Changing consumer expectations pose one of the most dynamic challenges facing today’s dairy industry. More and more, consumers seek organic products from smaller farms in pursuit of healthier food.
The irony? Newer, larger dairy farms and processing plants are more efficient and are better equipped to deliver “cleaner” products. So what do consumers really want? And how can dairy meet their needs? Ted, T3 and Anna discuss.
Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind. In this episode, we want to discuss whether the dairy industry has some catching up to do in terms of addressing consumers’ attitudes about nutrition. We’ll get to that in a few minutes. But first, let’s discuss the recent spike in cheese prices over the last few weeks. T3, you’ve said that you think the rally is “hollow.” What do you mean by that?
T3: Cheese inventories are still very high. There have been a couple of pieces of data who have indicated that maybe demand has picked up a little bit but when you’re sitting on a large amount of inventory, it takes a long time to really change the supply and demand balance. Just because a couple of data points say, “Hey, things might be getting better,” doesn’t mean you’ve solved the problem. It just means that maybe if you stay on this course for another six to 12 months, you might get to a point where you’ve solved the problem. And everybody’s reacting to it by saying, “Hallelujah, the cheese price can go up,” and I can tell you as a someone who has to go sell cheese every day, in the last three weeks as we’ve gone from $1.45 cheese to $1.73, more and more buyers have backed off and said, “I don’t need this cheese today. I don’t need this cheese anymore. I’ve got more than enough in inventory.”
I was just in Chicago in an industry meeting and the comment I heard from multiple converters of cheese was, “I’m pretty happy with where my inventory is right now.” Because they saw the cheese market go from $1.45 to $1.73 and they’re like, “Sweet, my inventory value just went way up.” So, now what are they gonna do? They’re gonna stop buying, they’re gonna run their inventories down into the market. And so, we could easily go the other way. That’s why it’s hollow.
Ted: And I tend to agree with that. Although I do think that most of the cheese inventories are hedged so they really carry the inventory is of nominal concern to them. And that’s a change that’s occurred over the last few years that will change how quickly this can change. It used to be, all of a sudden you get to a point that like somebody has flipped the light switch and, boom, it would take off one way or the other. It seems like the cycle has flatted out and lengthened because of the risk management, because of the storage ability, because of the flattening of demand and also, it’s probably flattened on the dairy side too, on the supply side. People are breeding for beef right now and not for milk.
T3: But that’ll be—we won’t feel the effects of that for another two years.
Ted: Well, that’s my point. It’s gonna be what? Once it turns around… I don’t think it’ll turn around this summer and go the other way. It may not go as fast as a lot of people like to see but it’ll continue for a long time.
T3: It could.
Ted: That’s what I’m sort of thinking it’ll turn out to be, which will be a change from what we had before.
Anna: Let’s move on. We talk about changing consumer expectations all the time. It comes up in pretty much every episode we do. Obviously, the food we buy and the reasons why we buy it always evolve over time. But right now, the dairy industry seems to be struggling with how to get people what they want. T3, start us off. In your opinion, what’s going on?
T3: We’re dealing with a market environment today of rapidly changing…
T3: Expectations. That’s a good way to put it. We’re in a marketplace today that’s dealing with rapidly changing consumer expectations and the dairy industry appears to be falling behind. And what’s the dairy industry doing about it?
Anna: Do you think that’s true, though?
T3: Yes, I do think it’s true.
Ted: Well, first of all, expectations with regard to what?
T3: With regard to food safety, with regard to local, with regard to big CPG companies versus small local producers and manufacturers. Today’s consumer is, generally speaking, less interested in the big food conglomerates and more interested in buying something unique, buying something local, buying something that’s more tangible. It makes traceability a much bigger issue. Blockchain is not just something that is being driven by the technological industry, it’s being driven by the consumers’ desire to know more about the food that they eat. And what’s happening is dairy is so stuck in the way we’ve done it for so long that we are having trouble as an industry adapting to the new customer expectations. The millennial… Everybody talks about millennials, they talk about how millennials are driving this market and I think that’s true, but I don’t think it’s only millennials. I think as a general population, we’re all looking for more from our food. When I say more which is kinda say…what I’m kinda saying is more information. They want to know more about the food and it comes up sometimes in ways that is anti-dairy. I don’t think it’s anti-dairy as much as it’s why isn’t this dairy product giving me what I want in terms of the information and the traceability behind what I’m asking for?
I think there are dairy companies that are doing a better job of it but the big dairy companies that are the huge drivers of demand where 1% changes in their demand affect us all in a positive way are the ones that are really struggling with it. And I don’t think that issue is dairy alone. You look at what the sales volumes are for most of the major CPG companies in the Fortune 500 index, they are all struggling with this issue, whether it’s Kraft Foods, whether it’s Heinz, whether it’s General Mills, you know, on and on, down to, you can, you know, throw out the top 10, you know, food companies in the United States, you’re probably going to see all of them struggling with the same issue.
Ted: Let’s divide this discussion then into two categories. Let’s, first of all, discuss food safety. All right? And then secondly, let’s discuss food nutrition. Now, with regard to food safety, I don’t think the dairy industry is necessarily behind.
T3: In food safety, I don’t think we are. There’s a difference between traceability and food safety.
Ted: First, a general observation with regard to food safety, having been there 50 years ago, involved in one of the first, the first recall on salmonella. In 1966, people had just figured out how to run salmonella. It was a complicated test. It took two weeks to run it. People had just succeeded in identifying that salmonella was a problem that caused you to have a tummy ache, which in the elderly and the infirm or the babies could be, in some cases actually fatal, but then for most people, it was at worst a tummy ache. And it became an issue of food safety back in 1965 and ’66. But the test was complicated and they couldn’t identify it correctly. You had product produced and on the shelf distributed all over the country and then three or four weeks or even a month later, somebody comes back and say, “Oh, we got a positive.” “And how bad of a positive did you get?” “Well, we ran 10 or 20 samples, and we got one.” So, all of a sudden, you’re scrambling to try to really find from your archives to get this to replete so you knew what you were doing. You had lot numbers and so on, and everything was tested and everything was archived but the complication of the test, when you went back to test it, it was two weeks. And then I found out subsequent to that, that some of the labs that said they knew how to do it didn’t know how.
So, if you look at it today, they can identify this on infrared immediately after. Either listeria or salmonella or E. coli, or for 157, and so on, can be identified almost immediately. Your food today is so much safer than it was 50 years ago and we don’t hear that. We hear about problems because all of a sudden it’s so easy to run a test and identify a problem.
Fifty years ago, people were raised differently. They drank unpasteurized milk. We weren’t as clean as we are now. And they developed immunities or at least resistance to some of the nasties that we’re talking about and, you know, nominal everyday contaminants. A little bit of salmonella won’t hurt you.
T3: Some people might disagree with that but…
Ted: In 1950, you had developed an immunity to some of these things. And today, the food has gotten progressively pure as time went on and people don’t have those immunities anymore. And we continue to move in that direction where the food supply becomes ever more and more pure and contaminant-free and people aren’t developing the natural immunities that they used to develop 50 and 60 years ago to these nasties. So, this is a change that’s occurred in food safety and we need to recognize it and also as it applies to the dairy industry, you know, basically, except for commodity items like cheddar blocks and barrels and powders. All of our plants are old, whether they’re bottling plants or whether they’re little cheese plants, they’re old. They’ve been around a long time. They have storage systems that are old. They have walls that are old, and they have ceilings which have been changed over the years to keep from condensate dripping down into the cheese vat and all the things that you do over the years to conform to these ever more stringent quality expectations. This also is a problem for the dairy industry in keeping up in the food safety issue area is how are we gonna modernize to accommodate this.
T3: We talk about how dairy farms keep getting bigger. The same is true with dairy plants. Dairy plants keep getting bigger. Well, the modern 5,000-head dairy is new. It has the newer processes, it has the newer equipment that from a technological standpoint could be argued are better from a food safety standpoint. Well, the next step is what about the cheese plant or the yogurt plant? Well, it’s the bigger cheese plants that are newer and therefore have built in better food safety technology from an equipment standpoint and from the way the building is built standpoint. And the same is true from the cheese converter standpoint. And so, what you’re getting is this dichotomy. You have your bigger dairies and your bigger cheese plants and your bigger converters. That’s where the modern technology and food safety has been built into the process. At the same time, and this is the irony to me, you have your smaller dairy farms that are not as well equipped from a food safety standpoint. You have smaller cheese plants which have the small size and therefore the flexibility to run organic product. You know, you have the smaller older plants and older farms that are running a lot of the organic products. And so, there’s a very real balance between having product that may be, you know, hormone-free and free of some of the other issues that have become important to today’s consumer. But they’re also running them through older plants that you could probably make a case for, don’t have the same food safety standards as the bigger corporations. Yet, as you look at the consumers’ changes in diet and what they’re wanting, what they’re actually wanting is ultimately coming from smaller plants.
Now, let me be clear, I don’t wanna be saying that this is true for all organic products or things like that. There are a lot of smaller new plants out there as well. But generally speaking, I think your premise about how there’s a lot of infrastructure issues that the dairy industry is dealing with, especially in Class I because it hasn’t been growing, are true. But I think this is one of the things that the dairy industry is really dealing with right now is you have a movement by the consumer towards products that are coming from, that are more local. They want more information. And so, you know, everybody talks about traceability, everybody talks about Blockchain. The irony is you probably have better traceability, better ability to put together Blockchain in terms of the bigger corporations, the bigger organizations, the bigger dairy farms, the bigger manufacturers. That traceability is much easier to put together because there’s fewer parts, everything’s bigger, and when everything’s bigger, it means you’re not talking about 5,000 pounds of milk a day from an 80-cow herd. You’re talking about 100,000 pounds of milk a day from a 5,000-cow herd. I probably don’t have my math right. You can probably tell me what the math is. But what I’m saying is it’s much easier to trace the larger organizations through the supply chain. It becomes more easy to trace that. It becomes more easy to establish proper food safety procedures throughout yet the consumer at the same time is saying, “I want local, I want GMO-free, I want organic, I want smaller.” And that dichotomy, I think the dairy industry is really, really struggling with that dichotomy. And I think that what you’re talking about in terms of all of these old plants that need to be updated is getting significantly even more stressed by the changes in consumer demand right now.
Anna: I wouldn’t say that consumers are less concerned about food safety. So, that’s not what I’m trying to say here. But I do think, you know, you talk about them wanting traceability and that’s not what I hear from most consumers. I would say they want local, they want all those things but that’s because they want less environmental impact, not because they wanna know exactly who it’s coming from.
T3: At the end of the day, it becomes kind of an interesting math question when you phrase it that way. What has a worse environmental impact, 100 small farms and 100 small plants where any one single plant will argue, “Well, my environmental impact is way smaller than this really big dairy farm down the street. Look at all of the manure they’re producing versus the small amount of manure I’m producing.” But to fill that demand need, you don’t need one of those farms, you need 100 of those farms. And I would say it’s very possible that the actual environmental impact of pulling from the smaller farms and the smaller plants, may be more than the bigger. And I’m not trying to defend the bigger farms or the bigger plants in this case. I’m just saying that I think it’s interesting that I don’t know if the consumer is really looking at the problem in the right way.
Anna: I don’t know that they are but I also think that when you are looking at purchasing food for your own home, if you want something that you feel like is the most sustainable, the smallest footprint, it makes sense that it should be the best option for you to find a local farm that’s going to a plant that’s very close, not necessarily because of the manure or anything else, but because of fuel and transportation, everything as well, to support someone who’s local to your community. It’s not just a, you know, carbon footprint issue, it’s also where do you want to put your dollars, where do you want to… You know what I mean? It doesn’t mean it’s right but in theory, it should be.
T3: I think you’re right. What the consumer wants is something tangible and they see small as more tangible. You know, they see local as more tangible. They can lock into that and be proud of that.
Anna: And we have a very emotional connection to our food. That’s more like we would rather purchase from someone that makes us feel good rather than just go to the grocery store and buy something in a box.
T3: Absolutely. I think you’re absolutely right. But at the same time, what’s happening is this brand new big plant is going to give us much better food safety. We need better traceability. This brand new big farm and this brand new big plant is going to give us better, you know, traceability, but it’s not what the consumer is actually asking for. But the flip side of it is, even though they’re not going to talk about it, every consumer is gonna say, “I want my food to be safe.”
Ted: Well, perception is reality. You know, you put your milk into a 10 million pound a day plant and what happens? It’s turned into mozzarella that is distributed worldwide into the pizza trade. It’s turned into sticks, cheese sticks for snack purposes, it’s turned into ingredients and various products. So, you have to sort of separate those applications from the small plant that produces a specific kind of cheese or a multitude of cheese. And we know who they are. We don’t wanna name them by name but you’ve got some quality plants up in Wisconsin that produce multiple cheeses that win awards every year.
T3: You have plants in Ohio that do it too, like they won this year.
Ted: That do the same thing, or even in California. But those kinds of specialty products are, you know, hard to market. If you go into the grocery store, you find a jumble of different cheeses and cuts and packages and so on of the different… I always look for an aged Edam because I’ve developed a taste over the years for aged Edam, hard to find. You can hardly find it anywhere. And this marketing of those types of products, marketing the safety, marketing the non-GMO, marketing organic, marketing the fact that it’s safe, it’s got a good background becomes increasingly difficult for a small producer.
Anna: Is it really safer? I mean, I don’t know that you can go backwards but is it really safer to have everything be this clean when we also see that there’s all these health complications from people not being able to tolerate any of that stuff.
Ted: Okay, I think it’s supremely safer but you have to distinguish because people’s resistance is lower and your testing is so much better. You can identify so many more problems today that you couldn’t identify even 20 or 30 years ago or even ten years ago.
Anna: But you look at children’s health now and how many more kids have asthma and allergies and everything else and is it because we’re making everything too clean and too safe? You know what I mean? Again, I don’t know that you can go backwards without hurting a whole lot of people.
T3: You’re making my point that we have done such a good job of making our food so clean that people don’t develop the immunities.
Anna: But I wouldn’t say that’s safer because then you keep having to escalate to make it more safe and more safe and more safe.
T3: Well, that’s exactly the environment we’re in.
Ted: That’s sort of where we are.
T3: What’s the solution? The solution is not to go backwards. It’s not to say, “Time to make our food less safe.”
T3: But let me throw this out there just, you know, that might be one of the underlying things of what the organic movement is, you know, is bring back, you know, the stuff that makes your body develop those immunities.
Ted: So, you’re gonna go on record as saying…
T3: No, I’m not gonna go…
Anna: That’s a little bit of survival of the fittest which is…
T3: As a scientist by training, I’ve always struggled with organic foods for that very reason. It defied what science said was safer. I understood why. I understood the more natural part, “Let’s go back to our roots,” part and I couldn’t deny that part of the thinking. But the science didn’t say it was better for you.
Ted: You know, the premise that all large dairies are better quality and all small dairies are worse quality is obviously false. But as a general rule because of the technological advances of the industry, the large dairies, bacteria counts if you want to use that as a standard to measure, you know, 2,000 per mil is a bad day on a truckload dairy. And some truckload dairies are considerably higher than that and some are also much lower. And if you look at, say, a dairy that’s producing 10,000 pounds a day, it’s going to mingle with a bunch of other dairies on a truck, you know, 20,000 per mil can be a normal day. Does that make it bad? No. Grade A, 100,000. But just the same, if you want to use the standard of blood counts as a criteria for measuring quality, the large high-tech dairy is more capable of producing low bacteria counts than the small dairy. And that isn’t a criteria to judge by because bacteria count maybe isn’t the criteria you should be using. But at the same time, it’s there and it’s a technological advancement that’s occurred over the last 20, 25 years.
Anna: But no consumer has access to what those bacteria results were for every load of milk yet.
Anna: Yet, that’s true.
Ted: Nor would it be particularly valuable if they did.
Anna: No, it wouldn’t.
T3: Well, and I agree with that. I agree with that. But there’s a lot of consumer groups that might disagree with that statement.
Anna: But most consumers who are choosing organic, they may have no idea that in general, yes, it’s dirtier, right? But, that doesn’t change the fact that if they’re trying to avoid chemicals, which is really probably what they’re trying to avoid more than anything else…
T3: Chemicals and hormones, I agree.
Anna: …who cares if the bacteria is a little bit higher as long as it’s still safe?
T3: Well, we might get a couple of emails on this comment but I’ll say this beforehand. My belief has always been this, you may have fewer chemicals, you may have fewer hormones, and the argument is always along the lines of, “Well, these things are causing cancer and I’m lessening the chance that me or my children will get cancer by going organic.” Well, the flip side of it is also is the more bacteria counts are in your milk, the more free radicals because bacteria, there’s a relationship between higher levels of bacteria, higher levels of mutations and potential for radicals that are the things that would cause the mutations that might cause cancer. It is not… Scientifically speaking, there’s two sides to that argument, both of which can be…you know, can affect what people really want.
Anna: But I wonder how much of people’s decision, say, for organic really is about worrying that they’re gonna get cancer and worrying about the overall health of our planet. Really, ultimately. And I know that sounds idealistic and high-minded, but quite frankly, I don’t know that that’s really something that we can ignore, either. I mean, there’s…
T3: I agree. I agree. Allow me to pivot this conversation a little bit and move it more towards marketing. Where are the greatest growth opportunities for the dairy industry today? Every single one of them is small and I don’t mean that in a negative way. It’s more specialty cheese, more unique products, more local products. I think that’s where the opportunities are for the dairy industry.
Anna: I think for food in general.
T3: Smaller farms, smaller plants, smaller demand for products and things like that. That’s where the growth opportunities are. I think there’s a ton of opportunities there but I think our industry, for a couple of reasons, is really struggling with how to access that market, how to successfully meet the consumers’ requests there.
Anna: I know both of you will have plenty of opinions on the subject of marketing in the dairy industry. There’s more to it than I think most people realize. Let’s save that discussion for our next episode, which we’ll publish in a couple weeks. We welcome your participation in The Milk Check. If you have comments to share or questions you want answered, send an email to email@example.com. Our theme music is composed and performed by Phil Keaggy. The Milk Check is a production of T.C. Jacoby & Co.
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