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Rise of ESG Threatens Dairy Market Survival


Senior Market Analyst at Interactive Brokers

Interactive Brokers’ senior market analyst Steven Levine provides a brief look at the U.S. Dairy Market. Firms such as Borden and Dean Foods have filed for bankruptcy due in large part to consumers’ diets generally shifting towards plant-based products.

Domestic dairy icons Borden and Dean Foods each recently filed for bankruptcy, as consumers’ dietary habits have been generally shifting away from cow’s milk and towards plant-based products. The conventional dairy crisis also falls amid a dynamic combination of factors, including changes in industry offerings, struggling farmers and unsustainable costs, which has spurred an upheaval in domestic raw milk consumption and production. Did you know- In the past year and a half alone, more than 2,730 dairy farms have gone out of business?

Find out more in Not Milk? The U.S. Dairy Industry in Crisis at IBKR Traders’ InsightSign up for our daily newsletter today!

Produced on January 8, 2020

Video Script:

The conventional dairy market has been pressured by a long list of related factors, including changes in industry offerings, struggling farmers, and unsustainable costs. These challenges have led domestic dairy icons Borden and Dean Foods both to file for bankruptcy recently, as consumers’ dietary habits have been generally shifting away from cow’s milk and towards plant-based products. In Borden’s Chapter 11 filing, the company’s CFO said that while “milk remains a household item in the United States, people are simply drinking less of it.” The company pointed out that aggregate U.S. consumption of conventional dairy milk has declined by an estimated 6% since 2015.

This in turn has spurred a significant dilemma for dairy farms, as lower demand for conventional milk has led to lower intake for producers, as well as rising costs for consumers. To help combat the issue, New York governor Andrew Cuomo recently announced more than US$18.6 million to protect the state’s dairy farms, with the state having provided over US$30.7 million since early 2018 to protect roughly 15,000 acres worth of viable agricultural land. Meanwhile, the U.S. plant-based retail market has been reaping the benefits from changing consumer diets away from fresh whole milk towards alternatives such as those sourced from almond, coconut, oat, and soy. According to the Plant Based Foods Association and The Good Food Institute, plant-based milks have grown 6% over the past year and now comprise about 13% of the entire milk category, while cow’s milk sales have fallen by roughly 3%.

Against this backdrop, the financial markets seem to be responding to these changes in the dairy industry, as the sector increasingly focuses on more environmental, social and governance-related attitudes among both consumers and corporations. For example, while prices on the current Class III milk futures contract have recently plunged, shares of Defiance’s newly launched DIET ETF have grown. Defiance describes the fund as offering exposure to companies focused on “the whole range of technological, ethical, environmental and social challenges of ensuring food security.” 

Also, certain grocers, such as supermarket giant Kroger, have been shifting gears to accommodate the changes in consumer habits. In its third-quarter financial report, Kroger said it launched plant-based brands that feature meatless burger patties and other products that “appeal to a growing number of customers exploring meat and dairy alternatives.” The company has also seen a generous lift in its stock price recently, as well as received very good demand for its latest 30-year bond deal this past week. Investors tuned-into the increasing popularity of how ESG is triggering changes in the dairy industry, as well as in other areas of food, beverage and consumer behavior, will likely be keeping a close eye on the survivability of other companies who may be slow to adjust to new business models.

In the meantime, you can find more details on this topic in my full report, available now at IBKR Traders’ Insight. I’m Steven Levine with Interactive Brokers.

Disclosure: Interactive Brokers

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Disclosure: Author Security Holding: No Positions

The author does not hold any positions in the financial instruments referenced in the materials provided.

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