Dairy Products Manufacture
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Industry Overview
The US dairy products manufacturing industry consists of about 1,200 companies that have combined annual revenue of $60 billion. Large industry participants include Dean Foods, cooperatives like Dairy Farmers of America and Land O'Lakes, and the US subsidiaries of foreign companies like Danone. The industry is rapidly consolidating: the 50 largest companies hold 75 percent of the market. Although most companies in the industry are small, a few large companies have been built through acquisitions.
Competitive Landscape
Changes in consumer income drive demand for various types of dairy foods. The profitability of individual companies depends on efficient operations and marketing, as milk is a commodity product. There are few economies of scale in the manufacturing process, which is why small companies can effectively compete with the large ones in local markets.
Products, Operations & Technology
The four major product segments are fluid milk and milk products ($30 billion); cheese ($20 billion); frozen desserts ($10 billion); and butter ($1 billion). Most companies specialize in only one product segment, although large companies may participate in several. Because of the perishable nature of much of the products, especially fluid milk, local production is the norm. Companies receive raw milk from local producers, process it, and distribute the products to local customers. Large companies own many local plants; Dean Foods (formerly Suiza Foods) owns about 77 local production plants.
Nearly all milk sold in the US is pasteurized and homogenized. The basic steps in a milk processing plant are separating milk fat from milk; adjusting the fat content; heating the milk to kill bacteria (pasteurization); pressure-treating to disperse fat droplets throughout the liquid (homogenization); and bottling in cartons or plastic containers. Milk designated as raw hasn't been pasteurized or homogenized. Butter is produced by solidifying milk fat.
Cheese, yogurt, cottage cheese, and sour cream are made from milk by adding various cultures of bacteria that coagulate the proteins in the milk. Ice cream is made by chilling a mixture of milk fat and sugar. Manufacturing processes are usually standardized and highly automated. Testing for product safety and quality is done at numerous steps in the production process. The number of products within each major segment is large, with differences in fat content, additives, flavors, and textures.
Milk, the major raw ingredient, is usually bought from individual local farms or farm cooperatives, which can be very large, with hundreds or thousands of members. Dairy Farmers of America, the largest cooperative, has almost 20,000 members in 45 states. Long-term supply contracts are rare, mainly because milk production has been abundant in the US. Supply contracts typically extend for a year and specify quantities, but not prices. Minimum prices for raw milk are set by states and the federal government.
Advances in dairy farming technology, including computerized, automated milking systems, and technology-based feeding systems, have created excess milk production capacity in the US. In ten years, annual milk yield per cow increased 15 percent to 19,200 pounds. As a consequence, total milk production increased to 171 billion pounds, even though the number of milk cows decreased to 9 billion.