Chairman, National Dairy Board
The consumption of fluid milk in the United States has been dropping for decades but in the last year, it has dropped at a rate that has many dairy industry people alarmed.
As a result, dairy farmers, through their various checkoff programs, have embarked on some projects to change the way the industry handles, prices and markets fluid milk.
Twenty-six percent of all milk produced in the United States goes into the fluid milk market, according to David Pelzer, senior vice president of Dairy Management, Inc.
That’s the organization that oversees the American Dairy Association, National Dairy Council and the U.S. Dairy Export Council.
“If the price of fluid milk or Class I milk is higher it lifts the price of all milk prices,” he told Wisconsin State Farmer.
The decline in fluid milk consumption has been a consistent trend over the last 40 years. When DMI officials talked to the fluid milk industry about turning this trend around, he said there was a “generational mindset” and bottlers said “we can sell more if you lower the price.”
Pelzer said DMI and dairy farmers decided they could be a catalyst to help find whole-industry solutions.
The Innovation Center for U.S. Dairy, another element of the dairy checkoff program, works with 300 companies and is helping “break the ice” and find solutions to this challenge. “We found there was more than we thought that we could agree on,” said Barbara O’Brien, president of the Innovation Center.
Stephen Maddox, a California dairy producer who is chairman of the National Dairy Board, said that consumption patterns have changed over the decades and generic advertising alone isn’t going to change the fundamental issues.
Because lifestyles have changed, more people are drinking bottled water, soda and energy drinks. While other beverage industries moved forward with advertising and product innovation, financial constraints limited innovation and brand marketing in the fluid milk industry, he noted.
To try to get the ball rolling, the dairy board in February approved up to $14 million in grant money to co-invest with industry to get the ball rolling in the direction of product innovation, Maddox said.
“It’s a complex supply chain. If it was simple we would have done it a long time ago,” he said.
O’Brien said some of the projects are aimed at schools and quick-serve restaurants. “We have a commitment to the lifelong dairy habits of American children,” she said.
One of the beliefs of this new program to jump start fluid milk sales is that if packaging is improved, sales will improve too.
MILK PRICE TOO HIGH
One of the problems faced by wanting to get higher fluid milk sales is that consumers are very sensitive to price. Once it reaches a certain level, they stop buying it.
O’Brien said that economic elasticity studies show that for every 1 percent rise in price, sales of fluid milk drop by 0.4 percent. (A 10 percent price increase would result in a 4 percent decrease in consumption.)
“This is like ice water in our face,” said Maddox. “We have to address this. Most of the national decline has been in California where the highest priced retail milk has been.”
When price increases peaked in Nov. 2011 at a national average of $4.11 per gallon (which was a 12.6 percent increase over the previous year) volume declined 5 percent or about 11 million gallons at retail that month.
Consumers who stop buying milk when prices swing upward may not ever come back to the category, says Maddox. The downside of this is that consumers find ways to do without milk in their diet.
One of the key assumptions of the checkoff project is that the milk industry is in crisis, he said. Milk sales are on a decades-long decline, processing facilities are aging and margins for processors are very slim, which leaves very little money for research and development.
Many of the projects being launched by the dairy board are aiming the message at consumers that milk is a “perfect food” said O’Brien.
One of the strategies is to partner with some of the food giants who lead their industry. McDonalds, she said, has contact with 27 million people each day in the United States. “What they do, everyone follows.”
There are six DMI employees working in menu development at McDonalds, where they are finding ways to bring dairy back into foods that have lost taste because the sodium and fat contents have been reduced.
O’Brien said DMI is also working with other marketplace leaders to help “pull the supply chain into innovation.”
Maddox said he spent 19 years serving on his local school board and found that rules require schools to take the lowest cost supplier of milk for school programs – and generally these are the old-fashioned paper cartons.
O’Brien and Maddox both said that there is growth in fluid milk sales in the specialty categories — lactose-free, organic and Omega 3 specialty milks as well as in special sized packages and in glass bottles.
Several of the farmer-funded programs are aimed at helping bolster the market for lactose-free milk products.
“Dairy farmers have been committed to allowing consumers to participate fully and freely in this market,” said Maddox.
For every dollar of checkoff funding that is put into building the lactose-free market, companies have been putting in $7, he said.
Together, they are putting together a multi-faceted program targeting health professionals and funding research.
Often, when people are diagnosed with lactose intolerance, doctors advise them to eliminate dairy from their diet, O’Brien said. The new programs are aimed at getting health professionals to recognize that lactose-free milk can be an alternative for these patients.
The program is also funding research with the Mayo Clinic and others and is directly contacting doctors with findings.
Other projects are aimed at helping develop new products with milk, like milk with probiotics added, high-protein milk or higher-calcium milk.
Non-dairy products, led by almond and coconut beverages, sometimes calling themselves “milk” are also a growing retail trend and Maddox wants to make sure there are real dairy milk products in the dairy case to go toe-to-toe with them.
There were 27 proposals submitted from industry for the $14 million in grant money that was available earlier this year, he said. Six were approved.
As well as looking at the projects themselves, they were evaluated for their mindset, he said. “Instead of looking at ‘stealing some one else’s market’ we wanted projects that wanted to grow the whole category.”
One project he mentioned was a processor that needed help figuring out shrink wraps that could be used to pack 18 single-serve bottles of UHT (ultra-high temperature) milk at a time so it could be sold in club stores. Milk processed in this way doesn’t need refrigeration.
Maddox said it was a fairly small investment for dairy farmers to make and it should yield more sales of single-serving milk in higher volumes.
Another area where the industry may be able to develop more sales is specialty milk — like high-protein milk that can be sold in nutrition stores and in health clubs as exercise-recovery drinks.
O’Brien said that the core of milk sales are still gallons and half-gallons of milk and those products have seen the most significant decline in sales.
“Processors have felt the squeeze and that has led to a lack of investment and lack of innovation. We asked processors up and down the value chain to give us their ideas,” she said.
A group of processors, retailers and dairy cooperative leaders were scheduled to get together at the end of October to look at what barriers are to growth in milk sales. “We want to all understand that this problem isn’t for dairy farmers to take on alone,” she said.
“The good news is that we are having incredible discussions. The checkoff has built a reputation for itself and by the end of the year we will have both a short-term plan and a long-term plan for DMI and the National Dairy Board.”
Maddox believes that the industry has the “wind at our backs” with the nation’s current obesity crisis. “People are going to have to go ‘back to the future’ with eating a simpler diet and bringing back dairy nutrition.”
Priscilla Brindley, a senior vice president with DMI, said those working on growing dairy consumption are also looking ahead to future demographics of the United States. A growing Hispanic segment of the population, a larger number of people over 55, and growing numbers of diabetics are among what they found in these future consumers.
“We need to get smart about innovation for these future consumers,” she told Wisconsin State Farmer.
There are 40 dairy product categories in which checkoff money paid for research and the next step is to bring in processors to take that research forward into marketable products, she said.
The industry will help prioritize areas of the dairy market that they feel are ripe for innovation that will lead to dairy sales, she said, perhaps reinventing milk packaging and technology.
“It’s exciting work, dealing with research and development, marketing and looking across functional areas.”
Maddox notes that the industry is “definitely swimming upstream,” but he hopes work with six dairy centers across the country — including the Wisconsin Center for Dairy Research — will translate into something that processors and manufacturers can embrace and take forward.
“Dairy is a great growth category,” says O’Brien. “There’s a lot of hope.”