Industry Has Great Opportunities Ahead in 2006, Executives Agree

Cheese Market News (subscription)
January 6, 2006
Excerpt

Welcome to Cheese Market News? 10th annual round table, a discussion about a variety of hot topics that affect the dairy industry.

Each year, Cheese Market News asks industry executives representing a wide array of companies and organizations to participate in this discussion. The participants, from companies small and large, don?t respond to each other but instead are asked to provide written responses to a number of industry-related questions. Cheese Market News then prints a selection of those responses. Due to space limitations, not necessarily every answer of every participant is included.

This week, you will read about topics including market trends, food safety and world trade. Last week?s round table covered issues such as current pricing, market structure and the next Farm Bill.

Cheese Market News thanks the following executives for taking time out of their busy holiday schedules to participate this year:

• Sue Conley, co-owner and executive cheesemaker, Cowgirl Creamery, Point Reyes Station, Calif.
• George Cornell, regional sales/procurement manager, Pacific Cheese Co. Inc., Hayward, Calif.
• Calvin Covington, CEO, Southeast Milk Inc., Belleview, Fla.
• Ted Jacoby III, vice president, cheese sales, T.C. Jacoby & Co. Inc., St. Louis
• Tom Johnson, owner/cheesemaker, Bingham Hill Cheese Co., Fort Collins, Colo.
• Mike McCloskey, CEO, Select Milk Producers, Artesia, N.M., and general manager, Fair Oaks Dairy Farm LLC, Fair Oaks, Ind.
• Rich Stammer, president/CEO, Cabot Creamery Cooperative, Montpelier, Vt., and executive vice president/COO, Agri-Mark dairy cooperative, Methuen, Mass.

What new dairy marketing, product or packaging trends do you see developing at this time?

Conley: I only hope that we can have access to packaging that does not end up in a landfill.

Cornell: The quality of packaging is outstanding, with exciting ideas in almost all segments of the industry. This has to be attractive to consumers.

There are two distinct directions the industry is heading. Low-cost, functionally-sound spreads and products have a place in the market. High-value specialty products are very much in demand in the dairy case, deli and foodservice areas, including the low-volume but fast-growing natural or "organic" market.

There seems to be no limit to success in this dynamic industry.

Covington: I see continuing growth in existing areas such as organic. The organic market has grown significantly over the past few years, and I do not see it stopping. I think we will see more dairy products that are not certified as organic, but are BST-free or marketed as being "natural? introduced to compete with organic.

It is likely that as milk travels greater distances to fluid markets we could see a market develop for locally-produced milk. Food miles, the distance food travels from the farm to the consumer, will receive greater attention. Locally-produced milk may receive a premium compared to "imported" milk.

Jacoby: The demand for organic dairy products has grown much faster than the supply of organic milk. Over the next three to five years, as the supply catches up, I expect the number of SKUs in the supermarket dedicated to organic dairy products to increase dramatically. More generally speaking, the growth in demand for specialty cheeses should continue to grow at a pace two to three times that of commodity cheeses like Cheddar and Mozzarella. On the ingredient side, we are seeing an increased interest in specific milk components in fluid form. Not just protein, butterfat and lactose, but specific proteins and specific minerals.

Johnson: I predict a shift in specialty cheese production such that today?s high-quality artisan cheeses will be made on a more industrial scale in the United States, as they are in Europe. This will predictably lower both the price and quality of the products.

McCloskey: New trends include marketing milk and its products as an alternative healthy food be it as a designer milk (like Mootopia, produced by Select Milk Producers), flavored milk, milk beverages, improved yogurts or specialty cheeses, all with exciting and convenient packaging for a consumer on the go. Also, milk fractionation will continue to develop and offer great opportunities for new markets as a functional and healthy ingredient.

Stammer: The courts? actions to uphold the constitutionality of the dairy checkoff program was a big 2005 story related to dairy marketing. With that now decided, Dairy Management Inc. (DMI) can aggressively pursue general dairy promotion going forward. In addition, DMI?s Dairy Innovation program seeks to identify the very product and packaging opportunities that will fuel future industry growth through innovation.

Branded dairy companies continue to complement the versatility of dairy products with new forms, shapes and packaging that focus increasingly on variety, convenience and function. Dairy companies must continue to serve consumers by meeting their needs, both actual and perceived, especially as competition from non-dairy products increases.

The current interest in healthier versions of existing products through R&D makeovers will continue through 2006 and likely beyond. Support through programs such as 3-A-Day will continue to define and advance the health and nutritional advantages of dairy products. One ironic note: This year the heightened health awareness that steers us away from "super-sizing? collides with pro football?s celebration of its "extra large? bonanza ? Super Bowl XL ? one of the largest dairy consumption days of the year.

The health benefits of milk, whey and certain milk fractions are receiving increased attention. Do you expect milk and dairy products to become more differentiated over time to meet the various health and wellness needs of consumers or is this area simply a passing trend?

Covington: The individual components of milk, rather than milk as a whole, will continue to become more valuable. As technology to separate and research to find uses for individual milk components continues to advance, the market for individual milk components will expand.

Today, we market milk at different fat contents ? whole, 2 percent, 1 percent and skim. Down the road I see fluid milk marketed at different protein levels as well. Filtration technology will make this more feasible. The desire to further differentiate milk, emphasize milk?s nutritional content, and consumer demand for higher protein milk will create a market for such products.

Cornell: I see a turnaround for milk products from a health issue to a benefit. We will see much more activity in this area in the future.

Jacoby: Membrane and fraction-ization technology is progressing to the point where we are increasingly capable of separating specific molecules from the basic components of milk. Through the use of this technology, milk and dairy products in general will become more differentiated over time. Some products will be developed for various health and wellness needs, others will be developed for other reasons such as improved taste or, more likely, improved functionality as an ingredient. Some of these new products will be nothing more than passing trends, but I expect several to become successful products. With specific regard to health and wellness issues, I expect the aging baby boomers to drive product development in this area for the next 10 to 20 years. This is not just a passing trend.

Do you think that the measures the U.S. government has taken to monitor food imports are ? and will be ? effective in maintaining food safety? Has the money spent by companies to meet more stringent food safety standards made consumers safer?

Conley: Cheesemakers must be allowed to make raw milk cheese if aged over 60 days (current law). Companies will be required to have a HACCP plan in the future, and this is a good thing.

Cornell: We are safer than ever, due to the interest of the federal, state and local governments and the massive job the industry has accomplished. When I think of my visits to cheese plants in the ?70s and ?80s and now ? Wow.

Covington: More work is needed to ensure that imported dairy products meet the same food safety requirements as domestic products. The U.S. food supply is the safest in the world. Both the production and processing sectors of the dairy industry, especially since Sept. 11, have implemented more safeguards to keep dairy products safe. However, this is one area we must keep high priority and continue to do what we practically can as an industry to make sure consumers receive the safest and highest-quality dairy products as possible.

Johnson: I believe many inspections and regulations related to bioterrorism are a colossal waste of time and money, whether for import or domestic dairy products. It does not appear to me that these efforts have made consumers safer, or that there was any serious risk in the first place. There are plenty of opportunities to get around the efforts of the federal government.

McCloskey: With regard to imports, food safety and quality are not what they should be. Companies talk a lot about food safety and source of origin but still are not willing to pay the additional dollars that this costs. Pressure from the consumer will continue and in time this will create a value that the processor will recognize and pass on to the producer.

What issue ? such as fat content, animal rights, environment, etc. ? do you believe is most detrimental to consumers? views of the dairy industry? Why? What can be done to improve consumer perceptions?

Conley: Bovine growth hormone and other GMO products, pesticides, herbicides and other toxins used by the industry will never appeal to consumers. The environment and animal rights can be addressed through consumer education, as long as we speak the truth and continue to improve in these areas.

Cornell: The largest issue is the environment. Dairymen, processors and distributors have to work together to improve the perception and in fact the environmental issues surrounding our consuming public. Air and water pollution can be controlled; it is a matter of money. Let?s get the job done through federal, state, local and corporate funding to clean up the air and water surrounding our farms, plants and factories.

Johnson: Whether there?s merit to the argument, the use of BST turns our customers? stomachs. It?s hard on the cows, and it is perceived as bad for human consumption. The solution, of course, is to quit using BST. But in an environment where producers are compensated largely on quantity rather than quality, there are disincentives to getting BST out of milk production. Just like steroid use in Major League Baseball, no one is willing to quit until everyone is forced to quit.

McCloskey: I believe that all the issues in your question are extremely important, but I see it in a different light. Well-managed, all these issues become positive marketing points for our dairy industry with unmatched value to the consumer. We just have to address these issues the right way, such as our Fair Oaks Dairy Adventure.

Stammer: Companies seeking to exploit marketing niches by trying to scare consumers into believing that there is something wrong with traditional dairy products are as likely to turn a consumer off from all dairy purchases as they are to get them to purchase the "safer? product. Consumers should certainly be given many choices in types and varieties of products, but the entire industry must re-enforce that all dairy products are safe and among the healthiest foods that consumers can purchase for themselves and their families. Marketing scare tactics hurt everyone in the long run because they shrink the total demand for dairy products.

Other than those mentioned here, what other key issues will the dairy industry face in 2006?

Jacoby: At some point in 2006, the FDA decision regarding the use of liquid ultrafiltered (UF) milk in cheesemaking will be finalized. Today, the proposed rule is flawed. It demands that cheese made with liquid UF milk shipped to a cheese plant from other locations must be labeled as such in the finished product. At the same time, under the alternate make procedure, milk that is ultrafiltered in the plant can be labeled simply as milk. In other words, the identical ingredient in cheese must be labeled differently if it is produced off-site than it does if it is produced at the plant. Neither nonfat dry milk (NDM) nor condensed skim milk require alternate labels when used as ingredients in cheesemaking. Similar to NDM and skim condensed milk, UF milk is not used in every vat of cheese that is produced in a particular cheese plant. Therefore, a labeling requirement will essentially prohibit the use of fluid UF milk in cheesemaking because it is cost prohibitive logistically to keep track of two "types' of Cheddar as it progresses through a national food distribution system.

If FDA?s proposed rule stands, the industry not only loses an important cost-reduction tool, it also sets a dangerous precedent for future technological advances in cheesemaking. Standards of identity are a very important tool for protecting the integrity of the dairy industry?s products. But standards of identity should not stand in the way of technological advances that allow companies to produce products more efficiently without change to the composition of the product itself.

McCloskey: Among the key issues the industry will address in 2006 will be the impact of Southwest Cheese Co., which I believe will not be detrimental, in spite of popular opinion, since this milk is already in the marketplace in one form or another.

Growth will continue to come out of California and fuel the growth in West Texas, New Mexico and Idaho.

Cooperatives Working Together will have its challenges in 2006, and I believe its leadership will rise to the occasion.

Stammer: While the dairy industry certainly faces its share of challenges, the industry also does a lot of things right and has a bright future here and abroad. We offer an array of thousands of products with varying levels of fat, calorie and flavor contents to meet all tastes. The domestic market for dairy products continues to grow, and we are expanding our international sales opportunities as well. Our products can address all types of the latest health concerns of the day with great-tasting products.

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