Recent advances in gene editing technology have made the production of dairy proteins in lab settings viable and potentially scalable. If the techniques can scale cost-effectively, and if consumers buy in, the dairy industry as we know it will change.
Ted, T3 and Anna discuss what’s at stake and ask: Should dairy farmers be worried?
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. We want to discuss something today that we think will cost significant issues for the dairy industry in the coming years. You’ve probably heard of Burger King’s Impossible Whopper, beef made in a lab, not from a cow. Well, it’s happening in dairy too. But before we discuss milk without a cow, let’s spend a few minutes on markets and pricing. Over the last several months, we’ve predicted that prices would continue to strengthen. Since we last spoke, persistent wet weather across the country has made it very tough going for farmers getting crops planted.
Ted: Looking at the pricing today, I think we’re on a slow trajectory up. I think it’s gonna continue for a period of years. I don’t see a change even next year and next spring. I think we may have a little bit of cycling. But given the crop situation, and so on, and the forage situation, 2020 looks like a continued strong year. Do I see an explosion? No, but a steady move up. The butter fat situation, probably, is not gonna be as explosive as we thought before, because I noticed an article come through the other day, that the average test is now reaching 3.8, the standard of identity on milk is 3.67.
So, it’s almost 1.3% up. Imagine what a big difference that’s gonna make for the demand from ice cream, and cream cheese, and butter, and so on, is concerned. So, I suppose we’ll see. Do you think we’ll break $20 by the end of the year on the Class III price? I doubt it, but I think we could come fairly close. I think $19 is probably doable. That would mean cheese at $1.90 at some point, maybe in September, October.
T3: I’m less bullish cheese in Class III than I am Class IV, because I think the continued lack of growth in the milk supply is going to affect the Class IV market more than the Class III market. I think the cheese plants will get their milk. But there’ll be some Class IV that won’t. I’ll add this to it, though. What I think is going on with the weather right now, and how wet it is, and how much people are struggling to get corn into the fields and things like that. It’s already had its effect, and it will continue to have its effect.
You may not see the effect of it in milk prices, or I should say in milk production, before this year’s harvest. So, between now and September, I don’t think you’ll see much. But that higher feed cost may force some dairy farmers who are on the bubble out of the business. So, it may increase or continue to support, even at higher prices, the exodus of dairy farmers we’ve been seeing over the past couple of years. And so, I would say that it does have a bullish effect on 2020.
Ted: The slaughter numbers that I’ve been following for the last couple of months, we were at about 70,000 per week, now it’s 58, 59, 57.
T3: A lot of that is seasonal, though.
Ted: It is seasonal. But the bottom hasn’t fallen out of it. Even with the increase in price, we’ve seen the Class III price and the blend prices go up a couple of bucks, a hundredweight. Big numbers. And still the slaughter numbers are staying up there. It sort of follows along with the predictions that we’ve been hearing, and that the smaller dairymen are, given the good job market and so on, are going into a different line of work.
Anna: I think the really small guys are, but we say that small farms are leaving, and I think that that’s true, and I think that will continue, like we’ve always said. But I think the net impact, I don’t feel from where I’m sitting at my desk, like, we’re losing that much production, I don’t see it. We are getting so many calls from people talking about building something or opening something new that I don’t feel like the net impact is gonna be what we thought for as long-term.
Ted: If I get a call from a dairyman who wants to know whether he should expand from 100 cows to 150, or even 200, I’m throwing cold water on it. Because now he’s on comingled load, where you’ve got $0.50 to $1.00 a hundred weight into the load before you ever know what the hell you’re gonna do with it. And I think that’s a critical juncture, to make sure that one dairyman ships one load. It also is an issue with companies like Walmart, Meijers, and supermarkets, or even cheese producers when it comes time for traceability. When quality problems rear their head from time to time, recalls are made. And so, they need to trace. And unless you can trace that truck, you’ve got five producers on the truck, now all of a sudden you’re traceability is very much diluted.
Anna: I agree. I just don’t know that people are exiting. I don’t feel like people are exiting at the rates we’re being told that they are.
Toby: Did you guys see that swine fever is in Hong Kong now?
T3: Yeah. It’s in Hong Kong, it’s in Vietnam, it’s in Cambodia, it’s in Thailand.
Ted: A little bit of discussion there, it’s probably in order. The effect of the whey price is on the milk price. What swine fever does is it affects our ability to export whey.
T3: And specifically the permeate, which is the carbohydrates in whey.
Ted: Specifically the permeate, but still, it’s a whey derivative. So, swine fever affects the whey price. There are six pounds of whey in 100 pounds of milk. If the whey price goes down a dime, say from $0.45 to $0.35 the effect on the class 3 price, rough numbers, is about $0.60 cents a hundredweight.
T3: Correct. And that is what’s already happened.
Ted: But the other side of the coin is a reduction in milk supply. The fact that we’re starting to nibble away a little bit at cheese inventories is a much bigger factor than the whey when it comes time to measure. And the only…you know, China, even though we have tariff disputes with China, we don’t sell China a lot of cheese. We do sell South Korea a lot of cheese. So, we’re not really affected in the dairy industry from an export standpoint as far as Southeast Asia is concerned.
T3: In cheese.
Ted: In cheese. The swine fever is maybe $0.90 to $1.00 a hundredweight, but really that doesn’t have much to do with tariffs. There’s been a lot of talk about tariffs, but I would ask you is cheese, how much cheese business have we lost into Mexico because of tariffs?
T3: Almost none.
Ted: Almost none. So, all this conversation about tariffs, I think the conversation is much more important to someone who’s producing soybeans than it is for someone producing milk.
T3: I agree. My experience with tariffs, in particular, and in a similar way, exchange rates, is that you usually see the effect in price much more than you see it in actual volume. Everybody keeps expecting to see big volume changes before they see big price changes, but it tends to happen the other way around, where you actually see the shift in price and then you keep the volume. I don’t think we’ve seen major effects on the volume of products that we’re exporting as a result of tariffs. But I do have a hunch that we’ve seen a negative effect on price, it’s just really hard to perceive it in a complicated marketplace like we have.
Ted: I agree.
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Now, back to our conversation. T3, you’re the food scientist, I mentioned the Impossible Whopper before, but it’s not stopping at lab-grown meat. Another company, Perfect Day Foods, is using DNA-editing technology to create dairy proteins. Can you tell us more about how that works?
T3: The technology has arrived at the point where it’s becoming cost-effective. You use CRISPR, the DNA technology, to splice DNA strands into microflora, most commonly yeast, but there’s other microbes and bacteria that are used. And those DNA strands cause the yeast bacteria to produce protein. And so, what Perfect Day Foods is working on specifically is splicing DNA strands to produce casein and other dairy proteins into the yeast, and then having the yeast grow casein and whey proteins, and then selling those proteins into the marketplace.
So basically, produce dairy products without needing a cow to do it. And that’s the irony, that what, you know, some of these things that we’ve seen, where you take lactose or permeate streams from different various dairy processes, and then they use those permeate streams as the feed into a microflora that produces, whether it’s ethanol, or produces various proteins, or things like that, it’s the exact same technology. And this technology is becoming relatively ubiquitous. And you’re at that point where you think about it in terms of Moore’s Law, which is the former CEO and founder of Intel. And Moore’s Law was always, “The speed of computer processing doubles every two years.” And what happens is, the more that R&D focuses on these processes, the more efficient you get in making this product, the more inexpensive it is, the faster you can do it, the more you can scale up, until you get to a point where you can literally produce these things in one way or another cheaper than the current product, which, in this case, is milk from a cow.
If Perfect Day Foods and Impossible Foods can scale it, you can imagine a world where you can get milk without a cow. You probably will always have a market for the wholesome milk that these days the organic market is trying to capture, where the farms are smaller and they have red barns and they produce milk, you know, the old-fashioned way. But the real dairy farms that are under threat by this technology are actually the bigger dairy farms. Because the market that is willing to consume milk from large corporate dairy farms is not that different from a market that would be willing to consume milk from a lab.
And when you think about that, and you think about what that means, if it’s milk from a lab, the feed costs are gonna be lower, the waste costs are gonna be lower, you won’t have to be disposing of all the manure. Yes, there will be byproducts they’ll probably have to get rid of, but it’s not gonna be to the extent of manure. And it’s not like, well, you’re still gonna need the meat from the cow, because what Impossible Foods is already doing is going to market with meat that’s not from a cow, and that’s the Impossible Whopper at Burger King.
Ted: I would observe that there’s several questions here that need to be answered before we feel really threatened about this. The question in my mind that needs to be answered with regard to the costs of production. If you convert that lactose to a usable milk protein, or to casein, or albumin, or whatever, you greatly enhance the value of milk. So, we’ll see where this is gonna go. I’m not sure at this point in time that the dairymen should be folding their tents over the threat from this, although the threat is certainly out there. They need to be vigilant as far as how this is gonna…
Anna: Just because of the cost?
Ted: The cost is gonna be the big issue, yeah.
Anna: I don’t think that’s what drives decisions toward something like this. I think you’re more likely to have people driven towards this because of a carbon footprint or an animal welfare issue or something like that.
Ted: You’ll have a lot of people reacting to that, but not as many as who will react because of the cost. The laws of supply and demand are still there.
T3: But I would say this. You’ll start exactly where you’re suggesting, Anna. This will start in the marketplace as something unique and different. To me, the reason that I think this is a very serious threat is because, one of the reasons that the ersatz milk hasn’t really gotten beyond the fluid mountain is because they don’t have a coagulating protein, so you really can’t make cheese. If you can produce casein without a cow, now you have a coagulating protein. I don’t think at this point anybody is gonna argue about whether or not there’s a market for dairy products that don’t come from a cow, and it will start with that market.
From that point forward, it’s all about scaling it. The math says that once the technology is there, it should be cheaper than coming from a cow. And the reason the math says that is because there’s gonna be lower input costs and lower output costs. If you have lower input costs and lower output costs, it’s just about the process. You know, whether it’s feed going into a cow, milk and manure coming out of cow, or it’s whatever this slurry they’ll send it the vat is and whatever comes out of the vat. It’s pretty easy to come to the conclusion that the inputs are gonna be lower in the vat, and the outputs are gonna be more defined in the vat. And then it’s just a matter about Moore’s Law. The more they work on the technology, the more they improve the technology, the more they scale the technology, the cheaper the technology is gonna be. And it’s no longer a question of if it becomes less expensive, it’s a question of when does it get there.
You know, all you have to do is go back in history and look at the example of the horse-drawn carriage versus the car. In 1898, it was an anomaly, it was less than 5% of the market. It was kind of interesting that only doctors and rich people drove around because it was kind of cool. But everybody still had horses and horse-drawn carriages and needed blacksmiths. By 1930, the amount of blacksmiths in New York City had dropped by a hundred fold. It starts small.
But when you’re thinking about dairy farming, or even in a different way you think about our business, You have to start thinking about whether…how possible is this? And when you think about the fact that the dairy market, in general, is a very inelastic market, where a 2% change in demand has a massive shift in price, and now you’re talking about shifts that may be in the 5% range or the 10% range, that’s a big number. And where is it gonna enter the marketplace first? Think about…
Ted: Predominantly as a curiosity.
T3: Yeah. A vegan…
Ted: Eats like the Impossible Burger.
T3: Right. But what’s everybody saying about the Impossible Whopper today? “Man, that tastes a lot better that I thought it would.” And then they’re gonna have a Domino’s, so it’s probably have a vegan pizza with cheese that’s not from a cow. And they’re gonna be, “Well, I bought it as a curiosity. Man, it tastes pretty good.” And then what happens? Then the market goes up, then they can scale it, the price goes down, and it really starts to extrapolate. We don’t know. I mean, this is all in the future, we don’t know if that’s gonna happen, but the scary thing is, we’re getting to the point where the technology says it probably can. Now, does that mean it’s gonna be the end of the dairy industry like it was the end of the horse-drawn carriage? No, I do believe that there will always be a market for milk from a cow. But the transition, if it’s going to happen, is scary.
Ted: As you know, we’ve done a little bit of work on the development of protein from lactose. The big issue with that is that the yield versus the processing cost doesn’t make it work.
T3: Today it does not, I agree.
Ted: It does not. So, you’re gonna have to do a lot better with regard to the costs, which is why I look at lactose as being the prime mover because lactose, basically, is the biggest carbohydrate in milk and the least valuable. If we can convert that into a protein, it makes a big difference on how one would look at this. But the cost of doing that is the issue. If corn syrup, for example, is easier or lower cost, it makes a difference. So, all these costs are gonna have to be evaluated.
T3: It was interesting. I was at an investors conference, the Farm to Market Investors Conference, a couple of weeks ago, and I saw a presentation by the CEO of Impossible Foods, and it was interesting. There were two things he said that really stuck out to me. The first thing he said for meat, the key ingredient in meat that differentiates the old plant meat, soy meats that always tasted like crap, between what Impossible Foods is making today, where people are actually really impressed by how it tastes, is a protein called heme, which is in the hemoglobulins of all mammal blood.
And he said, “Once you discover that that was the key to the flavor, that juiciness in meat that everybody desires, you can start building around it.” And today, they’re able to make that meat and sell it to…I think they’ve got over 20,000 restaurants nationwide that are now buying Impossible beef. And you can start to scale it, and they’re doing it. You know, you go buy the Whopper, you’re not paying that much more than you are for a regular beef Whopper. And so, if you can do it with beef, what’s the difference between milk and beef? A part of me is inclined to say meat might even be more difficult because of the texture, you know? In that case, they figured out how to use microbes to create the heme protein.
Perfect Day Foods is trying to figure out how to use the yeast microflora to produce casein. And casein is the coagulating protein that’s missing in current ersatz milk. Once you have that, the cheese industry is under assault. And, yeah, you’re right, it’s a matter of cost. But the second thing that the CEO of Impossible Foods said that took me by surprise is he said, “Outside of the technology that creates the heme protein, the DNA-level technology is not sophisticated, it’s standard equipment that anybody can buy.”
And it’s basically, and I’m still trying to learn more about this, but it’s basically a vat, and then it’s a matter of how do you extract the protein from the yeast cells without destroying the yield? That technology has been around for over 30 years. If you go back to Chy-Max, which is a microbial rennet that is used in a lot of cheese-making today, Chy-Max was originally developed over 30 years ago, and it became the most commonly used rennet in the industry. And Chy-Max was made by taking, what at that time was E.coli, and then they were able to extract it from these fermentation vats. So, it’s not new technology.
Ted: Well, the timeline will be an issue.
Ted: Ten, 20 years?
T3: Could be five. I mean, it won’t explode in five, but the path that Perfect Day Foods is on, they will have casein that’s not from a cow in the marketplace within five years. I think that will happen. And then it becomes a cost issue.
Ted: They’ll be able to market it as animal-free, vegan type—
T3: Yes. Yes. Now…
Ted: —which will appeal to a significant percentage.
T3: Right. Now, here is where I think the limitations are gonna be. First, you have standards of identity. If casein is not from a cow, you’re not gonna be able to call it cheddar cheese, you’re not gonna be able to call it mozzarella cheese. But let’s face it, most of the cheese that’s used on a Domino’s Pizza today is not technically standard of identity mozzarella. It’s pizza cheese. It has potato starch in it and things like that. So, for a pizza, that standard of identity isn’t gonna matter. So, that’s where the first limiting factor is gonna be. And that’s why I think it’s really important right now, that battle we fight over, as an industry over labeling becomes extremely important, because you wanna make sure that it is clearly defined that this product is not a dairy product.
Ted: I think the timeline for use, so you’re looking, probably, at five to ten years before it really has a cost-effective input into the dairy industry. The first thing that’s gonna happen is the development of processed cheeses, the artificial cheeses and so on, without mentioning any names, that’ll be the first thing to go. And then the pizzas will be vegan pizzas. As I think about it here in our discussion, I think the acceptance rate of this will probably be rather slow. And I think that getting our labeling squared away so that milk is treated as milk is a critical issue for the dairy industry, and we’d better put that on the front burner.
T3: Most importantly, you know, the message that I wanna get out there is, this bears watching, it bears watching intently. And the more people in the dairy industry who start appreciating the threat that this very well could be and probably is, the better chance we have as an industry of making sure we’re prepared for it.
Anna: 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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