Dairy processors told to embrace change

by Keith Nunes
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Barack Obama is not the only leader embracing change. At the International Dairy Foods Association’s 2009 Dairy Forum, Connie Tipton, president and chief executive officer of the association, said current market conditions are dictating that the dairy industry change as the domestic and global markets and consumer demands evolve.

Held Jan. 12-14 at the Disney Yacht Club and Resort in Orlando, Fla., the 2009 Dairy Forum focused on the current challenges facing the industry, including shifting consumer demand, market volatility, inflexible government mandated pricing formulas and country-of-origin labeling.

"You know voters are also consumers, let’s not forget that, and the main messages they sent to Washington on Nov. 4 are the same ones they are sending our industry today," Ms. Tipton said. "They want a cleaner, healthier environment. They want safe, healthy, good tasting and affordable food. They want accountability by their government and business leaders.

"In 2009, the dairy industry must move forward, but not toward more of the same. It is time to take a good hard look at the challenges that are coming our way and how to get around them."

Citing a study released earlier this year by Ketchum Inc., Ms. Tipton highlighted several areas where the marketplace is seeing significant changes. The results of the study, called "Food 2020: Consumer as c.e.o.," said consumers want to have a greater say about food, specifically the ingredients, safety and quality that go into their products, and by the year 2020 consumers around the world expect that the ways they shop and choose their food will be different than it is today.

"The goal (of the study) was to alert the food industry to trends and preferences as we look toward the year 2020," Ms. Tipton said.

The report also said consumers want local food, but they still care about the cost and taste.

"Only 17% — a number to remember — said they didn’t care where their food came from," Ms. Tipton said. "In fact, we’re already seeing retailers from Wal-Mart to Whole Foods devoting more shelf space to ‘locally grown’ products, trying to tap into that consumer nostalgia for the roadside stand and desire for fresh and safe products that support small, local farmers and help the environment.

"Now, don’t get me wrong. The point is not that ‘small’ and ‘local’ may take over the market, but that their inclusion signals a greater market mix."

Using the phrase "mission creep," Ms. Tipton also said food manufacturers are coming under increasing pressure from consumers to address societal issues as well as consumer health and wellness.

"Globally, more than 40% of consumers said they would be likely to pay more for food if it would improve the quality of water and food and bring medicines to those in need," she said. "Clearly, companies committed to ‘doing good’ — in addition to ‘doing well’ economically — can gain an edge.

"More ‘mission creep,’ in a sense, but consumers also expect food companies to be responsible for their health and well-being — whether it’s taking away the temptations that lead to obesity or simply making sure the food is safe."

Mr. Toad’s Wild Ride

Comparing the commodity market fluctuations dairy manufacturers have experienced the past few years to Mr. Toad’s Wild Ride, Ms. Tipton said the ramifications have had a dramatic effect on the industry.

"This year milk prices have come down, but we all know that’s only one side of the equation — fuel and feed prices have gyrated up and down," she said. "And, in many cases, our regulatory pricing system has left product manufacturers spinning, trapped in unprofitable situations with nowhere to turn. This kind of volatility has led to all kinds of chaos, but the aftershocks of unpredictable price fluctuations have reverberated through the entire chain — from markets to final product sales."

Ms. Tipton cited the current situation facing cheese manufacturers as an example. For years, cheeses have accounted for most of the dairy industry’s growth. Per capita consumption of Italian cheese rose from a little over 2 lbs in 1970 to 13 lbs in 2006, and overall national cheese consumption is over 32 lbs per person, a "win-win" situation, said Ms. Tipton.

"But in 2008, those numbers have been sliding," she said. "As cheese costs soared, many pizza chains chose to cut back on cheese, or on the overall size of their offering to keep their product affordable. On the surface this may not look like much, but do the math and it’s downright scary.

"The top 10 pizza chains use 30% of all of the mozzarella we produce. Cutting back just 1 oz of cheese on pizzas sold in these major chains equals a total drop of about 250 million lbs.

"So this is a big deal and what it means is that we must do a far better job of promoting that cheese represents real ‘value added’ in terms of taste and nutrition — and not just for pizzas, but wherever you find dairy."

The volatility of the market also has hurt dairy ingredient manufacturers as well. In an education session focused on product innovation, the concept of demand destruction was discussed.

As dairy ingredient prices rose in 2007, several food manufacturers shifted away from dairy-based ingredients to those that were less costly, but also offered buyers an opportunity to hedge future prices. Now dairy ingredient manufacturers are facing the difficult challenge of regaining market share while price volatility in the dairy industry remains an issue.

The volatility is not going to go away, either, said Mike McCloskey, chief executive officer of Select Milk Products, Inc., a dairy cooperative in the Southwest. He said the low prices dairy producers are currently receiving for their milk is not enough to cover their costs and he expects over the next three to five months dairymen to cull a significant number of animals from their herds. Such a move will ensure volatility remains in the market as supply wanes and prices rise.

Facing federal hurdles

The federal government’s outdated federal milk marketing orders is a common subject of complaint discussed frequently at past Dairy Forums, but Ms. Tipton noted the dairy industry must unite in the development of pricing strategies that allow all participants an opportunity to profit, but also gives them more flexibility.

"For years, the industry has struggled with government-mandated minimum prices that must be paid to farmers," she said. "The problem is that the formulas and dairy product prices used to calculate those minimum prices are, by design, ‘average’ — but, as we all know, no individual manufacturing plant is average in plant size, input costs, or even output prices. One size never fits all.

"Manufacturers who have spent the last nine years struggling to make these formulas work have learned an unhappy lesson — government-mandated minimum prices don’t allow them to adapt quickly enough to meet changing market conditions.

"We need to find a common voice for change that will allow all segments of the industry to be profitable. Fluid milk prices have also been driven to record highs with our formula pricing system. It factors in prices of dairy components popular in export markets and then piles Class I differentials on top. Now, given a continuing decline over many years in per capita consumption, what sense does it make to keep forcing higher costs on our fluid industry?"

In addition to finding a solution to the industry’s federal milk marketing orders, Ms. Tipton also sounded the alarm over the potential of dairy products being included in the country-of-origin labeling law that was passed as part of the farm bill.

"Prior to the elections, we saw Senator Clinton introduce mandatory country-of-origin labeling for dairy products," she said. "Now that the primary agriculture commodities are covered, the push will be on getting processed foods labeled — and that push may start with dairy products.

"Consumers already know where their imported cheese or yogurt comes from, because the government already requires the labeling of imported dairy products. But dairy ingredients and processed foods are a different story, and the effort to assign labels of origin in these cases is far more complicated than assigning the same labels to agricultural commodities like meat and produce."

She said the dairy industry was in favor of providing consumers with all of the information they want on labels, but added that the current labeling regulations in effect already work and do not need to be changed.

"Just imagine having to track different batches of dairy ingredients and label them according to source — whether U.S. or from another country," she said. "What a nightmare. And speaking of nightmares, just imagine the price tag for dairy. In a word — staggering — and it would certainly diminish our industry’s ability to compete against ingredients for which labeling is not a requirement."

This article can also be found in the digital edition of Dairy Business News, January 20, 2009, starting on Page 8. Click here to search that archive.

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