Right now, high-protein diets are hot and cheese is still the biggest user of U.S. dairy.

But will it last?

In this episode of The Milk Check, we pull out our crystal balls and try to see into the future of U.S. dairy.

• Why GLP-1 may be a catalyst, not the whole protein story
• How health and wellness trends are reshaping dairy demand
• How exports could change the future of cheese demand

The consensus?

Find out in The Milk Check episode 100: Is Protein a Fad, and Is Cheese Still King?

Got questions?

We’d love to hear them. Submit below, and we might answer it on the show.

Podcast: Play in new window | Download (Duration: 26:07 — 35.9MB)

Subscribe: RSS

Transcript:

Ted Jacoby III: [00:00:00] Coming up on the Milk Check.

The debate is: have GLP-1s changed dairy forever? Our second debate is will cheese remain king?

Welcome to the Milk Check from T.C. Jacoby & Co., your complete guide to dairy markets, from the milking parlor to the supermarket shelf. I’m Ted Jacoby. Let’s dive in.

Ted Jacoby III: Excited for our topic today. We are going to have a debate. The debate is: have GLP-1s changed dairy forever? The demand for protein right now is clearly extremely strong. It’s really a question of whether we think this demand for protein is a fad, or we think it’s a fundamental shift in demand that’s gonna be with us for a long time.

And so I’m gonna actually put Mike Brown on the spot first. Mike, has GLP-1s changed dairy forever?

Mike Brown: It certainly changed me forever. And I’m a big eater dairy for a long time. I’ve had good success with GLP’s getting my weight to where it needs to be, and one thing you do discover is that you do need to really watch your protein intake.

You need to make sure you’re getting adequate amounts because you will lose muscle. I think diets in general, we’re becoming less carb-focused.

We’re becoming more protein-focused. So, I don’t see it going away. Does that mean we’ll have the record-high prices we have now forever? Probably not the markets will stay strong, and I think it’s a shift in consumer demand . You just need to go into any Costco or Sam’s Club, and the amount of protein beverages they offer now versus three years ago, they’ve tripled in some cases.

So, it’s definitely a market of strength. And despite the high price of proteins, people still seem to be buying it. I’ll see limits when there’s sales in different stores, which tells you that demand is still extremely strong.

Ted Jacoby III: Josh, I’ll ask you next.

Are we changing demand forever, or is this a fad?

Josh White: I don’t know that GLP-1s are necessarily what’s changing demand forever, but they definitely are a catalyst and a disruptor right now. We were listening to a HighGround Monthly Update earlier today. I’ll echo something that was said during that update: A health and wellness trend [00:02:00] is absolutely happening, is global. They noted and cited in that, that over the last two years, gym memberships have been up in the U.S. If you go to other parts of the world that we export products to that GLP-1s haven’t yet reached, we’re seeing incredible health and wellness movements and protein consumption uptake.

So, what I think the GLP-1 aspect of it is doing is that it served as a bit of a catalyst and ignited this market and forced us all to recognize this shift that we’re seeing from just calories taken in to quality of calories taken in, and that is driving a lot of incremental protein demand that the dairy space is a benefactor of to date.

So, I don’t know if I really answered it, Ted. I think GLP-1 is a catalyst in forcing us to recognize a bigger trend that we’re seeing, not only in the U.S., but globally.

Jacob Menge: I do think it’s pretty important to talk about the time horizon that we’re discussing because there’s a really big difference in both availability and dietary preference of protein sources globally, right?

Like India, Sub-Saharan Africa, even China up until very recently was very plant protein-based. And so, even though protein consumption as a whole has certainly been growing where you are looking at depends on how much that’s actually impacting animal proteins. And so, I think that time horizon is important, right?

Because we know where population growth is occurring worldwide. Population growth worldwide is actually in areas that are plant protein consumers not animal protein consumers . And you’re getting some animal protein consumers actually trending lower on population, right? You look at the population outlook for a lot of Europe.

Korea was in the middle. I think they’re, like, 50/50, if I recall, on plant versus animal proteins. But I think that time horizon is a pretty important piece of the discussion.

Ted Jacoby III: So Jake, I’ll ask you the [00:04:00] question. So, five years from now, are we gonna be looking back on 2025 and 2026 and talk about the whey protein fad, or do we think that we will have seen a fundamental shift in where people have invested their investment dollars in terms of what kind of dairy production facilities, processing facilities have been built in the U.S. and around the world?

Jacob Menge: Five years is way too short of a timeline to see what I would call a freight train changing its course. And so, I think that’s pretty clear. We know what’s gonna be happening with U.S. exports, right? We are just set up to be the export powerhouse in the short term, and I would call five years short term for trends like this.

Even though this has happened very fast, knowing again what is happening with the U.S. export picture, I don’t think there’s any way we see a material change in what’s happening in the protein space in a five-year period.

Mike Brown: I think there’s one point of difference in milk proteins versus whey proteins.

I think we see, because of cost difference, I think, more interest in finding, how can I use milk proteins in a product versus whey? I noticed this weekend, again, looking at a sports beverage that 30 gram protein, number one ingredient’s milk, and it’s not a fairlife(R) product.

It’s an amalgamated product.

Jacob Menge: Couldn’t agree more. I was certainly one level higher in just saying any dairy protein or animal protein for that matter. But yeah, when you drill down, do I think there could be shifts within that makeup? Absolutely.

Mike Brown: The other thing is with whey proteins is that you gotta sell the cheese or you gotta sell the casein. And as we look at that spread in price, what’s that value of that whey protein worth versus what you get for the remaining part of the product? As we know, right now, Class IV, which is even dry milk powders and fat are worth way, way more than milk for cheese, even when you adjust for the higher protein revenues.

We have a $5 spread right now between Class III and Class IV. And that always takes care of itself, but exactly how it will, I think we all know there’s interest in do I add casein-producing capacity so I [00:06:00] can get to my whey proteins rather than just cheese?

If I make those caseins, where’s the market for those products? Where am I gonna be able to use them? So I think there’s lots of questions that we don’t know yet. ‘Cause if I’m a processor, one very high-value product, whether if it’s a half a pound or three-quarter of a pound yield per 100 pounds of milk, it’s not gonna drive all your decisions.

It’s gonna be a factor.

Ted Jacoby III: Gus, I’m gonna ask you the question: Has GLP-1 changed dairy forever? Or do you think it’s a trend?

Gus Jacoby: I’m of the impression that we are certainly following the trends within Western culture to evaluate more and more the health benefits of eating better nutrition.

And certainly, as time moves on, the protein component in your meal is going to be more and more important. So, I’m not going to take away from that. I think that will continue to evolve, but I also think that as we continue to evolve in that setting, other pieces of that nutrition will come to light and become the fad for a period of time.

At the moment, protein is hot, and I don’t think we can get away from that. For me, just looking at U.S. milk production and how much of that milk production goes into cheese ,the ever-increasing demand in cheese, I don’t see that going away either. I think that’s an entrenched part of our society, and I think cheese is a pretty important part of the daily food consumption here in our culture as well.

 I think there’s a place for both of them, and it’s hard for me to distinguish one from the other as being where we go as an industry.

Mike Brown: One thing we may see is more of these protein-based dairy beverages that aren’t Class I milk take more and more of that consumer stomach.

And so, we’re gonna see more of those UF-based products, which aren’t necessarily what we think of traditionally as fluid milk. And that’s where a lot of the growth has been: in the high-protein milks. Is that where the substitution will take place as much as in some other ways?

Gus Jacoby: I don’t think there’s any doubt, Mike, but I would also argue that we’re probably going to eat into that Class I consumption a bit by more of this dairy protein shake, which tends to be in the [00:08:00] Class II area.

Mike Brown: Yeah, that’s, and that’s what I, that’s what I meant. Yeah. Okay. If you’re gonna drink it as a Class II product, it all gets down to how regulation basically makes those products more competitive- Yeah … because of the regulated minimum price.

Gus Jacoby: That would be a very Interesting discussion probably for another day relative to- what we wanna cover in our debate today.

Mike Brown: Yeah. It’s a bit of a nerd fest, But we look at consumption trends, it isn’t hurting the high-protein products because they are priced differently.

Gus Jacoby: Yep.

Ted Jacoby III: Diego, what are your thoughts? This demand for protein: fad or a long-term trend?

Diego Carvallo: I think the trend is clear, and it still has a lot of room to grow. So, I think in a five-year period, it’s very easy to say that they’re gonna continue to grow.

Ted Jacoby III: You see the international space a lot more clearly than most of the rest of us.

What’s happening here in the U.S., is it happening internationally as well?

Diego Carvallo: Yes, and that’s why I said that there’s gonna be growth ’cause I still see areas of Latin America where that trend is just getting started . You still do not see any of the products that you’re seeing in the U.S. at the supermarket showcasing and showing marketing that much the protein content on the end product.

So I think that growth is still getting started.

Ted Jacoby III: Joe, last but not least, fad, long-term trend?

Joe Maixner: I think that the consumer shift is a long-term trend. I don’t know if necessarily the GLP-1 is the long-term trend because technology will continue to advance, and there’ll be something that comes out at some point that makes this old news.

I think that the health and wellness trend is certainly here for the foreseeable future. estimating 40 million people within the next five years are going to be on GLP-1s. That’s a big number. The one thing we’ve seen the effect on selfishly for my market is the amount of cream and fat that it’s spun off because of all the demand for the protein.

We did not expect to have this fundamental shift in the fat market domestically this quickly. Unless the farmers decide that they’re gonna change how they feed their cows and produce less fat, we’re gonna see that for a while too, and we’re gonna be surplus fat. And that [00:10:00] product is also affected by this GLP-1 because people tend to eat less sweets and snacks and fat-heavy products, so consumption’s been down on that side as well.

Ted Jacoby III: It’s gonna be interesting.

And I’ll just give my two cents. I do think the demand for protein is a long-term trend. I think it’s a trend both within certain segments of the population and I think it’s a trend in that I think, just comparing my generation and how I ate and drank in my 20s compared to how my children eat and drink in their 20s, they sure do live a healthier life than I did when I was that age.

I think I’m speaking for a good portion of that generation and not just my kids. So, we’ll see. It sounds to me that the consensus is pretty clear on this one. Whether it’s GLP-1s or not, this protein trend is a long-term trend, and it is fundamentally changing the dairy industry.

And we’re all curious to see how it’ll play out. All right, now I’m gonna switch to our second debate. This debate is will cheese remain king? So in my lifetime, milk production, when I was born, milk production was roughly 20% of milk was made into cheese. Today, it’s 55%. It is very clear that the driver in dairy consumption in the United States is a per capita increase in cheese that is part of a long-term trend.

My question for everybody today is: Have we started to reach the point where that trend is starting to plateau? Is cheese still king? Will it continue to be the driver of increases in per capita dairy consumption, or have we reached a point where we’re not going to see cheese driving the bus anymore? It’s 55% of milk production goes into cheese today.

Is it gonna be 65% in 10 years, or is it still gonna be in the 50s? Gus, I’m gonna throw you out there first. What are your thoughts?

Gus Jacoby: I think it’s hard to say that it isn’t still king considering the large amount of milk in U.S. milk production that goes into cheese.

And even with respect to the protein segment that we just talked about, you can’t make whey [00:12:00] without making cheese, so you’re not gonna get whey protein without cheese. I don’t think the American consumer is going to lose their appetite for cheese anytime soon.

I understand that certainly with the GLP-1s we’re gonna eat a bit healthier. But I find it hard to believe that while maybe the growth might become less than it has been over the last number of years I do believe that cheese is gonna be with us as the majority taker of milk at least for the foreseeable future.

Ted Jacoby III: Do you think the trend is strong enough that 15 years from now 65% or 70% of all milk goes into cheese? Or do you think maybe we’re gonna plateau right around here at 55%?

Gus Jacoby: I think it still has room to go a little bit higher. I think there’s a possibility of plateauing, though maybe at some point north of 60.

But at the end of the day I just don’t see how it can be removed from the diet. If people wanna start playing with what type of cheeses are in their diet for better health benefits, I guess that may happen.

Ted Jacoby III: All right.

Gus Jacoby: Not in the near term.

Ted Jacoby III: Jake, what are your thoughts?

Jacob Menge: I would imagine that the percent of milk that is turned into cheese goes lower. That’s my gut feel. We’re gonna be export-dominated.

We maybe can capture some markets that we haven’t historically gotten into before with more shelf-stable products. We’re just gonna have to export a lot of product. And cheese is exportable obviously, but it just feels, with the new markets we’re gonna be moving into, the amount of product as a percent that we’re gonna be exporting, dietary shifts, it all points to me that, as a percent, it’s hard for me to make the case that cheese goes higher.

And so by default , I’ll argue it goes lower.

Ted Jacoby III: Joe, what are your thoughts?

Joe Maixner: I think that what happens with cheese moving forward depends on how well the dairy industry markets cheese moving forward. If we do a better job of [00:14:00] marketing the protein benefits, the fact that it’s the cheapest protein per gram and playing into those strengths that would help keep it as king and increase consumption.

If we continue to sit on our laurels and not really do any additional marketing, I think that we have a chance to lose capacity.

Jacob Menge: So what’s your gut? Do we do a good job marketing it or not?

Joe Maixner: Okay. I don’t think we do. But we could. The potential is there. We just, we’re not doing it.

Ted Jacoby III: I think dairy has struggled for a long time just to market itself as how healthy it is, and some of that I think is because we sit in a position of strength in the marketplace, and so everybody’s always coming after dairy to say they’re better than dairy and dairy’s got issues.

So all the plant guys can grow their plant-based products. All of those food products that don’t come from dairy tend to attack dairy in order to grow their own market share. And I think that’s why dairy struggles. I think your point about how the value of a gram of protein in cheese is a lot less than the same cost of that protein, let’s say, in whey powder or in other things. I’m curious to see how that plays out, because I think it’s a really good point.

Mike Brown: I’d make a point on the competition. Where we’ve seen shrinkage in the refrigerator dairy case is the non-dairy beverages. They are losing market share. Milks are doing better, particularly the protein milks, are doing so much better. I think there’s still potential, so we can’t assume that. I also think there’s two questions on cheese to me: market share and total market. I think total market still has a little room to grow. I think market share will not grow, maybe decline modestly, and that’s more because of the Class II demand for proteins now with yogurt, Greek yogurts, and cottage cheese, and all the Class II-based liquid beverages.

So, it’s more of an issue perhaps of market share, and that takes time to build capacity. We all know that. But the demand is there. Cheese is gonna continue. We [00:16:00] look at the supermarket sales data, it’s still growing modestly, as is butter, and that’s just total sales.

I think the other factor we gotta think about here is population growth because our growth’s gonna be much slower. With current immigration policies, I don’t see a quick turnaround in growth of population like we’ve experienced in the past. A lot of that from folks who are big users of dairy in their diet.

In the benefit of cheese, as we get older, we drink less, and we eat more milk proteins, and that’s part of our growth, of course, with cheese. The other one is food service. It’s huge, particularly the mozzarella side of the business, and it’s looking pretty tepid right now.

That tends to go with health of the economy. I expect it’ll rebound again when people have more money to spend. I think that’s part of it, too. So, cheese is gonna remain strong. Jake made a very good point, though, as did Joe. It’s kinda sold itself, and we’ve had no trouble selling it.

We are now the export market, kinda like we did with non-fat dry milk, what, 20 years ago, Josh? We’re, and we’re dependent on that export market. So, it makes us more vulnerable to world price, term, but it also means it’s a chance to grow if our industry adapts to meet those demands. And as we see, everything from powders to butter to cheese, the industry is working on that.

But it’s a slow process, ’cause it’s always been that market when we have a little extra it was an opportunistic market, now it’s becoming part of sales strategy, and that’s a very different way to look at your business.

Ted Jacoby III: Yeah. It means It’s really matured.

Mike Brown: Yes, a lot.

Ted Jacoby III: Diego, what are your thoughts? I know you’re not the cheese guy, you’re more of the ingredient guy, but internationally, cheese is definitely growing. Cheese gonna remain king? Or is the other protein sources gonna take over and pull milk away from cheese?

Diego Carvallo: So I have contradicting thoughts here.

I think that everybody here agrees that the demand for WPCs and WPIs is gonna continue growing, and that’s definitely been making cheese plants very profitable . But at the same time, I’m seeing that many cheese plants being built in the past few years that I think that [00:18:00] the competition is gonna get fierce in that aspect.

I would say in the coming years, I see more probabilities of people who build, and companies who build dryers, for example, for non-fat and skim , to have an advantage and definitely a good incentive.

Ted Jacoby III: So my two cents is this: I think we are underestimating how much the export demand for cheese is gonna keep driving it. There’s a lot of proof that cheese consumption in developing countries tends to follow a generation or two after milk powder consumption. It starts with infant formula, then tends to stay in the diet as they get older, and eventually manifests itself in cheese, mostly as an ingredient in something like pizzas or burgers, et cetera.

And so, I do think cheese demand for cheese out of the U.S. will continue to grow. I do think the curve will flatten a little bit. I also think that you are going to get a continued pressure to build more cheese plants just so you have access to the whey protein, because I think the whey protein is gonna maintain its value.

But I’m a little bit like Diego, ’cause on the other side, one of my thoughts is I hear a lot of conversations lately about instead of making cheese, what if we make micellar casein and we pull the native whey, and then we dry the native whey separately? So, I can also see technology continuing to evolve where maybe you don’t actually need to make cheese in order to have access to the whey proteins, and I think we have to keep our eye on that.

But I do think cheese is the dominant use for milk in the United States. I don’t see that changing anytime soon, but I do think the trend is probably gonna start to slow down a bit. Josh? What are your thoughts?

Josh White: I’m gonna step back a bit and start with one belief, and that belief is that United States dairy economies of scale have now reached a point where we’re gonna grow in our market share for the global dairy consumption. We’re gonna continue to grow in our participation in that business, and we will capture more market share.

And if you believe that, at its core, cheese is maybe one of the… If not, it’s the most calorie-dense product that we have. [00:20:00] And there’s an argument that it goes into products as both ingredients and as the primary food service or retail product, which accesses a lot of different demand potential.

If you think about the cheese factory, maybe not how they’re run today, but if you think about it, I’ve made the mistake multiple times of saying that we’re gonna start balancing to cheese, and there’s been a big argument about that, internally. And I can understand why there’s an argument on the surface level.

But in the bigger picture, it’s what may be the most versatile way to process milk and balance out whether we have extra protein, extra fat, or we’re short of either of those product or whatnot. You can spin off more cream. You can bring in more solids. You really optimize that recipe, and I feel like that makes it foundational.

And if it’s foundational, you’re gonna continue to see investment in these large cheese plants. If whey protein’s hot, great, whey protein benefits, and cream prices are poor it’s offsetting . If cheese demand globally is growing or fat demand’s growing, great we’ll maneuver our recipe a bit to take advantage of that.

It feels very… Optimized maybe is not the right word. Someone help me with a word for it. But it feels like it’s a natural hedge, and it just seems if we’re gonna continue to grow in the commodity foundation of dairy products and then optimize all the ingredients and all the special opportunities around it, the cheese processing facility is maybe going to be the best to build around.

And so with that in mind, I don’t know if that necessarily takes a greater market share, but it’s gonna be the foundation for our growing volume of milk solids out of the U.S. over the next several years.

Ted Jacoby III: Josh it’s funny, you mentioned, are we gonna start balancing into cheese versus balancing into a powder plant?

And my initial reaction when you first mentioned it a year or so ago was to say, “A cheese plant is just way too expensive.” It’s two, three times the cost to build a cheese plant as it is to build a plant that [00:22:00] dries non-fat. But the more I thought about it, the more I started to realize this:

Already today we’ve seen a fundamental shift, and it will continue. I think cheese will always get enough milk to run the plant, but the competition for that marginal next pound of milk that could go to any of those plants, I think the competition for that last pound of milk has been ratcheted up a notch or two, and I don’t think cheese is gonna win that battle at all costs, like it historically has.

And so I think there are times when your UF milk plants, when your ESL plants, and even when your non-fat butter plants are gonna win that competition from time to time. And so, the balancing function for a milk supply is gonna start getting spread over the course of multiple plants rather than the way we’ve been over the last 50 years, where everything was balanced in and out of a milk drying plant.

All right. So have we decided? Have we come to a conclusion? Is cheese king? Let’s just go around. Is cheese gonna stay king? Mike, is cheese gonna stay king?

Mike Brown: Cheese will stay king, but the strength of its kingdom will be a little weaker, ’cause it’s gonna have some strong competition from other proteins.

Ted Jacoby III: Perfect. Jake?

Jacob Menge: Couldn’t have said it better. Agree completely. Yep.

Ted Jacoby III: Gus?

Gus Jacoby: I would agree with how Mike said it. Yeah.

Ted Jacoby III: Awesome. Joe?

Joe Maixner: Yeah. No, no argument here.

Ted Jacoby III: Diego?

Diego Carvallo: I’ll have to say no. It’s because of the high competition and the amount of plants that are being built right now.

Joe Maixner: Yeah.

Ted Jacoby III: So are you saying you agree or disagree?

Diego Carvallo: I disagree.

Mike Brown: It’s the degree that cheese is ahead; it’s gonna take a lot of time for that to shift.

Ted Jacoby III: A little bit like the Roman Empire in the year 200 AD, it’s still got 250 years to go, but it’s no longer gonna be the powerhouse it was 50 years previous.

Josh, what do you think?

Josh White: Yeah cheese is the king, and we’re gonna build a bigger kingdom around it.

Ted Jacoby III: All right. And I agree with the general consensus that the cheese stays king, but the trend of an ever-increasing percentage of the supply is starting to slow down a bit.

All right, everybody. Hey, this was a great [00:24:00] conversation. Thanks for joining us today. To all of our very valued listeners, we thank you for taking the time to listen to us. And if anybody ever has any questions about some of the topics we talk about, don’t ever be afraid to reach out and contact T.C. Jacoby & Company.

We’re always happy to help. Take care, everybody.