Volatility an added ingredient to dairy market

by Keith Nunes
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Dr. Robert Cropp, professor emeritus at the University of Wisconsin at Madison, confidently predicted during the 10th Annual Dairy Ingredients Symposium, put on by Dairy Management, Inc. and the California Polytechnic State University-San Luis Obispo Dairy Products Technology Center, that there is a 100% probability milk and dairy product prices will average lower in 2008 than in 2007. But he added volatility has become a bigger issue in the market and anyone purchasing dairy ingredients must learn how to manage risk.

During a presentation at the symposium, held March 18-19 in San Francisco, Mr. Cropp outlined the factors that led to the run up in 2007 dairy ingredient prices that took a financial toll on large companies like Kraft Foods Inc., Dean Foods Co. and The Hershey Co. During the year, U.S. milk production grew about 1% during the first six months, and ended the year up 2.1%. On the other hand, there was strong growth in commercial disappearance with a favorable market for cheddar cheese and a strong market for milk proteins.

But the key driver was international demand for U.S. dairy ingredients. In 2007, the U.S. exported dairy ingredients with a value of $3,014 million, a 61% increase compared to the previous year. Putting the increase in exports in perspective, Mr. Cropp said during 2007, as a per cent of total U.S. milk production on a total solids basis, the U.S. exported 10% of its production. A decade earlier, the U.S. exported only 4.5% of its production.

"Exports were not a factor in past market outlooks, but they are now," Mr. Cropp said. Mexico was the largest importer of dairy ingredients during 2007, importing ingredients valued at $857.7 million. Canada, at $358.2 million in value, was the second largest market followed by Japan, which imported dairy ingredients valued at $185.1 million.

"As an area of opportunity, we need to look at emerging markets," Mr. Cropp said. "Several factors contributed to the spike in exports, but it is clear there is a demand for dairy ingredients around the world."

Some of the factors Mr. Cropp cited as driving international demand included a weak U.S. dollar, a growing world economy that has led to an increased demand for dairy products at an annual rate of 2.6% since 2000, slow growth in global dairy production caused by drought in Australia and a change in E.U. domestic support programs for farmers, and bans on dairy exports by the governments of India and Argentina.

"Strong demand for milk proteins, cheese and butter in Asia and other developing markets mean the growth in dairy exports will continue," Mr. Cropp said.

Looking to 2008, Mr. Cropp said U.S. milk producers have responded to the increased value of their products by increasing production. He predicted milk cow numbers will increase until at least the first half of 2008, but high feed prices will mean the growth will not be as great as would be expected. He estimated milk production in 2008 will increase 2.3% to 2.5% compared with 2007.

While the increased production will lead to prices moderating, Mr. Cropp added that exports will continue to grow in 2008. He said the continued drought in Australia will lead to an additional 5% decrease in milk production, and the drought now has spread to New Zealand, which has led to concern about milk production in that country.

"(Dairy) ingredient prices will depend on domestic production, domestic use and exports," he said. "Given all of the factors affecting the market, prices in 2008 will decline compared to 2007, but the volatility will continue."

Tracking dairy consumption trends

Anne Mixen, a researcher within The NPD Group’s Food and Beverage division, presented domestic consumption trends for dairy products. Most notable was the increase in yogurt consumption, which according to NPD data increased from 10 eating occasions (eatings) per capita in 1990 to 26 in 2007, which when factored against the total U.S. population comes to 7.9 billion eating occasions annually. Ms. Mixen said yogurt consumption trends have been steadily climbing, because the product fits in a variety of meal occasions.

"Really, it fits many people’s lifestyle," she said, particularly the trend of eating on the go.

Between 2005 and 2007, the per capita eating occasions increased to 26 in 2007 from 19 in 2005. Ms. Mixen attributed the increase to the proliferation of yogurt products containing probiotics.

"Yogurt has a great halo, health image," she said. "We’ve seen consumption increases in every age group, because it’s a good fit across a variety of needs. But the dramatic spike between 2005 and 2007 indicates these newer products have increased interest in yogurt."

Ironically, Ms. Mixen said there is some confusion among consumers about probiotics. As part of The NPD Group’s Diet Monitoring Service, the researchers ask consumers what they are trying to get more of in their diet and what they are trying to cut down on.

"Fourteen per cent of the respondents told us they are trying to get more probiotics in their diet while 12% told us they were trying to get less," she said. "I think it shows how some consumers are more in tune with health claims while others are not."

After declining from a peak of 33 eatings annually per capita in 1998, ice cream consumption leveled at 27 in 2007. The age group showing the strongest growth for ice cream consumption were consumers 65 years of age or older.

Ms. Mixen attributed the growth in ice cream consumption among older consumers to the proliferation of better-for-you products in the category, such as those promoting low-fat and reduced-sugar claims. She added that she expects consumption trends among the 65+ population to continue to trend toward products promoting health and nutrition.

"This is a group that is becoming more aware of their health needs and will take steps to address them," she said.

A new market assessment tool

Representatives from D.M.I. and Technomic, Inc. also unveiled Project DIAMOND during the symposium. DIAMOND is an acronym for Dairy Ingredient Assessment Monitoring of Opportunities and New Developments. The project is designed as a tool for dairy ingredient suppliers to help them assess market conditions by tracking ingredients from production through end-use applications.

The analysis currently focuses on seven ingredients, including nonfat dry milk, sweet whey, whey protein concentrate, whey protein isolate, milk protein concentrate, casein and lactose. The project is ongoing and will be updated annually in an effort to more closely track changes in the dairy ingredient market and inform suppliers of trends as well as emerging opportunities.

"Our goal with DIAMOND is to give the market a snapshot of where dairy ingredients are being used," said Laura Gottschalk, director of U.S. manufacturing and ingredient marketing for the D.M.I.

For nonfat dry milk, for example, DIAMOND revealed that during 2006 the market produced 617.5 million lbs. The top four product categories the ingredient was used in, according to the survey, included powdered milk (32%), ice cream (22%), yogurt (18%) and infant formula (7%).

Also, as part of the survey, users were asked if they planned to increase or decrease their use of nonfat dry milk ingredients. Eighteen per cent of those surveyed said they planned to increase use, 10% said they planned to decrease use, and 69% said they did not plan to change their usage pattern.

"This is top-line data from the DIAMOND data base," said David Henkes, a vice-president with Technomic, Inc. "As we further analyze the information and continue gathering data we will be able to provide the industry with accurate information about what is happening in the market."

The D.M.I. plans to officially unveil DIAMOND in the near future.

This article can also be found in the digital edition of Food Business News, April 1, 2008, starting on Page 29. Click here to search that archive.

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