameras to monitor herd behavior and feeding patterns in-shed, negating the need to tag animals individually.

While improvements in manufacturing efficiencies are receiving the most focus in the dairy industry, consumer packaged goods manufacturers are diversifying their product portfolios by investing in and creating new brands to cater for changing consumer demands. This includes dairy alternatives such as alternative milks, but also premium products that promote organic practices, product traceability, and animal welfare.

Competition

SomaDetect is a provider of agricultural technology that connects dairy farmers with the milk-quality indicators relevant for the management of their production.
Connecterra is a developer of a farming sensor system to track livestock.
Stellapps is a developer of IoT for dairy farming optimization.

The dairy production market is increasingly driven by farming cooperatives such as Land O’Lakes, Dairy Farmers of America, Fonterra, and Arla Foods, as farm consolidation increases globally. The milking systems themselves are provided by established companies such as Madero Dairy Systems or GEA, while start-up competition is greatest among technology providers trying to optimize these systems and provide herd management solutions. Incumbent activity in this sector includes Cargill’s investment in Cainthus to understand feeding patterns and provide insight for its animal feed products, while Merck acquired Antelliq in December 2018 to drive improvements in its animal health business. Wilbur-Ellis recently invested in SomaDetect, a developer of in-line milk analysis technology for production management, through its venture arm Cavallo Ventures.

The dairy CPG market is driven by multinational and vertically integrated companies such as Nestle, Danone and Kraft-Heinz. Recently, we have seen these companies increase their portfolio of CPG brands, including the creation of accelerator programs to drive a product pipeline, such as Agropur’s Inno Agropur Program or Kraft-Heinz’s Springboard accelerator.

Are you keeping up with the changes affecting the Agriculture & Food Sector?

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