“Here’s what scares me.”


Is there a structural problem plaguing the dairy industry?

In this discussion, Ted, T3 and Anna dig into some fundamental changes in the way Americans are eating that spell bad news for the supply side of the industry, which seems unable to shut off the spigot.

Anna: Welcome to “The Milk Check,” a podcast from TC Jacoby and Company, where we share market insights and analysis with dairy farmers in mind. As we’ll discuss in a moment, markets haven’t changed much since last month, but we plan on having a wide-ranging conversation about a few market dynamics that have us worried, and it has nothing to do with tariffs. T3, get us started.

T3: We’re sitting here in the first week in August, the markets, at the moment, are very similar to the markets of July. Not a lot has changed in terms of tone in the last month or two. Cream multiples have been better, so maybe on the butterfat side things have been a little bit better. But probably not enough to create a material difference in a farmers’ milk check. My guess is that the August milk check isn’t going to be that much different than the July milk check.

As you get into late August, schools are getting back in session, the Class I plants will be pulling some milk away from the cheese plants and the Class IV plants. And so, you may see a small increase in cheese prices, you may see a small increase in powder prices, which may mean the Class III and Class IV prices go up a little bit. But the way I look at the market right now, if you look at the current spot prices for cheese and whey and non-fat dry milk and butter, and you look in what that calculates out from a Class III, Class IV perspective, and you compare it to the futures. You’ll see there’s about a 75 cent to a dollar gap between where we are now and where the futures are predicting, September, October, November are gonna be.

We certainly have a different attitude about the strength of dairy markets in the fall today than we did four or five months ago. We’re definitely not as confident about better demand and higher prices today than we were. And as a result, we’ve kind of gone off into a different kind of path in our discussion on the podcast today.

Ted: I’m troubled by the fact that everything I read is trade and tariffs.

T3: Right.

Anna: Yeah.

Ted: Everything. We’re obsessed with it, and we have record trading, okay, right now. And everybody says, “Well, this is the source of the low prices.” It’s not.

T3: Well, it’s a timing issue though. Most of the tariffs…

Ted: I will grant you that if all of a sudden we have embargoes and a full-fledged trade war, it will happen, but we haven’t got that at this point.

T3: Right. Most of the tariffs didn’t go into effect until the first week in July. And so far, our trade data is through June. And so, we won’t know the effect of the tariffs until they start producing the July data.

Ted: Well, why doesn’t the world know that? You know, this has reached the point of the most disingenuous thing in the face of the Earth. It’s not. It may be one day, but it’s not right now. What we got right now is too much milk and not enough sales.

T3: And not enough domestic sales.

Ted: Yeah. Domestic sales are the issue.

T3: The first question is gonna be, “Why are sales down?” The second question is gonna be, “Where did the sales go?” You know, and so, that’s what we don’t know, is where the sales went. Now, I suspect, you know, the vague answer to that is there’s a lot of little privately-held food companies out there that are grabbing a lot of these new sales. I know part of it is also they keep saying they’ve lost a lot to private label. But we see the private label side of it with Schreiber and Great Lakes and those guys. And even Deans.

I mean, the dairy industry is actually probably more advanced on the private label side of things than most food industries. But we’re not seeing it there either, you know. I would say this. Is private label growing and brands not in dairy? Yes. But private label isn’t growing so much that the whole category is growing. So, dairy is losing sales to something else.

Cereal sales are down 3%. Well, when you have cereal, you have milk, which means if cereal sales are down 3%, then there’s a correlating response on the milk side of things too. But, you know, talking about decline in fluid milk sales is—

Anna: We’ve known that.

T3: —we’ve been talking about that for 20 years. You could say it’s things like, you know, the keto diets and the low sugar diets and these intermittent fasting diets, but is that really…is 5% of the population skipping breakfast due to intermittent fasting?

Anna: I wouldn’t say intermittent fasting, but I do think grains are getting vilified in a way that they weren’t before, at all.

T3: So, grains are getting vilified?

Anna: Yeah.

T3: Somehow that’s affecting dairy. Which means you probably have… I’ve talked to somebody who said pasta sales are up. Italgrani, who is a pasta company here in St. Louis, their comment was their sales are phenomenal.

Anna: Really?

T3: You know, bakery sales have been flat-lining for a while.

Anna: Maybe it’s sugar.

T3: It could be sugar. So, is everybody eating less? Are we suddenly no longer an obese society?

Anna: Everyone I know is actually cutting out sugar. Yeah. But I wouldn’t say that that’s—

T3: Well, and dairy gets caught up in that because of lactose. But not butter. And you know what? Maybe butter sales, you can say, are in decent shape. But cheese sales are flat, and cheese doesn’t have lactose in it. You know, with the keto diet, you can have a lot of cheese.

Ted: I didn’t even know that.

Anna: Yeah. But I think more people are going, like, Whole 30 and paleo though. I mean, this is just my experience of people that I know, and that is definitely—whole 30 and paleo and things like that.

T3: So, whole 30, and paleo, and keto, and Atkins are all very similar. South Beach, it’s all that…

Anna: Keto and Atkins are…that’s the low carb. So, you can still have all…and those are high fat, like, keto you push fats. Whole 30 and paleo are not necessarily like that. Whole 30 in particular, I mean, there’s no dairy. You can have ghee, but you can’t have butter, which all of a sudden after that took off, there was ghee on the shelves everywhere and there never used to be.

T3: Whole 30 is an elimination diet. It’s like, “Okay. Let’s take it all out, and slowly add it back [crosstalk 00:06:46].”

Anna: Oh, we’ve done it. We had a lot of fun on that one.

T3: Did you find out anything?

Anna: Yeah. Everything. You react to everything when you put it back in.

T3: You just find out how…

Anna: But you feel fantastic at the end of that 30 days. It’s hard, but oh my gosh, I’ve never felt better in my life.

T3: Good.

Anna: It was unbelievable.

Ted: We need to get back on the track here.

T3: Yeah.

Ted: But I do think that the diet…you know, you watch TV, you got one ad right after another, three different diet ads following one right after the other. You know, that has to have an effect.

T3: But my questions is…

Ted: These people are paying for that…

T3: …is it that much different today than 15 years ago?

Anna: I think what’s different, I think those diets were around, but I think that what’s happening more now, at least from what I see, is that more people are picking something to eat by. So, whether it’s doing a paleo diet or a Whole 30 or ketogenic, or whatever that is, Nutrisystem, I think people are picking something just because it’s easier to have a framework to operate in than just to eat whatever.

But I also think it’s interesting too, because one of the things that we’ve seen with trainers, like my husband just went to a trainer recently, and the first thing that they told him before they even gave him exercises was to start your morning with protein. And that’s your breakfast, that’s your cereal right there. If a lot of people are…

T3: But cereal doesn’t have a lot of protein.

Anna: Well, that’s why I’m saying that…we were talking about cereal sales going down, but I wonder if everybody is getting that same advice. You know, start your day with protein. Then that makes a big difference to how people are buying breakfast.

T3: You know, let me ask you this question. So, you’re a generation older than we are. When—

Anna: I’m a generation younger than him. I don’t like that he lumped me in there. I’m just kidding. Actually, we’re closer in age than that.

T3: My two boys who are 16 and 19, are extremely healthy and extremely healthy eaters, including my college student. When you were my age and you had children my age, when I was 19 and, you know, my brothers and sister, were we healthy eaters?

Ted: You didn’t have any choice. If you were gonna eat, you were gonna be healthy.

T3: Well, when we went off to college, and it was no longer mom choosing what we ate, were we healthy eaters?

Ted: Well, I don’t know what you ate in college, or drank. In a lot of ways, I never asked.

T3: But did we come back…did we all come back fatter? Did we all come back out of shape?

Ted: To some extent, yes.

T3: And the question becomes, is that happening today with college students like it did in my generation? And my gut says no.

Anna: Well, I think when I was younger I remember it being a big deal. Like, it was so much easier, it was new and it was exciting that you could buy macaroni and cheese in a box, that you could… You know what I mean? And my kids don’t eat that stuff now. We don’t ever have that stuff around the house. And they eat stuff I never would have dreamed of. Like my kids, one of their favorite foods is mushrooms, and I wouldn’t have touched that when I was 10 years old.

T3: Yeah. My…

Ted: But there’s no question that people’s habits are changing.

T3: I think if you go back over the last 75 years. Let’s say World War II, so 1945 to today. The cycle, and I’m pretty sure it’s documented somewhere, is, you know, in 1945, there wasn’t a lot of processed foods, there wasn’t a lot of pre-packaged foods. You know, most moms, you know, were homemakers, and they made everything. And between 1945 and let’s call it 1990, more and more processed foods became a part of the diet. Everything became more packaged, whether it’s…

Anna: For sure.

T3: …more macaroni and cheese, more cereal, more frozen foods, whatever it is, that grew. But my suspicion is, in the last 20 years, is processed foods, and it’s clearly the last couple of years, processed foods hit a wall. And the growth in the last couple of years has been back to fresh on multiple levels. You know, and where I don’t know if the data would show it, is, but the other thing—I remember when I was a food science major, which is now almost 30 years ago, they were just starting to talk about isolating proteins and to put together foods that were specific to what’s good for you.

And then, in the explosion in the last 30 years of that, you know, everything from Clif Bars, to Fairlife, to all of these energy drinks and protein drinks and protein shakes and you name it, it’s all been in the last 30 years. And that’s really been one of the biggest explosions in how the diets changed. And, technically, that’s processed foods, but think about what that means. It’s a totally different kind of processed food.

Anna: It’s totally different. I’m curious to see how long that lasts and how much people like that. Because I do feel like your body knows how to use certain things, and I also think that in terms of, you know, like, trying to use whey proteins, and…I mean, corn, we’ve been trying to use corn for decades, trying to get rid of it. Like, that was the big processed food that was one of the big pushes. We need to use all that up. I don’t feel like any of that stuff’s gonna make us any healthier.

Ted: You know, one of the issues that we started with and didn’t finish with, other than diet changes, is what to do about it. What should the dairy industry do about it?

T3: I think that’s the great discussion, and you phrased it the right way. What does the dairy industry need to do to make more desirable and healthy foods?

Ted: And it’s the time to ask the question because of the juxtaposition of all these disingenuous trade discussions with the actual problem, which is change in the people’s eating habits.

T3: I agree. That’s what’s scary, is… Both of us, we live by the dairy industry. We want the dairy industry to succeed, we also wanna be healthy. And when we’re trying to figure out how to be healthy and what we’re seeing is a change, a reduction in how much dairy we consume, neither of us want to consume less dairy, but we have to consume that which is best for our bodies. And the problem is, there are not enough dairy products that are both good for your body and… You know what I’m saying?

Anna: Yeah.

T3: You know, breaking it down a little bit more, you know, from a nutritional, chemical level, you’ve got carbohydrates built mostly in the form of lactose, which has become, let’s say, for the most part—I don’t wanna use the word undesirable, but less desirable. Especially, for those of us who’ve, you know—for me, you know, when I carry extra weight, I don’t need the extra calories in something like lactose, which doesn’t have a lot of nutritional value beyond that.

Then you take the fat. Fat’s kind of in the same boat. Though the research on fat has proven to be that maybe it’s not as bad for you as people originally thought. And what’s happening with butter is they’re also saying compared to other fats, this is a good fat. So, that’s one of the reasons that butter has increased in value, I’d say, you know, in the last 5 or 10 years.

Anna: And people now definitely know more about good fats than they used to in terms of what kind of oils they’ll use, butter and everything, yeah.

T3: You know, and so, on the protein side, you know, as people say, we need more protein. One of, I think, the most fundamental economic changes in the dairy industry of the last 30 years has been what used to be all about protein value when dairy was in casein. Now, I would say whey proteins are probably worth more than casein. So, all the other proteins are worth more than what was originally considered the most valuable part of milk.

One of the things that I think I wanna know more about is what’s up with casein. Where is…do people consider casein to be a really important protein? And the other thing about casein, it’s a huge molecule. You know, is the next advancements with dairy going to be breaking casein molecules down into the right parts so that it’s a more desirable protein? Because, nutritionally, probably where food is going to evolve next, it looks like it’s going to evolve next, is people becoming more specific about what’s the right protein. Think about it. We now know the different…

Anna: Do you think people will?

T3: Yes. Here’s why. Think about it, 10 years ago or let’s say 20 years ago, fat was fat. There wasn’t good fat and bad fat, there was just fat. We can actually start having this debate now, about this is a good fat and this is a bad fat. So, if we’re gonna have fat, this is the kind of fat we need. We know we want olive oil and we don’t want, you know, vegetable oil.

Anna: See, what I would say, for me, the perspective that I have is that instead of going forward to someone saying, “Now, we know this is good or bad,” I’m going backwards and saying, “This was fine on the farm, and my great grandmother would have recognized it. So, this is okay.” Like, butter is one of those things that isn’t, like, crazy processed. They don’t have to do anything insane to make it butter. And so, like, my own, personal preference would be not towards going towards something that’s more technologically, you know, isolated for me. It’s gonna be going the opposite direction to something that is simple, and that I… You know what I mean? Does that make sense?

T3: It does. But you’re gonna get both, and here is why. Convenience.

Anna: That’s true.

T3: And the problem with fresh food is it’s not convenient. And so, how do we, today, balance that? And my belief is, you’re gonna continue probably to decrease the amount of processed foods, foods that are processed in the wrong way, lots of preservatives, everything’s broken down, lots of sugar, you know, all of that. I think that is a part of the diet that is gonna really go backwards for us. So the demand for those kinds of products will continue to go down.

But, you’re gonna say, “Well, I need something that’s convenient and I need just the right thing. And I don’t have time to go get a salad.” So, you’re gonna get that one thing that you can eat that’s just right. Or you’re gonna get down to the point where you say, “This is the amino acid profile that’s perfect for this particular persons’ body.” And so, you’re gonna have, like, you know, 20 different energy bar choices that each have different amino acid profiles based on, you know, what different people’s needs are at that point in time.

I mean, think about it from a genetic testing standpoint. You know, you can actually go and get a blood test today, and from that blood test, you know, a dietician can tell you, “You should probably be eating this.”

Ted: We have an industry that’s become very staid and mired in its structure. And now, the proprietaries are going out of business because the co-ops can basically supply milk to them cheaper than they can get it themselves. So…

T3: Yeah. But I would also say that there are a number of co-ops that are financially on their last legs at the moment.

Ted: No, they’re not. They’re not gonna go anywhere. The ones that we support, they just pay the producers less.

T3: I don’t disagree, but I think they all know there’s a problem. They’re just afraid to do…to swallow the bitter pill to fix this.

Ted: Co-op structure is not positioned to solve the problem, which is actually what the conversation should be about, is that we got 95% of our milk now tied up with co-ops who are not structurally situated to solve the issue. They don’t have the people, they don’t have the administration, they don’t have anything. They’re not Kraft. They’re not Nestle. They’re not proprietaries that have R&D departments and so on.

What co-ops are there under the Capper–Volstead Act is to try to get the price of milk up. They’re not there to solve any marketing problems. So, that’s the issue that we need to discuss, is how are we gonna solve this marketing problem in view of the changing demographics of the industry?

T3: And so, you’ve got, basically, you’ve got two parts of the same debate. How do we make dairy healthier and more desirable to a changing diet of the American public? And how does the federal order system adapt to encourage that?

Ted: Yeah. The co-op, of course, their lifeblood is the federal order system, because it gives them the control. The regulatory portion of it gives them control of the milk, and they can then dictate the pricing. So, that’s the price we pay for the classified pricing system. It’s what it is. It is what it is, and that’s why the co-ops are gonna be…to their last breath they’re gonna stay with the federal order [inaudible 00:20:28] and the regulatory system, which is getting to the point of driving those who are going to be able to solve our marketing and demographic problems out of business, or at least away from the industry.

Anna: Why would that have to be?

Ted: Because co-ops don’t have the people.

Anna: No, I know. But why would that… Because if I come up with some great new product, and it doesn’t fit into the regulatory system, but it’s a great new product and it’s making money, I can just pay people whatever I want and have them stay independent. And make sure that they’re doing better than they would have under the federal order system.

Ted: If you come up with a great new product, it’s called a brand. And it’s called Anna’s Great New Product, is your brand. It costs billions to develop that brand, just like Fairlife. Fairlife came up with a brand and they couldn’t do it by themselves. They got together with Coca-Cola. And Coca-Cola had the pockets that could take the brand to the marketplace, okay? Co-ops don’t have brands. There are a few exceptions. Cabot has a brand, Tillamook have a brand, you know, even Foremost and some others have brands.

But they’re not in a position where they can develop branded products or sell branded products, you know, and extol the virtues of them from a health and nutritional standpoint.

Anna: But if you’re someone like Fairlife and you partner up with someone like Coca-Cola, what’s to stop you from operating outside of the Federal Orders? Why wouldn’t you?

Ted: Nothing.

Anna: I mean, that’s not a hindrance to having you do it.

Ted: You can go get your milk independently. The only thing that you have is the fact that, by law, if it’s a Class I product, under the current rules…

T3: Then you have to, yeah.

Ted: Then you have to. But if it’s a Class III product—

Anna: Unless you’re really clever.

T3: Class III or IV, and to be honest, you’d actually be encouraged to stay in the Federal Order system with Class III and IV, because that’s gonna be your lowest cost milk.

Ted: Exactly.

T3: And that’s part of the problem.

Ted: Yes, it is.

T3: Is, you know, what happens in a market environment?

Anna: But that’s why I’m saying though too, that the federal order system then isn’t the hindrance to getting that done, right?

T3: Well, here’s how it’s the hindrance. You have an R&D department, you are gonna spend money in your R&D department figuring out how to make more money. If you make a product using fluid milk, then you have to pay a Class I price. But if you make that same product out of powder, it’s cheaper because it’s basically Class I price.

You’re actually gonna have your R&D department spending all their time, trying to figure out how to reformulate this to use a class four. And that’s essentially what’s happened at Nestle. That’s what’s happened with MUSCLE MILK and a lot of these other, you know, other energy drink products. They’re all made from powder. They’re not made from powder because it’s better, they’re made from powder because it’s cheaper to make on the ingredient level, and, therefore, more profitable.

Anna: But are we saying then that the solution to the marketing issue lies in Class I?

T3: No. What we’re saying is, you have to have a system that doesn’t actually incentivize the buyer to spend all their time looking for how to buy things cheaper.

Anna: Okay. I see what you’re saying.

T3: You wanna create a system that is actually incentivizing people to be creative.

Anna: I agree with that. Yeah. That makes sense.

T3: And the ultimate flaw of the Federal Order system is it incentivizes the buyers to be creative in the wrong way. My general attitude about a lot of the dairy business right now is the next two to three years may be about survival. We may be having to go—and here’s what scares me, the economy’s going very well, and yet dairy is not participating.

Right now, it’s not getting bad enough to quickly eliminate supply, which means hope is on the other side of that. You just survive the downturn like you did in 2008. You’re gonna get to a point where it’s gonna be better. Now, it was utterly painful in 2008 and ’09 for dairy farmers. But those who survived participated in ’10, ’11, ’12, ’13, ’14, ’15, which were actually really good years. And most of them lost a ton of equity in ’08 and ’09, and by 2015 had gotten it back.

But now, you’re at a period where they’re starting to bleed again, but this one almost looks like a slower bleed. And that’s what’s scary to me, is this slow bleed can last for four or five years rather than for a year and a half of extreme pain. It becomes a slow bleed, which means it takes that much longer for supply to correct itself. The mindset you need to get to, to solve the problem is the abandonment of hope. Get to the point where, finally, enough medium-sized dairy farmers are finally going, “Screw this, I’m done.”

Anna: This has been a bizarre conversation and we didn’t really come to any concrete conclusions, but we definitely have a lot to keep our eyes on in the coming weeks, and we’ll keep you posted. Thanks to both of you. We welcome your participation in “The Milk Check.” If you have comments to share or questions you want answered, send an e-mail to podcast@jacoby.com. Our theme music is composed and performed by Phil Keaggy. “The Milk Check” is a production of T.C. Jacoby and Co.

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We can put our insights to work for your operation. Learn more about dairy cooperative support services from T.C. Jacoby & Co.

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