Daran fehlt es.
What is the better translation of the above sentence?
That is missing.
That's what's missing.
That is missing. The second translation means basically the same, but is "unnecessary complicated". We have no Relativsatz in german, so we have no need to create the english counterpart.
Yes. Wir brauchen mehr Holz. Daran fehlt es. We need more lumber. That is lacking.
Depends, I think. Personally, I'd guess that "That's what's missing" would be a more elegant translation / a more common phrasing, but that's really a question for native English speakers, not really about the German phrase, because the structure of the phrase doesn't exist in English in the exact same way.
Maybe I'd prefer to translate it with "That is lacking / That's what's lacking", and e.g. "Daran fehlt es ihr (dative)" with "That's what she lacks" - although a more exact, but also quite formal German translation of "She lacks that" would be "Daran mangelt es ihr".
Examples: "The problem with this team is that nobody cares to show up to the meetings on time. Their problem is punctuality. Daran fehlt es." - or - "The people in that country are starving, and their water is polluted. Food and water, daran fehlt es." - well, choose for yourself if you prefer "That is missing" or "That's what's missing". I think the important thing here is to retain the original tone and keep it natural.
The other way round, staying close to the original English wording, you'd translate "That's what's missing" into German with "Das ist es, was fehlt", and "That is missing" with "Das fehlt".