Cheese

Cheese Global Market Outlook:

• The global supply–demand dynamics scenario is stabilizing in both milk and dairy derivatives, as the oversupplied condition in the market is lightening. The regional differences and skewed trade dynamics are expected to govern the global price volatility in the near term

Cheese Demand Analysis

• The global cheese landscape was oversupplied by 0.87 MMT, with production growing at a CAGR of 2.18 percent against consumption at 2 percent in 2022

• The global cheese production is projected to marginally increase by 186 Thd MT in 2023 to 22.35 MMT supported by favorable milk production in the region

Market Outlook

• Regional differences and lop- sided trade dynamics are expected to govern the global price volatility in the market

• The growing GDP in developing countries and CPI in developing countries are expected to boost the demand for dairy derivatives

• Emerging markets, namely Russia and Belarus, have improved production by 25 and 34 percent, respectively, between 2016 and 2022, thereby contributing to the global market supply and have projected an increased level of self-sufficiency to meet rising domestic consumption levels

Cost Structure Analysis : Cheese

• Raw material is the key cost factor (47-52 percent), in cheese and butter production. Since whey is a by-product of cheese and casein, no raw material cost is calculated to it. The profit margin of producing derivatives is 30 percent, which is higher than that of milk powders (~15 percent). Thus major producing regions, concentrate more on butter and cheese.

Key cost factors and feedstock that impact the materials:

• Raw material is the key cost factor, which constitutes around 50 percent of the total production cost. Labor cost accounts for nearly 30 percent, which includes manpower cost in cheese making (22-25 percent), packaging (20 percent), Engineering and maintenance (21 percent), etc.

Key factors tracked for pricing estimations:

• Total annual production, capacity utilization, cost components (fixed cost, operating cost. overhead cost), and profit margins.

Cost factors between co-operative and private dairies:

• In large producing countries, such as India, co-operatives like Amul, dominate the organized dairy industry (80 percent of revenue), as raw-material sourcing dynamics favor them

• Dairy farmers own the shares in co-operatives, whose objective is sustainable input cost maximization and co-operatives work on a no-profit no-loss principle, thus benefitting farmers

• Indian dairy and derivatives producers for co-operatives retain a large share (77 percent) of the price that consumers pay for the dairy products

Porter’s Five Forces Analysis: Cheese

Supplier Power

• The market volatility opens opportunities for dairy farmers in India, Russia, Ukraine, China, and Brazil to increase efficiency of production

• Major suppliers are integrated to dairy farm level and companies like Fonterra and Amul, are secured through the co-operative models

• Significant threat exists if major suppliers/ co-operatives cannot make competitive milk pay-outs to shareholder suppliers

• Equal opportunities and threats maintain supplier power at a medium

Barriers to New Entrants

• Economies of scale is a significant barrier

• Global entrants are most likely to be from low- cost supplier nations, with a strategy of increasing export share or highly targeted high- value niche producers

• Countries, like New Zealand, with deregulated market structure and relatively low cost might attract entrants (e.g., Chinese manufacturers) as a base for export-oriented supply and processing

Intensity of Rivalry

• Continued consolidation of industry could see competing dairy resources being merged into larger, more efficient competitors

• Competitors may respond to trade liberalization through increasing global growth strategies

• With increasing consolidation, rivalry among large competitors is expected to increase significantly, after they achieve saturation in their own markets

Threat of Substitutes

• The dairy derivatives are unique natural products, however, substitutes do exist in the form of vegetable oils

• The shift in consumers from milk fat product to vegetable oils in the emerging and few developed countries.

• Substitution is possible, but with consumer preference for cheesy snacks in the U.S. & EU; butter considered a tradition in countries like India; and growing inputs of whey protein in infant formulae, the threat is low - medium

Buyer Power

• Continued consolidation of food manufacturing and retailers has the effect of reducing the overall number of buyers and increasing their negotiation power

• Most buyers are pursuing strategies to secure supply channels

• Since the market is oversupplied, the buyers engaging with integrated suppliers have high negotiation power

• Supplier switching cost is low, as the products are often traded in standardized forms E.g., Cheese 40# Block