Dick Groves
Editor, Cheese Reporter

 

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25 Years Of BST/BGH

It’s kind of hard to believe, but as noted in our From Our Archives column in last week’s issue, it’s now been 25 years since the US Food and Drug Administration approved bovine somatotropin/bovine growth hormone for commercial use by dairy producers.

This milestone prompts a brief look at the past, present and future of this controversial product of biotechnology.

As far as the past is concerned, BST/BGH holds at least one distinction for the US dairy industry: it was quite possibly the most controversial and analyzed technology ever approved for use in the dairy industry.

Folks who have joined the dairy industry in the last quarter-century might not have an appreciation for the BST/BGH controversy, which was more than a decade old by the time FDA finally approved BST/BGH for commercial use (it may further be recalled that BST/BGH didn’t actually become commercially available after gaining FDA approval; there was a 90-day moratorium on its use).

The first mention of this controversial technology in this newspaper was back in our Oct. 30, 1981 edition, in a front-page story with the following headline: So You Think There’s A Milk Surplus NOW? The first sentence of that story was as follows: “Scientists at Cornell University have increased milk production in dairy cows by 10 to 40 percent by giving the animals daily injections of natural bovine growth hormone.”

About eight years later, in August of 1989, an FDA “Talk Paper” noted that FDA “is currently reviewing applications to manufacture and market bovine somatotropin, or BST, to increase cows’ milk production (and thereby reduce costs).”

That’s actually a second distinction with BST/BGH: the technology has been debated and discussed under two different names for over three decades. Generally, opponents of the technology call it “bovine growth hormone,” while proponents and most regulatory/scientific entities call it “bovine somatotropin.” As noted earlier, the first reference in this newspaper, way back in 1981, was to “bovine growth hormone.”

And to further complicate the issue, the biotech product is technically recombinant BST/BGH, or rBST/rBGH.

Regardless of what you call it, BST/BGH garnered an astonishing amount of attention before it was approved by FDA 25 years ago. By then, more than 1,500 studies, books, professional papers and surveys had examined BST/BGH and its implications, according to a 1998 “Agriculture Information Bulletin” from USDA’s Economic Research Service.

Following FDA approval, BST/BGH became available to dairy farmers in February 1994. When it was approved, survey evidence had created expectations of at least a temporary reduction in milk consumption, but according to that 1998 ERS bulletin, no effect of the introduction of BST/BGH on fluid milk consumption was found.

That conclusion prompts at least two observations. First, while BST/BGH had no effect on fluid milk consumption, it certainly doesn’t appear to have done consumption any good. Per capita fluid milk consumption fell from 247 pounds in 1975 to 215 pounds in 1992, and then kept on falling to 198 pounds in 1998 (when the ERS bulletin was released), 186 pounds in 2005 and 149 pounds last year.

In other words, it’s hard to blame BST/BGH for a decline in fluid milk consumption that started long before the BST/BGH controversy, but it’s also impossible to see how this controversial hormone did any good from a consumption standpoint.

Second, they say timing is everything, and we can’t help but think that the timing of the BST/BGH controversy was perhaps beneficial for the dairy industry. Can you imagine this debate raging here in the 21st century, with Facebook, Twitter and other social media venues providing digital megaphones to countless knuckleheads masquerading as “experts?”

So where is the BST/BGH controversy today? Well, according to a 2016 report from USDA’s Animal and Plant Health Inspection Service, in 2014, 9.7 percent of US dairy operations used BST/BGH, and 14.7 percent of all cows received BST/BGH during the most recent lactation.

That was in 2014. Our guess is that the number of US dairy operations using BST/BGH has declined since then, as more and more dairy companies restrict its use within their supply chain.

Just to cite one illustration to support that guess: in 2015, Dean Foods launched DairyPure, which it described as the country’s first national branded fresh white milk. DairyPure is backed by a “Five-Point Purity Promise”; the first of those five points is no artificial growth hormones.

As far as the future of BST/BGH is concerned, from a US perspective, that future isn’t very bright, and may end up being nonexistent. Perhaps that’s because BST/BGH might be a good production tool, but it’s been a lousy marketing tool.

That is, the fact that almost 10 percent of US dairy operations were using BST/BGH back in 2014 is an indication that this biotech product performs as advertised: it boosts milk production in cows that receive the treatment. If it wasn’t cost-effective, dairy producers wouldn’t use it.

The flip side of that is, we’re not aware of a single marketer over the past 25 years that has touted the use of BST/BGH in its products.
In another 25 years, perhaps mention of BST/BGH in the US will prompt the question: What’s that?

The Midterm Election

The US midterm election takes place on Tuesday, Nov. 6, and as usual we’ll make just one recommendation: Vote.

Yes, the midterm election lacks the “glamour” (or circus atmosphere) of a presidential election, but there’s still plenty at stake here, including all 435 seats in the US House of Representatives as well as 33 US Senate seats.
Winners of those elections will be shaping (or not shaping) US policy over the next couple of years.

And what sorts of policies will they be shaping? That depends on a lot of things. From an agricultural perspective, one of the keys will be what happens with the farm bill. Both the House and Senate have passed their own versions of the farm bill, and that legislation is now tied up in a House-Senate conference committee.

There appear to be a couple of potential outcomes here. First, it’s possible that Congress will pass a farm bill during the lame-duck session that will take place after the election. If that’s the case, winners in next week’s election won’t have to worry about passing a farm bill.

Second, it’s possible that Congress won’t pass a farm bill during the lame-duck session. In that case, the farm bill process will start all over again in January, when it’s at least somewhat possible that Democrats will have control of the House (Republicans control both the House and Senate right now).

Another issue that the new Congress will likely be heavily involved in is trade. Here, there are a number of possible congressional actions that could impact the dairy industry.

For one thing, Congress will have to approve the new United States-Mexico-Canada Agreement. Negotiations between the three countries were completed over the last couple of months, but Congress reportedly won’t be taking up the agreement until sometime next year. And that means it will likely be the new Congress that will be voting on the USMCA.

Congress may also attempt to have more of a say in tariff-related affairs. Legislation was introduced earlier this year that would have required congressional approval of national security-designated tariffs.

It may be recalled that the US earlier this year, citing national security concerns, imposed tariffs on imports of aluminum and steel. In response, retaliatory tariffs were imposed by many countries, including tariffs imposed by Mexico on US cheese exports.

So the legislation noted above may be of some interest to dairy and agricultural interests, and in fact the legislation has been endorsed by several agriculture organizations.

And there’s also been legislation introduced that would provide for congressional review of the imposition of duties and other trade measures by the executive branch.

Needless to say, no matter who controls the House and Senate over the next two years, trade-related legislation will be front and center as long as the trade wars with Mexico, China and other countries continue. And we would also expect hearings to be held by both the House and Senate ag committees, among other panels, on the administration’s trade policy.

One thing we won’t see no matter who controls Congress over the next two years is any significant change in the direction of US trade policy. President Trump has made his policy pretty clear over his first two years in office, with actions such as withdrawing the US from the Trans-Pacific Partnership agreement and imposing tariffs on numerous countries under at least a couple of US trade regulations (Section 301 and Section 232).

In addition to trade, Congress could also consider a wide variety of food-related measures over the next couple of years. If recent history is any indication, this legislation could take one of three forms: bills introduced and backed by Republicans; bills introduced and backed by Democrats; and bipartisan bills, an increasing rarity in today’s Washington.

For example, legislation introduced in both the House and Senate last year — the Codifying Useful Regulatory Definitions Act, or CURD Act, which would define the term “natural cheese” — had bipartisan sponsors and co-sponsors in both the House and Senate.

Also enjoying bipartisan support in both the Senate and House is the Defending Against Imitations and Replacements of Yogurt, Milk, and Cheese To Promote Regular Intake of Dairy Everyday Act, better known as the DAIRY PRIDE Act, which would prohibit the sale of any food that uses the market name of a dairy product, is not the milk of a hooved animal, is not derived from such milk, and does not contain such milk as a primary ingredient.

The DAIRY PRIDE Act hasn’t gotten much traction in Congress, but the US Food and Drug Administration is currently accepting comments on the labeling of plant-based products that include the names of dairy foods. In other words, legislation may not move in Congress but it can sometimes lead to movement within regulatory agencies.

One bill introduced and co-sponsored only by Democrats in both the House and Senate is the Food Labeling Modernization Act of 2018. This legislation is obviously going nowhere this year, but could gain some traction if Democrats take control of the House next year.

With all of this in mind, there are a couple of options for the midterm election: vote, or don’t vote. No matter the outcome, Congress will be involved over the next two years in legislation that affects the dairy industry. If nothing else, voting in the election provides a license to complain over the next couple of years.

Things We’ll Miss About The California State Milk Order

In less than a week, the US dairy industry will see one of the biggest changes it has seen in years: California’s dairy industry will formally join the federal milk marketing order system.

Also in less than a week, California’s state milk order will officially end. And that will also mark the end of at least a few things we’re going to miss about the California State Order.

The first thing we’ll miss is California’s Class 4b and 4a prices. These prices date back to 1983, according to a California Department of Food and Agriculture document, “History of Class 4b Pricing Formula,” which was published roughly a decade ago. Prior to August 1983, there was a single Class 4 price both for cheese/whey products and for butter/nonfat dry milk.

Over the years, we’ve written about the Class 4b price many times. On some of these occasions, we mention a talk given by Bill Blakeslee, vice president, Mid-America Dairymen, Inc., at the 1989 Midwest Milk Marketing Conference in Madison.

At the time, Blakeslee felt that it was Class 4b prices that “we in the Midwest really need to be concerned with.” In 1988, there was over a dollar a hundredweight spread between the cost of milk going into cheese in the Midwest and the cost of milk going into cheese in California, which “translates into a dime a pound advantage Californians have on milk going into cheese production.”

Blakeslee then compared Madison’s and California’s delivered cheese prices (using an added freight cost of $1.65 per loaded mile) and found that “California can go from the West Coast to the East Coast and have a competitive advantage over the Midwest.”

That was back in the late 1980s, and California’s cost advantage on cheesemilk has continued to this day, albeit with fluctuations over the years due to various factors. Last year, for example, the Class 4b price averaged about $15.20 per hundred, while the federal order Class III price averaged $16.17 per hundred (pretty close to the difference discussed by Blakeslee back in 1989).

Interestingly, in September, the difference between the Class III and the 4b prices was 47 cents per hundredweight, or about five cents per pound of cheese. Next week, the final California Class 4b price will be released, and the final Class III vs. 4b comparison can be made. After that, there will just be a Class III price (and a Class IV price, since the 4a price will also be eliminated).

We’ll also miss the “Hearing Matrix” menu item on the CDFA’s Dairy Marketing and Milk Pooling Branch website. Over the years, this has been the source of a number of developments (and, from a news perspective, a heck of a lot of stories) in the California dairy industry (and the entire US dairy industry, for that matter, at least when it involved Class 4b and 4a prices).

Just to put this in perspective, the CDFA held what turned out to be its last hearing on California pricing formulas back in April of 2016. In its report, the hearing panel noted that that hearing marked the seventh hearing held by the CDFA over the previous five years to consider modifications to the Class 4b pricing formula.

Regarding the “Hearing Matrix,” there are a couple of historic items to note. First, the final hearing held in California took place in April 2016 and focused on the dry whey factor in the Class 4b formula. And the last petition requesting a hearing was submitted to the CDFA in January 2018.

In that petition, California Dairy Campaign and Western United Dairymen requested an emergency hearing to consider increases to all five milk prices for a period of 12 months. The CDFA denied that hearing request, stating that it would be “inappropriate” to hold a hearing while California dairy producers are deciding whether to approve a federal order for the state. And approve it they did.

Related to the “Hearing Matrix,” we’ll also miss the speed with which the California hearing process is conducted. The CDFA had to accept or deny a hearing request within 15 days after receiving a petition, and after a hearing, changes had to be effective within 62 days of the hearing date.

Perhaps in the future, the California dairy industry will come to appreciate this timeline.

We’ll also miss the annual Manufacturing Cost Exhibit published by the CDFA. This exhibit includes processing costs for Cheddar cheese, butter and nonfat dry milk. Among other things, these processing costs help illustrate how inadequate current federal order (and California) make allowances are.

Notably, back in June of 2008, USDA released a tentative partial final decision setting the federal order make allowance for cheese at 20.03 cents per pound. USDA explained that its decision concluded that the
CDFA’s 2006 survey of average cheese manufacturing costs was the best available information representing the manufacturing cost of producing a pound of Cheddar cheese. Accordingly, the make allowance proposed for adoption for Cheddar cheese was 20.03 cents per pound, including a .015 per pound marketing cost adjustment. That make allowance is still in effect.

In what turned out to be its last cost study, the CDFA found that, in 2016, the average cost to manufacture a pound of Cheddar cheese had risen to 24.54 cents per pound. If nothing else, the dairy industry will no longer receive annual reminders that make allowances are too low and should be raised.

Time will tell whether California’s dairy industry is better off without its state order. From our perspective, there are aspects of that state order that we’re going to miss.

 

Packaging Industry Keeps Growing, Thanks In Part To Dairy

The largest-ever Pack Expo International (and co-located Healthcare Packaging Expo) was held this week in Chicago, bringing together some 2,500 exhibitors and 50,000 attendees across 1.25 million net square feet of exhibit space in the massive McCormick Place.

That alone should tell you that the packaging industry is alive and well these days. Further evidence of that point came from PMMI, The Association for Packaging and Processing Technology, owner and producer of the Pack Expo portfolio of trade shows.

PMMI released a new report, State of the Industry US Packaging Machinery Report, that reported that the value of domestic shipments of packaging machinery rose 6.4 percent to $8.2 billion in 2017, and are forecast to increase at a compound annual growth rate of 4.1 percent to 2023.

Food represented the largest packaging machinery sector in 2017, accounting for 36.6 percent of shipment revenues, followed by beverage, at 22.1 percent.

These figures provide a nice reminder of how important packaging has been in the dairy industry, not just historically but also as far as the future is concerned. Three dairy categories help illustrate this point.

First, US cheese production seems to set a new record every year; indeed, cheese production hasn’t declined since 1991, and in fact has more than doubled since then, to almost 12.7 billion pounds last year.

But a stroll through pretty much any supermarket will illustrate that, while cheese production keeps growing, the retail packages of that cheese continue to shrink. Go back maybe three or four decades and there were very few single-serve packages of cheese on the market, primarily String cheese and products from Bel (Laughing Cow, Babybel).

Today, you can buy individually wrapped packages of pretty much every commodity-type cheese, ranging from mild to sharp Cheddar to Colby and Pepper Jack. But you can also find an impressive array of specialty cheeses being packaged in single-serve packages, everything from Parmesan and Gouda to Asiago and Havarti.

Meanwhile, per capita cheese consumption continues to set new records pretty much every year, and expectations are that it will continue to grow in the future. Based on the number of single-serve packages on the market, per capita consumption will continue to grow one ounce, or three-quarters of an ounce, at a time.

Then there’s yogurt, a product category that exploded for a number of years but has recently flattened out. More specifically, yogurt production grew from under a billion pounds back in 1989 to a record 4.77 billion pounds in 2014 before falling short of that level in the following three years.

Back in the early years of yogurt, one of the standard package sizes was the eight-ounce container. Today, not only is yogurt different — Greek yogurt now dominates the category — but the average container size is more like 5.3 ounces.

A nice illustration of this point can be seen in the retail price data collected by the US Bureau of Labor Statistics. The BLS published average prices for eight-ounce containers of natural, fruit-flavored yogurt for a number of years, but stopped back in 2003. During the period in which the BLS published those prices, the average retail price of an eight-ounce container of yogurt increased from under 50 cents back in 1980 to over 80 cents in February and March of 2003 (the final two months for which average prices were reported).

For what it’s worth, back in 2002, the last full year that BLS reported average yogurt prices, US yogurt production totaled about 2.3 billion pounds. Last year, yogurt output was just under 4.5 billion pounds, which means that a whole lot more yogurt is being sold these days in smaller containers than was the case just a decade and a half ago.

Finally, there’s fluid milk, a category that’s been in decline (as far as per capita consumption is concerned) or at best flat (as far as sales were concerned up until about seven years ago, before declining fairly dramatically starting in about 2011).

It’s been about two decades since single-serve bottles of milk began showing up in the dairy case, and now those bottles are pretty much everywhere. But not only have these single-serve containers not been able to boost sales, they don’t even appear to be accounting for a very high or growing percentage of sales in the declining fluid milk category.

Specifically, at least in California, statistics from the California Department of Food and Agriculture show that one-gallon containers accounted for almost 69 percent of packaged fluid milk sales in October 2017; that’s actually up from about 67 percent in October 2007.

Meanwhile, pints accounted for just 0.27 percent of fluid milk sales in October 2017, compared to 1.59 percent of sales in October 2007. On the other hand, sales of half-pints (eight ounces) accounted for 10.33 percent of fluid milk sales in October 2017, up from just under 10 percent in October 2007.

While it doesn’t appear that smaller containers are going to turn around fluid milk sales, different container sizes might be helping, at least to some extent. Specifically, fairlife — the joint venture of Select Milk Producers and the Coca-Cola Company — appears to be doing quite well, selling its milk in 52-ounce and 11.5-ounce single serve containers.

The packaging industry certainly has a bright future, thanks in part to the dairy industry.

 

Per Capita Cheese Consumption: 40 Pounds Is Within Reach

The latest per capita cheese consumption figures were recently released by USDA’s Economic Research Service and, as reported on our front page last week, those figures look pretty positive for the cheese industry. And we expect further growth in per capita cheese consumption in the future.

No doubt about it, per capita cheese consumption has been on a nice little roll lately. Actually, per capita cheese consumption has been on a pretty nice roll for roughly half a century now.

Believe it or not, there was a time when per capita cheese consumption in the US was under 10 pounds. That was from the time statistics started to be kept up until 1968, when per capita consumption reached a then-record 10.05 pounds (for what it’s worth, it was also in 1968 that the US population first topped 200 million, implying a US cheese market of about 2 billion pounds).

By 1970, per capita cheese consumption had reached about 11.4 pounds. It then grew every year in the 1970s except for 1975, and grew every year in the 1980s except for 1988.

By 1989, per capita cheese consumption had reached almost 24 pounds (it had actually been 24.1 pounds in 1987, then fell below that level in 1988 and 1989 because the federal government stopped giving away surplus cheese in early 1988; nothing boosts consumption like giving a product away). Per capita cheese consumption kept growing, topping 29 pounds in 1999 and then hitting 30 pounds for the first time in 2001.

Looking back over the statistics, we noticed that per capita cheese consumption first topped 20 pounds in 1983. So, if it took 18 years for per capita cheese consumption to grow from 20 pounds to 30 pounds, and if it takes another 18 years for per capita cheese consumption to grow from 30 pounds to 40 pounds, is it possible for per capita cheese consumption to reach 40 pounds by next year?

Probably not. Looking back over the period when per capita consumption was rising from 20 to 30 pounds, there was actually only one decline; that was in 1988 which, as noted earlier, was the year when the government stopped giving cheese away. Per capita consumption in both 1988 and in 1989 was lower than in 1987, but other than in 1988, it did increase every year.

Interestingly, since reaching 30 pounds in 2001, per capita cheese consumption has declined just once: in 2008, when per capita consumption of 32.39 pounds was down more than half a pound from 2007.

But after consumption reached a record high in 1987, it again reached a record high in 1990, and that 1990 record was more than half a pound higher than the 1987 record.

By contrast, it wasn’t until 2011 that the 2007 per capita consumption record was broken, and per capita consumption that year only broke the 2007 record by three-tenths of a pound.

So while there was a three-year period in the late 1980s during which per capita consumption grew by only about half a pound, there was a four-year period earlier this century during which per capita consumption grew by less than half a pound. Thus, reaching 40 pounds next year (18 years after reaching 30 pounds) doesn’t seem very realistic, especially since per capita consumption last year was 37.23 pounds.

Still, it does seem realistic for per capita cheese consumption to reach 40 pounds by early in the next decade, for at least a couple of reasons. First, since being relatively flat from 2007 through 2013 (rising from 32.94 pounds to just 33.66 pounds over that period), per capita cheese consumption has really exploded.

Put another way, per capita cheese consumption hasn’t just broken records in recent years, it has shattered them. It grew by almost three-quarters of a pound in 2014, almost a full pound in 2015, more than a pound in 2016 and more than half a pound in 2017.

Yes, it could be argued that per capita consumption growth is bound to slow down after such a period of rapid growth, but we’re optimistic that the impressive growth we’ve seen in recent years will continue.

Backing up that belief: during the first seven months of 2018, domestic commercial disappearance of cheese was about 181 million pounds higher than during the first seven months of 2017.

Second, last year’s record per capita consumption was accomplished despite a drop in per capita consumption of Italian cheeses. That’s pretty amazing because, pretty much no matter how far back you go, increases in per capita cheese consumption have been driven more by Italian cheeses than any other category.

For example, back in 1970, per capita consumption of American-type cheese was seven pounds, while per capita consumption of Italian cheese was just over two pounds. Last year, despite a decline in Italian cheese consumption, both categories were tied, at 15.06 pounds. So since 1970, per capita consumption of Italian cheese grew by 13 pounds, while per capita consumption of American cheeses grew by eight pounds.

Also last year, per capita Mozzarella consumption declined, for just the fifth time since 1995. Since per capita consumption of other Italian cheeses was unchanged from 2016, the decline in per capita consumption of Italian cheeses last year can be attributed entirely to Mozz.

Given the likelihood that Italian cheese consumption will rebound this year, we expect per capita cheese consumption overall to also increase, again. Forty pounds by 2022 seems plausible.

New NAFTA Looks Pretty Good For US Dairy

It hasn’t been all that great a year for the US dairy industry as far as trade policy is concerned, but the agreement reached between the US, Mexico and Canada to modernize the North America Free Trade Agreement looks pretty favorable.

Prior to reaching agreements with Mexico and then with Canada, US trade policy had really been all about disagreements, rather than agreements.
There were disputes over steel and aluminum and intellectual property, and tariffs implemented against everybody from China and the European Union to Mexico and Canada.

So just from the perspective of an agreement being reached, the new pact between the US, Canada and Mexico, under the new United States-Mexico-Canada Agreement (USMCA), is good news.

And the details of this new agreement provide a fair amount of good news for the US dairy industry (and some good news for the global dairy industry). For example, under the agreement, Canada will eliminate its Class 7 milk pricing program.

That program, which was implemented in early 2017, allowed Canada to artificially lower milk ingredient prices; it helped push Canada’s skim milk powder surpluses onto global markets at extremely low prices. The program was so unpopular that it drew rebuke not only from the US but also from the European Union, New Zealand, Australia, Mexico and Argentina.

The US dairy industry also gains a considerable amount of new access to the Canadian dairy market under the USMCA. Among other things, the US will receive a new tariff-rate quota of 12,500 metric tons (27.6 million pounds) of cheese by year six of the agreement, growing 1 percent for another 13 years. Some 50 percent of that amount will be available for any kind of cheese, while the remainder is for industrial cheeses.

To put that in some perspective, US cheese exports to Canada in recent years have ranged from a low of 25.9 million pounds in 2017 to a high of 31.5 million pounds in 2013.

Also under the new USMCA, Canada will provide new TRQs exclusively for the US for a number of other dairy products, including fluid milk and cream, skim milk powder, butter and cream powder, concentrated and condensed milk, yogurt and buttermilk, powdered buttermilk, products of natural milk constituents, ice cream and ice cream mixes, whey, and other dairy.

Obviously, dairy trade between the US and Canada will continue to be more restricted than dairy trade between the US and Mexico (which is tariff-free under NAFTA), but the new TRQs provided by USMCA at least represent progress for the US dairy industry. And keep in mind that US dairy exports to Canada have topped $600 million in each of the last two years.

Finally, the USMCA includes new disciplines on geographical indications. According to the Office of the US Trade Representative, for the first time in a US trade agreement, Mexico and the US agreed to not restrict market access in Mexico for US cheeses labeled with certain terms.

Interestingly, the USTR says that, for the first time in NAFTA, the US and Mexico have agreed to certain GI standards. It might be recalled that, when NAFTA was originally negotiated (roughly a quarter-century ago), the GI issue had yet to rear its ugly head.

Evidence of the positive dairy outcomes for US dairy included in the new USMCA can be seen in the praise heaped on the agreement from organizations such as the International Dairy Foods Association, National Milk Producers Federation, and US Dairy Export Council.

So are there any negatives in this deal, from a dairy perspective? Possibly. For one thing, just because Canada will be providing new market access doesn’t mean US dairy exports to the Canadian market will automatically increase.

Further, these new TRQs all include the phrase “by year six” of the USMCA, and then they grow 1 percent for another 13 years. In other words, this market access will be made available to the US dairy industry very slowly, and even after almost two decades (technically, it will be more than 20 years from the time the agreement was finalized, on Sept. 30, 2018, until it is fully implemented), US market access will be pretty limited.

On top of that, it’s worth remembering that Canada isn’t exactly a huge potential market for the US (or any other dairy exporter, for that matter). Canada’s population is roughly 36 million, or about 4 million less than the population of California.

It’s often observed that the US needs to increase its exports because 95 percent of the world’s population lives outside the US; it could also be observed that almost 95 percent of the world’s population lives outside the US and Canada. From a dairy industry perspective, the US would have far more to gain from increased access to markets in countries such as China and Japan than it will gain from increased access to the Canadian market.

One final negative here: it appears that Mexico’s tariffs on US cheese imports will remain in place. So from that perspective, US dairy trade to Mexico, at least in the short run, is worse off than it was a year ago.

Those negatives aside, the new USMCA looks like a very positive development for the US dairy industry. In light of trade policy developments earlier this year, this new agreement is mighty welcome news.

Imitation Is The Sincerest Form Of Flattery, But...

Daiya Foods, a Canada-based producer of plant-based foods, debuted new line extensions of some of its dairy-type products at Natural Products Expo East in Baltimore, MD, earlier this month, and the company is definitely taking aim at some cheese market niches with these new products.

Among those new products: Deluxe Cheeze Sticks, available in Cheddar Style and Mozzarella Style flavors; Mozzarella Style and Gouda Style Slices; and Zesty Cheddar Deluxe Cheeze Sauce.

No doubt about it, these products appear to be pretty good imitations of the “real thing”; that is, actual cheese products, made from cow’s milk. But the operative word here is “appear”; these products may look like cheese, but they don’t exactly do a good job of imitating cheese in a couple of key areas.

One of those areas is nutrition. Among other specifics, both of the Deluxe Cheeze Stick products from Daiya contained exactly zero grams of protein per serving. That’s more than a little interesting, given that protein has emerged in recent years as a pretty trendy macronutrient, not to mention the fact that, as one of three macronutrients (fats and carbohydrates are the other two), dietary protein is absolutely essential at all stages of life.

Just for the sake of comparison, we checked a few real cheese snack stick products for protein content, and, well, for starters, they all did in fact contain protein. A couple of sharp Cheddar snack sticks contained five or six grams of protein, while a couple of String cheese samples contained either six or eight grams of protein.

At the micronutrient level, the Daiya products also come up short when it comes to calcium. Both of the Deluxe Cheeze Stick products contain 162 milligrams of calcium, or 10 percent of the Daily Value, per serving (22 grams).

Meanwhile, the calcium content of several real cheese stick or String cheese products ranges from 15 to 20 percent of the Daily Value, with one brand listing the actual calcium content at 220 milligrams.

Daiya’s Deluxe Cheeze Sticks also might struggle to appeal to consumers looking for low-carb options; each of the company’s sticks contains four grams of carbs per serving, whereas the real cheese snack sticks contain no more than one gram.

Yes, for calorie-counters, Daiya’s Deluxe Cheeze Sticks have the advantage: each 22-gram stick has only 60 calories, while the real cheese sticks have 80 to 100 calories per stick (either 24 or 28 grams). And, unlike real cheese sticks, Daiya’s sticks are cholesterol-free (something more and more nutrition experts say doesn’t matter).

But when it comes to overall nutrient density, it would appear that the real cheese sticks are the clear winners.

Another key area where these new “cheese” snack products come up short is in the ingredient list. We mention this, of course, because more and more consumers seem to be interested in fewer and fewer ingredients in their food and beverage selections.

With that in mind, here’s the ingredient list for Daiya’s “Deliciously dairy-free” (that’s what it says on the front of the package) Mozzarella Style Deluxe Cheeze Sticks: filtered water, coconut oil, potato starch, tapioca starch, potato protein isolate, tricalcium phosphate, sea salt, vegan natural flavors, xanthan gum, lactic acid (vegan), konjac gum, fruit and/or vegetable juice concentrate, vegan enzyme, inactive yeast, coconut cream.

By contrast, String cheese contains just four ingredients: pasteurized milk, cheese cultures, salt and enzymes.

Obviously, this isn’t just a matter of the sheer number of ingredients; it’s also a matter of the types of ingredients. If consumers are really interested in ingredients they can actually pronounce, how do they really feel about a product that contains such things as xanthan gum, tricalcium phosphate and konjac gum?

Beyond the nutritional and ingredient shortcomings of these “cheese” products, we can’t help but wonder how they compare in taste and texture to the real cheese products. Until we hear otherwise, we’ll have to conclude that a Cheddar Style Deluxe Cheeze Stick doesn’t really compare to a sharp Cheddar cheese stick made with cow’s milk.

With all those shortcomings in mind, it’s probably safe to say the plant-based foods business is going to struggle in the future, right? Apparently not, as it turns out.

The Plant Based Foods Association recently released data showing dollar sales growth of 20 percent in the plant-based foods industry over the last year and sales topping $3.3 billion. Among other things, PBFA noted that sales of plant-based “cheeses” were up 43 percent, to $124 million, in the 52 weeks ending June 2018 (for more details, please see Plant-Based Food Sales Rose 20% In Past Year; Plant-Based ‘Milk’ Sales Grows 9%, on page 5 of our Aug. 3, 2018 issue).

And the Good Food Institute recently reported that total sales of plant-based foods now exceed $3.7 billion, with plant-based milk being a $1.8 billion market and some other plant-based “dairy” foods also posting impressive sales increases over the past year, including cheese, up 41 percent; yogurt, up 54 percent; creamer, up 62 percent; and ice cream, up 40 percent.

Plant-based foods are doing a good job of imitating dairy products in some areas, but come up woefully short in areas such as nutrition and ingredients. Yet more and more consumers seem oblivious to those shortcomings.

New California Federal Order Starts To Get Real

The dairy industry is still about a month and a half away from when the new California federal milk marketing order becomes fully effective, but there are some things happening right now that are making the new California federal order more and more “real.” And the “realness” of the California federal order is only going to increase between now and the end of the year.

The story of California joining the federal order program is several years old now. It was back in February of 2015 when three dairy cooperatives — California Dairies, Inc., Dairy Farmers of America and Land O’Lakes — asked USDA to call a hearing to promulgate a federal order for the state of California.

The process of California adopting a federal order played out over several years, culminating in over two-thirds of the state’s dairy producers voting in favor of a federal order. Prior to USDA announcing that referendum result, CDI, LOL and DFA announced that they had bloc voted on behalf of their respective members in support of a California federal order.

USDA published in the Federal Register a final rule establishing a federal order for California on June 8, 2018. That final rule actually includes two key dates. There’s an “applicability date”; all provisions of the final rule apply to affected parties as of Nov. 1, 2018.

There’s also an “effective date”; the final rule is effective with the “Announcement of Advanced Prices and Pricing Factors” on Oct. 17, 2018.
That announcement will include, among other things, the Class I base price and the Class II skim milk price for November.
And so it was noteworthy on Monday, Sept. 10, when the California Department of Food and Agriculture published its October 2018 Class 1 price announcement. That announcement included the following:

**Please Note: Due to the implementation of a Federal Milk Marketing Order (FMMO) for California, this is the final price announcement for Class 1 milk issued by the California Department of Food and Agriculture.
Future price announcements for Class I milk in California will be issued by the United States Department of Agriculture. For more information regarding the California FMMO and applicable minimum class prices, please visit: https://www.cafmmo.com/.


That announcement, in a way, marks the official beginning of the end for the California state milk order. In a few short weeks, California’s Class 1 price will cease to exist, and will be replaced by the federal order Class I base price.

In a couple of weeks (no later than Oct. 1, 2018), the CDFA will announce the September 2018 Class 4a and 4b prices. And then about a month later, the CDFA will announce the October 2018 Class 4a and 4b prices.

Those will be the final Class 4a and 4b prices issued by the CDFA. Effective Nov. 1, those prices will be replaced by federal order Class IV and Class III prices, respectively.

This will end three eras in California milk pricing: the eras of a Class 4 price, the era of the Class 4a price and the era of the Class 4b price. Prior to August 1983, California had a single Class 4 price based on butter and nonfat dry milk commodity prices. The Class 4 price applied to all manufactured products.

From August 1983 through August 1988, the Class 4b (cheesemilk) price was set equal to the Class 4a price, which continued to be based on butter and NDM commodity prices. And since September 1988, California has had separate prices for Class 4a and 4b.

And in a couple of months, those prices will all be relegated to the scrap heap of dairy pricing history. And so will California’s Class 1, Class 2 and Class 3 prices.

But that’s progress in the dairy pricing arena. Indeed, a CDFA “History of Class 4b Pricing Formula” document published about a decade ago notes that, from January 1989 through September 1989, the Class 4b price was based on a hundredweight price set equal to the Class 4a price calculated at the support purchase prices for both butter and for nonfat dry milk, times the National Cheese Exchange block Cheddar cheese price divided by the support purchase price for block Cheddar cheese.

So an early version of California’s 30-year-old Class 4b price included two factors that no longer exist: a National Cheese Exchange block Cheddar cheese price (the NCE ceased operations in 1997) and support purchase prices (the Dairy Product Price Support Program, under which USDA’s Commodity Credit Corporation purchased surplus dairy products, was terminated in 2014).

In addition to the federal order Class I milk price announcement on Oct. 17, the California dairy industry can look forward to a couple of additional, historic price announcements in the near future.

First, on Dec. 5, USDA will announce Class III and IV prices for November; those prices will succeed the California 4b and 4a prices. And then on or before Dec. 14, USDA will announce November’s producer price differential.

There are some other, subtle changes taking place that will also indicate that the California federal order is becoming a reality. Among other things, there’s a menu item on the CDFA Dairy Marketing and Milk Pooling Branch website entitled “Hearing Matrix.” With California joining the federal order program, there will no longer be a need for anyone to petition the CDFA to hold a hearing on any price-related matter.

Thus will end decades of wrangling over appropriate levels for California milk prices.

Dismal Performance Continues For Fluid Milk

The latest fluid milk sales and consumption figures have been released by USDA’s Economic Research Service, and once again, these figures paint a pretty grim picture for what used to be the predominant and preeminent dairy product in the US marketplace. This ongoing sales and consumption decline raises at least two issues that bear discussing.

As reported on our front page this week, US fluid milk sales last year totaled about 48.6 billion pounds, down more than a billion pounds from 2016 and down about 6.4 billion pounds from 2010. That year, fluid milk sales topped 55 billion pounds, but sales have dropped every year since.

Reflecting that sales decline, ERS also reported that per capita fluid milk consumption last year fell to 149 pounds. That’s down five pounds from 2016, down 48 pounds since 2000 and down 98 pounds from 1975.

Indeed, since 1975, per capita fluid milk consumption has increased exactly once: in 1984, when it rose one pound from 1983, to 224 pounds.
There have been a few times when fluid milk consumption was steady, but otherwise it’s been slowly declining for decades now.

Putting this in the context of the size of the US dairy industry, back in 1975, fluid milk sales totaled 53.8 billion pounds, and US milk production totaled around 115.4 billion pounds. Thus, about 46 percent of all the milk produced in the US 43 years ago was sold and consumed in the form of fluid milk.

Last year, fluid milk sales totaled 48.6 billion pounds and US milk production totaled about 215.5 billion pounds (interestingly, almost exactly 100 billion pounds higher than in 1975). Thus, about 23 percent of all the milk produced in the US last year was sold and consumed in the form of fluid milk.

It goes without saying that this is a profound change in the US dairy industry.

With these numbers in mind, one question that comes to mind is: how low can fluid milk sales go? As noted earlier, fluid milk sales have fallen by more 6 billion pounds just since 2010. Three times during that period (in 2013, 2014 and 2017), sales dropped by more than a billion pounds from the prior year.

So it’s not too difficult to conclude that, first of all, fluid milk sales will continue to decline, and second, they will decline faster in some years than in other years. And perhaps by 2030 or thereabouts, we could see fluid milk sales drop below 40 billion pounds.

If milk production continues to grow as projected, maybe just 15 percent of all milk produced in the US in 2030 will be sold in fluid form.

But maybe milk sales won’t decline that much. There are, after all, some bright spots in the latest fluid milk sales statistics. Most notably, whole milk sales increased by 383 million pounds last year, to 15.754 billion pounds. Yes, that’s still less than half the volume of whole milk sales back in 1979 (32.5 billion pounds) and it’s down more than 20 billion pounds from 1975 (36.2 billion pounds).

But last year was also the fourth consecutive year in which whole milk sales increased; since 2013, whole milk sales have risen by about 1.8 billion pounds. Meanwhile, sales of flavored whole milk posted their third consecutive increase last year, and sales of other flavored milk also posted their third straight increase and reached a record 4.042 billion pounds.

In other words, all is not gloomy for fluid milk sales. But at this point, the few growing categories are outweighed by the declining categories.

A second question raised by the ongoing declines in fluid milk sales relates to milk pricing. More specifically, we can’t help buy wonder how much longer US milk pricing systems will continue to place a premium on fluid milk.

Keep in mind that one of the purposes of federal milk marketing orders is to assure an adequate supply of fluid milk. Well, considering that fluid milk now uses less than one-fourth of all milk produced in the US, it’s safe to say federal orders are accomplishing their mission, and then some.

Historically, the fluid or beverage uses of milk have been classified in the highest-priced class (Class I). This is true today in both the federal order program as well as in the California State Order (where it’s known as Class 1), which will be terminated in less than two months.
Considering the long-term problems facing fluid milk sales, maybe it’s time to turn milk pricing upside down, with fluid milk being the lowest-priced class.

There are at least two problems with this idea. First, dairy producers would in all likelihood never go along with such an idea.

And second, we’re not sure if lower prices will actually help boost fluid milk sales. Retail milk prices are now at their lowest levels in almost a decade, and have been relatively low since early 2015, but sales continue to drop.

There have been periods over the past decade where high retail prices could perhaps be blamed in part for fluid milk sales declines, but the flat to declining retail prices seen since early 2015 would seem to indicate that high prices aren’t the reason (or at least the main reason) why fluid milk sales continue to drop.

It’s beginning to look like a long-running story for fluid milk: sales and per capita consumption continue to decline, year after year, with no end in sight. And fluid milk continues to be priced with a premium in regulated pricing systems.

Which one of those ends first remains to be seen.

It’s Time To Terminate The War On Salt

The war on salt dates back at least four decades in the US. But recent evidence indicates that this has been a misguided war at best and a war that could be doing more harm than good at worst.

It was 40 years ago last month, in July of 1978, when the Center for Science in the Public Interest filed two petitions that called on the US Food and Drug Administration to set ceilings for sodium in processed foods, to reclassify salt (sodium chloride) from Generally Recognized As Safe (GRAS) to food additive status, and to require sodium labeling on packaged foods. CSPI also suggested that FDA require a special symbol on the labels of high-sodium foods.

The gist of the argument made by CSPI, and many others, is that sodium is a public health concern primarily because it increases blood pressure.
Reflecting that concern, reduced sodium intake has been a public health goal going back at least as far as CSPI’s 1978 petitions. For example, in the 1980 edition of the Dietary Guidelines for Americans, the sixth of seven recommendations was to avoid too much sodium. And one way to avoid too much sodium was to limit your intake of salty foods, such as cheese.

In 2005, the Dietary Guidelines for Americans report specifically recommended that people consume less than 2,300 milligrams of sodium (approximately one teaspoon of salt) per day. That recommendation continued in the most recent edition of the Dietary Guidelines, which also noted that average sodium intake is around 3,440 milligrams per day.

The US is hardly alone when it comes to battling sodium. Health Canada recently released a report showing that Canadians consume an average of 2,760 milligrams of sodium each day, which is almost double the recommended amount of sodium (for more details, please see Sodium Consumption Is Still Too High; Cheese Among Leading Sources, Health Canada Says, on page 7 of our Aug. 10th issue).

As it turns out, the average sodium intake in the US and Canada, among other countries, might be a bit low, not quite a bit too high. Research that’s been published in recent years, including a study released earlier this month, has found that sodium intake that’s both too high and too low can be hazardous to your health.

Most recently, a study published in The Lancet concluded that, for the vast majority of communities, sodium consumption is not associated with an increase in health risks except for those whose average consumption exceeds five grams per day (equivalent to 12.5 grams of salt).

The World Health Organization actually recommends reducing sodium intake to two grams per day, but that has not been achieved in any country, the study noted. That’s probably a good thing, because the study found that low sodium intake (below three grams per day) is associated with an increased risk of cardiovascular events and mortality.

This latest study is hardly alone in its conclusions. For example, a study published in The New England Journal of Medicine four years ago this month concluded that an estimated sodium intake between three grams per day and six grams per day was associated with a lower risk of death and cardiovascular events than was either a higher or lower estimated level of intake.

And a study published several years ago in the American Journal of Hypertension identified a specific range of sodium intake (2,645 to 4,945 milligrams) associated with the most favorable health outcomes. Both low sodium intakes and high sodium intakes are associated with increased mortality.

From the latest research as well as quite a bit of research dating back at least a few years, we can reach several conclusions. Among them: current sodium consumption in the US, Canada and a number of other countries is just fine as is; and goals being pushed in the US, Canada and other countries for reductions of sodium intake below 2,500 milligrams per day will probably do more harm than good.

These conclusions in turn lead to some additional thoughts about sodium reduction efforts. First, the voluntary sodium effort launched in the US a couple of years ago should be abandoned once and for all.

Those voluntary recommendations, which were released by FDA back in mid-2016, are flawed for the simple reason that they are based on the current recommendation to reduce sodium intake to 2,300 milligrams per day. As it turns out, the current intake of 3,400 milligrams per day is right where it should be, so reduction efforts, either voluntary or mandatory, simply aren’t necessary.

The same thing applies to Canada where, as noted earlier, intake averages 2,760 milligrams of sodium per day.

Disturbingly, sodium reduction remains a key goal at FDA. When FDA Commissioner Scott Gottlieb announced the agency’s Nutrition Innovation Strategy back in late March, he noted that most Americans exceed the recommended intake of sodium. But that recommended intake, it appears, is way too low.

Still, FDA seems determined to pursue sodium reduction. Key activities currently planned as part of its Nutrition Strategy include reducing sodium in the diet. And the agency said it is committed to advancing the short-term voluntary sodium targets.

We also can’t help but notice that all of this new sodium research is coming out as FDA, as part of its Nutrition Innovation Strategy, contemplates the possible use of a standard icon to denote the claim “healthy” on food labels.

It’s impossible to predict the outcome of FDA’s strategy, but it would be ludicrous if low-sodium foods get to use a “healthy” icon.

Searching For Solutions

Albany, NY, and Madison, WI, are almost 1,000 miles apart geographically, but they were much closer, in at least one way, on Monday, Aug. 13: both cities hosted dairy meetings that looked at various aspects of the current dairy farm crisis and possible solutions to that crisis.

The Albany meeting was organized by Agri-Mark, the Northeast dairy cooperative, and focused on proposals that could increase farm milk prices and net farm income. The Madison meeting was the first gathering of the new Wisconsin Dairy Task Force 2.0, which was announced a couple of months ago by Wisconsin Gov. Scott Walker.

Both of these meetings grew out of the same thing: low farm milk prices. This point can be illustrated by simply looking at mailbox milk prices over the last few years. Mailbox milk prices, it should be noted, represent the net pay price received by dairy farmers for their milk.

Back in 2014, the mailbox milk price for selected reporting areas in federal milk marketing orders averaged a record $24.04 per hundred.
That shattered the previous record of $20.20 per hundred, set in 2011.
Notably, the federal order mailbox milk price in 2013 also averaged above $20.00 per hundred, at $20.06, an indication that, over the 2011-2014 period, milk prices weren’t all that terrible.

Since then, the federal order mailbox milk price averaged $17.02 per hundred in 2015, $15.95 per hundred in 2016 and $17.31 per hundred in 2017. The first four months of 2018 were even worse: the federal order mailbox milk price averaged $15.29 per hundred.

So what we’re seeing right now is a really prolonged period of low milk prices. Yes, mailbox milk prices have averaged lower in certain years, but prices haven’t been so low for so long in well over a decade. For example, the federal order mailbox price averaged $12.82 per hundred in 2009, but had averaged $18.40 per hundred in 2008 and $19.16 per hundred in 2007, and then rebounded to $16.29 per hundred in 2010 and then to a then-record $20.20 per hundred in 2011.

Speaking of low milk prices, some of the proposals presented at Agri-Mark’s Albany meeting dated back almost a decade, to the 2009 era of historically low milk prices. For example, Holstein Association USA’s Dairy Price Stabilization Program dates back to 2009, while the Federal Milk Marketing Improvement Act was actually introduced in the US Senate back in 2011.

While the Agri-Mark meeting focused on prices, income and milk production decisions, the Wisconsin Dairy Task Force 2.0 will be taking a look at pretty much anything and everything that will be impacting the dairy industry today and in the future.

That’s a pretty daunting task, as can be seen by the diverse priorities identified by task force members during their first meeting. Those priorities do include price volatility and profitability, but also include such things as product and process innovation and invention, regulatory certainty, rural communities support and infrastructure, consumer confidence and perception, education and the workforce, access to capital and barriers to entry, economies of scale versus size, and the next generation (transfers and transition).

That last priority is really what both of these meetings boil down to: the next generation. The sad part of this story is that dairy farmers are going out of business on pretty much a daily basis.

Yes, that’s an age-old story; it’s difficult if not impossible to recall a time when the number of dairy farms didn’t decline, even when milk prices were really good. For example, Wisconsin lost a total of 460 dairy farms back in 2014, which, as noted earlier, saw record-high milk prices.

But things are definitely worse right now. Between Jan. 1, 2018, and Aug. 1, 2018, Wisconsin lost a total of 382 dairy farms. Yes, the state’s milk production during the first half of this year was higher than during the first half of last year, but as more than one task force member pointed out, as dairy farms go out of business across Wisconsin, it’s getting more and more difficult for rural communities to maintain such necessities as schools and food stores.

The good news is that there doesn’t appear to be any shortage of young people interested in pursuing a career in the dairy industry. Several dairy farmers serving on the task force talked about sons, daughters, nieces and/or nephews who have worked on a dairy farm their entire lives and want to continue in that profession.

This is, of course, good news for cheese makers and other dairy processors, who won’t have much of a business if there aren’t any farmers around to produce milk (we’re talking about the traditional definition of milk here, not the plant-based stuff).

So how can the dairy industry ensure that there is a dynamic, profitable and hopefully growing dairy industry for the next generation? Part of the answer — for example, when it comes to regulatory certainty — lies with the government, but not all of it does. After all, the federal government has been involved in milk pricing for roughly 80 years, but the number of dairy farmers has declined in pretty much every one of those years.

So a lot of the answers lie with the industry itself. Indeed, for proof of this point, we look no further than the first recommendation of the final report of Wisconsin’s first Dairy Task Force: “Wisconsin should strongly emphasize and commit resources to producing and marketing cheese and expanding cheese varieties.”

Notably, Wisconsin’s specialty cheese production has grown from 83 million pounds in 1993 to 799 million pounds last year.

 

Agencies Should Agree On Terminology For Dairy Alternatives

On the one hand, it’s been refreshing to hear Scott Gottlieb, commissioner of the US Food and Drug Administration, talk about the need for greater clarity when it comes to the traditional dairy terms currently being used by many if not most plant-based foods on the market these days.

On the other hand, it would appear that the federal government itself needs to come to some sort of agreement on these dairy terms before it starts consistently enforcing its existing regulations in the consumer marketplace.

What are we talking about here? First, Gottlieb has mentioned several times this year that he wants FDA to take a closer look at how non-dairy alternatives are labeled.

Most recently, at FDA’s public meeting two weeks ago on the agency’s Nutrition Innovation Strategy, Gottlieb noted that there has been a proliferation of products like soy and almond beverages calling themselves milk. The challenge for FDA is, as a regulatory agency, “we can’t unilaterally change our regulatory approach if we have a history of enforcing our provisions a certain way.”

Meanwhile, the US Department of Agriculture recently caught our attention when it sought bids for the acquisition of sunflower seed butter. The agency awarded a contract to Red River Commodities, Inc., Fargo, ND, for a total of 258,720 pounds of sunflower seed butter at a price range of $1.9475 to $1.9899 per pound. The delivery period is the last three months of 2018.

Interestingly, USDA also recently bought some real dairy butter.
Specifically, the agency purchased a total of 75,600 pounds of butter from Challenge Dairy Products, Inc., at a price of $2.85 per pound. The delivery period is the last three months of 2018.

This raises at least a couple of questions. First, what the heck is sunflower seed butter? And second, isn’t it a little inconsistent for FDA to talk about cracking down on the use of dairy terms on non-dairy products while at the same time USDA is buying non-dairy products that use dairy terms?

USDA actually has a Commercial Item Description (CID) for sunflower seed butter (a number of dairy products also have CIDs, including “buttery spreads”). According to that CID, sunflower seed butter must contain a minimum of 90 percent sunflower seeds and be prepared by grinding shelled, roasted sunflower seeds. The sunflower seed butter may contain additional ingredients, such as, but not limited to, salt, sea salt, sweeteners, sunflower pieces, sunflower oil, palm oil and other stabilizing and preservation ingredients as permitted by the US Food and Drug Administration.

Regarding that second question, it certainly does seem inconsistent to have FDA talking about cracking down on dairy terms used on non-dairy alternatives while at the same time USDA is buying some of these non-dairy alternatives.

When it comes to butter and plant-based butter alternatives, there’s arguably more history involved than with any other plant-based dairy alternatives. Butter is believed to be the only food product that has actually been defined by Congress.

Specifically, way back in 1923, Congress defined butter as a product “made exclusively from milk or cream, or both, with or without common salt, and with or without additional coloring matter, and containing not less than 80 percentum by weight of milk fat...” There doesn’t seem to be any mention of sunflowers.

This does raise a related question about peanut butter, a plant-based food that also uses a dairy term. As it turns out, according to the National Peanut Board, back in 1895, Dr. John Harvey Kellogg (the creator of Kellogg’s cereal) patented a process for creating peanut butter from raw peanuts.

So the use of the term “peanut butter” predates the law defining “butter” by almost three decades, meaning that, if the federal government really does crack down on dairy terms being used on non-dairy foods, it could just grant an exception to peanut “butter” based on its long history of use.

USDA (and FDA’s parent agency, the Department of Health and Human Services) is actually inconsistent in its use of dairy terms for non-dairy alternatives. The most recent edition of the Dietary Guidelines for Americans, for example, advises that healthy eating patterns include fat-free and lowfat dairy, “including milk, yogurt, cheese, or fortified soy beverages (commonly known as ‘soymilk’).” There are several points in the report where the same clarification is used.

USDA reverses course on its choosemyplate.gov website. When discussing the “Dairy Group,” USDA notes that foods made from milk that retain their calcium content are part of the group, while foods made from milk that have little to no calcium, such as cream cheese, cream, and butter, are not.

The agency then offers this: “Calcium-fortified soymilk (soy beverage) is also part of the Dairy Group.” So cream cheese, cream and butter aren’t part of the dairy group, but “soymilk” is? Interesting.

USDA also offers some helpful selection tips. For example, calcium choices for those who do not consume dairy products include calcium fortified rice milk or almond milk, as well as soybeans and other soy products (soy yogurt is specifically mentioned).

FDA is accepting comments on its Nutrition Innovation Strategy public meeting, including its standards of identity, through Aug. 27, 2018. As it sifts through the many comments it will no doubt receive, the agency should also consult with USDA on how exactly to refer to non-dairy alternatives. The inconsistency within the federal government isn’t doing anybody any favors.

 

USDA Assistance To Farmers Will Be Woefully Inadequate

Last week, the US Department of Agriculture announced plans to spend up to $12 billion to assist dairy and other farmers negatively impacted by the ongoing trade wars the US has been engaged in this year with Mexico, China, Canada, the European Union and others.

While it’s still pretty early in this war, it would appear that this $12 billion will prove to be far less compensation than what farmers end up actually losing, in the short and the long term, as these trade wars drag on, and the US struggles to ink new trade deals.

As reported on our front page last week, USDA’s assistance to farmers will include three programs: a Market Facilitation Program, which will provide payments to dairy and other producers; a Food Purchase and Distribution Program to buy unexpected surpluses of commodities such as milk; and a Trade Promotion Program to help develop new export markets for US farm products.

There are at least three problems with this trade-war related assistance. First, $12 billion seems to be a bit small compared to the losses that dairy producers and others could potentially incur due to the ongoing tariff tradeoffs.

For example, National Milk Producers Federation has estimated that retaliatory tariffs imposed by Mexico, China and other key US dairy trading partners will cost US dairy farmers $1.8 billion just through the remainder of this year, based on the decline in milk futures prices since the retaliatory tariffs were implemented.

USDA said it will authorize up to $12 billion in producer assistance programs, which is in line with the estimated $11 billion impact of the retaliatory tariffs on US agricultural products. But those dollar amounts seem low, especially in light of NMPF’s estimate of the impact on dairy producers just during the second half of this year.

In its news release announcing the producer assistance, USDA mentioned not only milk but also field crops such as soybeans and sorghum, plus pork and “many fruits, nuts, and other specialty crops.”

According to the American Soybean Association, since talk of the tariffs began back in March, US soy prices have dropped more than $2.00 per bushel. Coupled with dairy and the other impacted commodities, it seems like $12 billion isn’t going to adequately compensate farmers for their financial losses during the ongoing trade wars.

Second, more than one ag organization responded to USDA’s announcement by saying farmers prefer trade over aid. Indeed, politicians and others have been talking about the need for farmers to get more “market-oriented” for decades now.

And farmers have listened. Just in the dairy industry, it’s worth noting that the US Dairy Export Council was founded back in the mid-1990s to help the US dairy industry become more export market-oriented. Since then, the dairy industry has spent hundreds of millions of dollars trying to boost exports, with pretty impressive results.

And USDA, through a couple of its export assistance programs, has also provided millions of dollars of funding every year to help boost US dairy exports. Indeed, USDA spends tens of millions of dollars every year to promote US agricultural exports in general.

Now, USDA is turning around and spending billions of dollars because of ongoing trade war-related price declines. This just seems to go against the longstanding philosophy of everybody from farm organizations to USDA itself.

Third, at this point, there doesn’t seem to be any end in sight to these ongoing trade wars. As noted earlier, NMPF has estimated that the retaliatory tariffs imposed so far will cost US dairy farmers $1.8 billion just through the remainder of this year.

What about next year? What if Mexico, China and others are still imposing tariffs on US dairy imports? How can USDA even begin to compensate dairy and other farmers if these tariffs start reducing both US exports and US farm prices?

And related to that point, while the US is engaged in these trade wars, it isn’t negotiating any new trade agreements. Meanwhile, the EU is finalizing trade deals with key US markets such as Japan and Mexico, and launching trade talks with countries like Australia and New Zealand. The US is getting left behind while others ink new trade deals and liberalize dairy trade.

Yes, President Trump and European Commission President Jean-Claude Juncker did meet last Wednesday at the White House and agreed to work together toward zero tariffs and zero non-tariff barriers. But there are at least two problems with that agreement, in addition to the fact that the US and EU launched talks on a Transatlantic Trade and Investment Partnership (TTIP) back in 2013 but those talks have been on hold since Trump took office.

First, the US already runs a huge dairy trade deficit with the EU. Last year, US dairy exports to the EU were valued at $116 million, while US dairy imports from the EU were valued at around $1.5 billion. Will the US dairy industry really gain more than it loses under a US-EU trade deal?

Second, how much will the US dairy industry benefit if non-tariff barriers are eliminated? At least a couple of EU dairy organizations view the Pasteurized Milk Ordinance (PMO) as the main sanitary barrier as it affects EU exports of most types of dairy products. Negotiations to eliminate the PMO will be contentious, to say the least.

USDA plans to spend up to $12 billion to assist farmers negatively impacted by tariffs, but at this point, that amount of money seems to be woefully inadequate.

 

A Decade Of Global Dairy Trade Auctions

A few weeks ago in this space, we noted the 25th anniversary of the launch of dairy futures. This week, we note another dairy price discovery anniversary: 10 years of Global Dairy Trade’s dairy commodity auctions.

It was back in April of 2008 when New Zealand’s Fonterra announced that it was introducing a new internet-based sales channel for its internationally traded dairy commodities. Fonterra described this as a “world first for the global dairy industry.”

The first GDT auction took place on July 2, 2008 (although Fonterra reported, in a press release dated July 3, that the inaugural trading event for GDT concluded at 5 a.m. this morning, New Zealand time; such is life in the global dairy business, where it’s often tomorrow somewhere, depending on where you are). The clearing price for regular whole milk powder for shipment in September 2008 was “in line with current market prices,” Fonterra noted.

A month later, the second GDT auction took place; the clearing price for regular whole milk powder for shipment in October 2008 was US$3,705 per metric ton ($1.68 per pound). Interestingly, the winning price for whole milk powder for Contract 3 (October) in last week’s GDT auction was $2,980 per ton ($1.35 per pound).

Obviously, much has changed since those early GDT auctions (and not just the prices). For one thing, the auction is no longer held just once a month; it’s now held twice per month, or 24 times per year.

Also, the auction has grown from just one product, whole milk powder, to a total of nine products, including skim milk powder, Cheddar cheese, butter, anhydrous milkfat, rennet casein, lactose, sweet whey powder and buttermilk powder.

Some of those products are traded in much greater volumes than others. GDT noted in its 2017 annual report that, in 2017, the main milk powders, WMP and SMP, accounted for 78 percent of the quantity traded (54 percent for WMP and 24 percent for SMP), while AMF, butter and Cheddar cheese represented another 18 percent of sales.

Further, when it was launched, GDT’s auction featured the products (or product, initially) of Fonterra, its owner. Today, sellers on the GDT auction platform include not only Fonterra but also Amul, Arla, Arla Foods Ingredients, and Polish Dairy.

That’s just the current sellers on the GDT auction platform. Late last year, GDT hosted its first multi-seller pool, which offered US-sourced lactose products, but that multi-seller pool was temporarily suspended a couple of months ago while options to enhance effectiveness are considered. That lactose pool included Agropur, Hilmar Ingredients and Valley Queen Cheese.

Yet another change that has occurred in the 10 years since GDT was launched is that GDT is no longer just a semi-monthly auction. Today, Global Dairy Trade offers a product suite, which includes not only GDT Events, the global auction for trading large volume dairy ingredients and reference price discovery; but also GDT Marketplace, a broader marketplace to buy and sell a range of dairy products, in any quantity, at any time; and GDT Insight, a data subscription service.

Like GDT Events, GDT Marketplace helps illustrate the international nature of Global Dairy Trade. GDT Marketplace sellers currently include Amul, Fonterra’s Anchor and NZMP, Arla Foods, Asian Blending, California Dairies, Inc., Cayuga Milk Ingredients, CROPP Cooperative, Dairygold, Dale Farm, Glanbia Ireland, Leprino Foods, Milligans Food Group, and Tillamook County Creamery Association.

These companies not only represent pretty impressive geographical diversity, but the products they produce and/or sell also span a wide range.

In addition to contributing to global dairy price discovery through its semi-monthly auctions, Global Dairy Trade has also had an impact on the global dairy futures business. When GDT started its auction a decade ago, dairy futures markets were limited to the US, where a variety of dairy futures and options are traded on the CME.

Two years after GDT started its auction, New Zealand’s exchange, NZX, launched a whole milk powder futures contract (which, as noted earlier, was the only product initially traded on GDT’s auction), followed by skim milk powder and anhydrous milkfat futures in February 2011 and butter futures in December 2014.

All of these futures contracts are cash settled to an average of winning prices for Contract 2 in GDT auctions in the same month. In other words, it would have been much more difficult, if not impossible, for NZX to launch dairy futures contracts were it not for the existence of the GDT auctions.

One final indicator of GDT’s growth over its first decade is just seeing how closely its activity is monitored around the world. Examples of this are too numerous to cite, but suffice it to say, GDT auctions are closely followed as an indicator of current and near-term price trends.

So with a decade under its belt, what does the future hold for Global Dairy Trade? The obvious answer is: more change. GDT has grown from one product, one seller and a monthly auction to nine products, half a dozen sellers and a semi-monthly auction in 10 years. Just in the last year, Polish Dairy joined GDT Events, initially offering four products already traded on the auction but earlier this year reintroducing whey powder.

Dairy price volatility isn’t going away, and for a decade now Global Dairy Trade has offered some unique ways to help the industry better cope with this volatility.

Dairy Fats Have A Healthy Future

It hasn’t been easy for fat-containing dairy products over the past 40 or 50 years, despite their wonderful flavor, but there are more and more indications that the future, at least from a nutrition perspective, is going to be mighty healthy for foods that contain significant amounts of dairy fats.

As reported on page 21 of this week’s paper, a new study has found no significant link between dairy fats and cause of death or, more specifically, heart disease and stroke. And certain types of dairy fat may actually help guard against having a severe stroke.

That’s a pretty significant change from all the negative news about dairy fat that’s been inundating consumers for decades now. But the science behind that negative news has been coming under considerable scrutiny in recent years, and as it turns out, that science has been somewhat flawed, to put it diplomatically.

Generally speaking, fat-bashing dates back at least to 1961 (and undoubtedly earlier), when University of Minnesota physiologist Ancel
Keys made the cover of Time magazine; the title of the magazine’s cover story was “The Fat of the Land.” The gist of his research was that saturated fat led to heart disease.

And that conclusion has driven US nutrition policy pretty much ever since. The first edition of the Dietary Guidelines for Americans, for example, advised that, for the US population as a whole, “reduction in our current intake of total fat, saturated fat, and cholesterol is sensible.” That was in 1980.

The 1980s was a pretty lousy decade for the dairy industry, from a dietary advice perspective. Indeed, in 1989, an independent multi-disciplinary panel of experts convened by the dairy industry (in something known as the “Bridge Project”) unanimously concluded that the health and medical community had reached consensus on their concern about the fat issue; that consumers weren’t far behind in their attitudes; and that the issue was likely to grow in magnitude because health and medical groups and federal government agencies were, for the first time, organized in an aggressive, coordinated, long-term campaign to convince consumers to lower their intake of dietary fat.

The 1990s wasn’t much better for dairy fat. Among other things, Congress passed, and FDA implemented, the Nutrition Labeling and Education Act of 1990, which required most packaged foods to bear the Nutrition Facts panel.

And that Nutrition Facts panel was decidedly anti-fat in general and anti-saturated-fat specifically. That’s because it required, among other things, a declaration of calories from fat, as well as declarations of total fat content as well as saturated fat content. The declaration of trans fat content, one of today’s dietary demons, didn’t become mandatory until earlier this century.

Also in the 1990s, the dairy industry in general and the cheese industry specifically focused considerable resources on developing decent-tasting cheeses with less fat content. Some of these efforts were pretty successful, but for the most part these reduced fat, lowfat and fat-free cheeses haven’t done all that well where it really counts: in the marketplace.

There were a couple of additional indicators of how bad things were in both the 1980s and the 1990s for dairy fat. For one thing, whole milk sales fell from about 31.3 billion pounds in 1980 to 18.8 billion pounds in 2000. And per capita butter consumption, which was actually above 18 pounds back in the 1930s, dropped to 4.2 pounds in 1981 and was only 4.3 pounds as recently as 2001.

But things have slowly started to change, particularly during the second decade of the 21st century. Among other things, investigative journalist Nina Teicholz authored The Big Fat Surprise: Why Butter, Meat & Cheese Belong in a Healthy Diet, which details how misinformation about saturated fats took hold in the scientific community and how recent findings overturn those beliefs.

Those recent findings continue to pile up, with the study published in the American Journal of Clinical Nutrition being the latest and, arguably one of the best, examples.

There are still a couple of missing pieces here, one of which is consumer perceptions. That will only change over time, and also as the government’s anti-fat crusade fades away.

That’s already started, albeit modestly, with the new Nutrition Facts label no longer requiring a declaration of calories from fat. But saturated fat and cholesterol are still required, near the top of the Nutrition Facts panel and above one of the new dietary villains, sugar.

But there’s yet another potential opportunity for the federal government to “get it right” on saturated fat: the 2020 edition of the Dietary Guidelines for Americans. The most recent edition of the Dietary Guidelines still includes a recommendation to consume less than 10 percent of calories per day from saturated fats, and specifically for dairy products, the Dietary Guidelines state that healthy eating patterns “include fat-free and low-fat (1%) dairy...”

But Marcia Otto, Ph.D., the AJCN study’s first and corresponding author and assistant professor in the department of epidemiology, human genetics and environmental sciences at the University of Texas Health Science Center at Houston, said results of this latest study “highlight the need to revisit current dietary guidance on whole fat dairy foods.”

Indeed, the federal government will be revising current dietary guidance over the next couple of years. If the next edition of the Dietary Guidelines finally gets it right on saturated fat, we could be entering a whole new, glorious and healthy future for dairy fat.

 

Eating More Milk And Drinking Less

Mike Brown, director of dairy supply chain for The Kroger Company, may have come up with one of the more succinct and accurate “roadmaps” for the dairy industry during his presentation at the Wisconsin Dairy Products Association’s Dairy Symposium in Egg Harbor, WI, on Tuesday.

“We’re going to continue to eat more milk and drink less,” is what Brown said early in his presentation. Indeed, that’s not only a roadmap for the future but also a summary of what’s taken place in the recent past.

Let’s start with the “drink less” part of Brown’s comment. The decline in the fluid milk business has been well-documented in recent years, and can be illustrated with a couple of sets of statistics from USDA.

First, fluid milk sales have been fairly flat for decades, until declining quite dramatically in recent years. More specifically, fluid milk sales had reached a recent high of around 55 billion pounds in 2010, but by 2016 (the most recent year for which USDA statistics are available) had dropped to 49.7 billion pounds — their lowest level in decades.

The flat fluid milk sales up until a few years ago would seem to indicate that fluid milk was at least holding its own, but that ignores the fact that the US population continues to grow. And that point is reflected in per capita fluid milk consumption, which dropped from 292 pounds back in 1965 to 152 pounds in 2016.

(That 1965 figure might be a bit misleading; USDA figures for that year, and for the next decade or two, included not only fluid milk but also cream as well as yogurt and sour cream. However, the long-term decline in per capita milk consumption can be confirmed by the long-term flat beverage milk sales along with population increases, among other statistics.)

While it seems pretty safe to conclude that we’ll be drinking less milk, Brown did point out that Kroger sees growth opportunities in specialty beverages, pointing out that people will pay for fluid products that meet specific needs.

Among the products he mentioned: fairlife, the joint venture of Select Milk Producers and The Coca-Cola Company. And Brown isn’t the only one touting fairlife these days; a recent CoBank report noted that fairlife has experienced stronger growth than the combined plant-based “milk” sector since its introduction in 2015 (for more details, please see the story on page 7 of last week’s issue).

Other beverage milk products mentioned by Brown, CoBank or both as showing some potential included lactose-free milk, organic milk, grass-fed milk, flavored milk and a2 brand milk. But increases in all of these products will struggle to make up for the decline in sales of traditional, plain white milk.

As far as the “eat more milk” portion of Brown’s observation, well, the supporting statistics are pretty easy to find, especially when it comes to cheese.

For example, back in 1965, when per capita consumption of fluid milk and cream was close to 300 pounds, per capita cheese consumption was actually below 10 pounds (9.6 pounds, to be exact). And the US was producing less than 1.8 billion pounds of cheese annually.

In 2016, per capita cheese consumption reached a record 36.62 pounds, and in 2017, cheese production reached a record 12.66 billion pounds. Obviously, a lot of that milk previously consumed in liquid form is now being consumed in the form of cheese.

Yogurt also helps illustrate this “eat more milk” trend. USDA’s National Ag Statistics Service didn’t even start tracking yogurt production until 1989, when it totaled about 912 million pounds. Also in 1989, beverage milk sales totaled just under 55 billion pounds (almost exactly what they totaled in 2010), and per capita fluid milk consumption was 222 pounds (this number is just for beverage milk products, not the additional “fluid milk” figures reported for 1965 as explained earlier).

By 2016, per capita yogurt consumption had risen to 13.7 pounds (down from the record 14.9 pounds set in 2013 and 2014), and yogurt production last year totaled 4.48 billion pounds, up 0.4 percent from 2016 but still below 2014’s record output of 4.757 billion pounds.

So some of that milk previously consumed in beverage form is now being consumed in the form of yogurt, although not quite as much as a few years ago.

Looking at the “big picture,” it should be noted that, back in 2000, beverage milk sales reached 55.5 billion pounds, their highest level in well over 25 years and also the highest level since then. US milk production that year totaled 167.4 billion pounds.

In 2016, beverage milk sales dropped below 50 billion pounds, while US milk production reached a then-record 212.4 billion pounds. In other words, from 2000 to 2016, US milk production grew by 45 billion pounds while beverage milk sales declined by 5.8 billion pounds.

That’s due in part to products like cheese and yogurt, but it’s also due in part to exports. Certainly the “eat more milk and drink less” observation applies to the domestic market, but it really, really applies to the export market, simply because the US doesn’t really export any fluid milk.

But the US certainly exports a lot of manufactured dairy products, ranging from nonfat dry milk/skim milk powder and cheese to dried whey and lactose. Exports on a skim-solids basis rose from 751 million pounds in 2000 to 3.5 billion pounds in 2016, while exports on a fat basis increased from 1.6 billion pounds in 2000 to 8.4 billion pounds in 2016.

Mike Brown is correct: we will continue to eat more milk and drink less, and export milk in many forms, but not liquid
.

 

Something’s Not Healthy In FDA’s Nutrition Innovation Strategy

There are definitely some intriguing aspects to the Nutrition Innovation Strategy that was announced back in late March by Scott Gottlieb, commissioner of the US Food and Drug Administration. But there’s still something about this strategy that’s not quite right.

Among other things, the strategy includes modernizing the federal standards of identity to provide more flexibility for the development of “healthier” products, while making sure consumers have accurate information about these food products.

Gottlieb last week specifically mentioned two dairy-related standards. First, the standards for certain cheeses don’t always permit the use of salt substitutes, which could be used to lower the sodium content of cheese.

And second, FDA has been asked to modernize the standard of identity for yogurt to support the innovations occurring in this food category, Gottlieb added (for more details, please see the story on our front page last week). Yes, FDA was indeed asked to modernize the yogurt standard — in a petition filed back in February of 2000 by the National Yogurt Association.

So modernizing standards of identity is certainly a good idea, maybe even a great idea, certainly an overdue idea. So is another idea mentioned by Gottlieb: FDA wants to know if consumers are being misled in ways that can adversely affect their dietary decisions when certain products qualify themselves with terms such as milk, but are made from ingredients that don’t reflect the traditional assumptions about how products labeled that way are derived.

Depending on what FDA may learn, the agency “may step up our enforcement efforts against false or misleading labeling,” Gottlieb said.
Those positives aside, what really bothers us about this Nutrition Innovation Strategy are the numerous references (by both FDA and Gottlieb) to “healthy” foods.

FDA will be soliciting input at a meeting slated to be held July 26th in Rockville, MD (and accepting written comments after that), on ideas for new claims on food labels that could be easier to decipher and would encourage innovation to produce more healthful foods, Gottlieb noted. One example is the definition of “healthy.”

It’s been almost two years since FDA started a public process to redefine the “healthy” nutrient content claim for food labeling (which means the process was started under the Obama administration, and before Gottlieb became FDA commissioner, and so could now be considered a “bipartisan” undertaking).

This regulatory proceeding garnered a fair amount of interest from industry and others; FDA received more than 1,100 comments in response to its request for input. And there was a fair amount of disagreement in the comments submitted to the agency, with some going so far as to recommend that FDA stop allowing the term “healthy” on food labels.

That’s actually a good idea, for the simple reason that the list of foods deemed “healthy” continues to evolve. It may be recalled that, at one time (and for decades), margarine was considered a healthy alternative to butter. Today, partially hydrogenated oils (the key ingredient in hard margarines) aren’t even Generally Recognized as Safe (GRAS), let alone healthy.

But FDA is apparently not going to be content simply defining the word “healthy.” As part of its work to update that definition, FDA is also soliciting input on whether adding a standard “healthy” icon could be valuable to consumers.

This reflects a growing interest in front-of-package labeling, which is just not a good idea. As Michael Jacobson, longtime executive director of the Center for Science in the Public Interest, put it back in 2011: “The whole point of front-label nutrition information or symbols should be to convey quickly and simply how healthful a food is.”

But how “healthful” a food is can be pretty complicated, if for no other reason than the science is hardly settled and is constantly changing. As Prof. John Lucey and Rebekah McBride of the Wisconsin Center for Dairy Research put it in their comments to FDA regarding the definition of healthy, “science is now finding that the chemistry of cheese, or the cheese matrix, is a unique type of food product and an excellent vessel for important nutrients.”

But what is the likelihood that full-fat cheese will be considered a “healthy” food under any future FDA definition? Pretty slim.

Gottlieb also mentioned that FDA wants to empower consumers with “modernized food labels” that will make it easier to inform better choices while at the same time providing incentives for food manufacturers to produce the “more nutritious products consumers demand.”

The problem is, that’s already been tried, and it was an epic failure. Almost 25 years ago, the Nutrition Facts label became mandatory on most food products, and that label was clearly very anti-fat (and, by extension, anti-dairy).

The new Nutrition Facts label is slightly better, in that it no longer includes a declaration of “Calories from Fat,” among other changes. But it continues to emphasize fat and cholesterol as nutrients to avoid.

And it should be kept in mind what the result of almost 25 years of the Nutrition Facts label has been: rising rates of obesity and type 2 diabetes, among other things. Does Gottlieb really believe FDA’s “modernized food labels” will make it easier to inform “better choices?”
FDA’s Nutrition Innovative Strategy certainly contains some positives, but it also includes plenty of potential negatives.

And some of these negatives could prove to be unhealthy for the dairy industry.

An Interesting, But Flawed, Food Safety Consolidation Proposal

One huge advantage George Washington had when he became the first US President is that he more or less started with a clean slate. That is, it was difficult for him to propose government reforms or reorganizations because there was nothing to reform or reorganize.

But pretty much every President since Washington has tried his hand at reforming the federal government. Specific to agriculture, this usually takes the form of shifting some responsibilities and functions within the US Department of Agriculture; and specific to food safety, this generally takes the form of shifting some responsibilities and functions within the US Food and Drug Administration.

Of course, President Washington had no such opportunities, since USDA wasn’t established until President Lincoln’s first term (in 1862, to be exact), and the modern FDA wasn’t established until President Teddy Roosevelt’s second term (in 1906, to be exact).

Notably, FDA’s origins actually date back to a single chemist at USDA back in 1862. FDA in its early years was known as the Division of Chemistry and then (after July 1901) the Bureau of Chemistry. That agency’s name changed to the Food, Drug, and Insecticide Administration in July 1927. Three years later, the name was shortened to the current Food and Drug Administration.

FDA remained under USDA until 1940, when it was moved to the new Federal Security Agency. In 1953, FDA was again transferred, to the Department of Health, Education, and Welfare. In 1980, the education function was removed from HEW to create the Department of Health and Human Services, FDA’s current home.

That brief history alone tells you a lot about past government reorganization efforts, since changes at FDA (or its predecessor agencies) took place during the administrations of Calvin Coolidge (1927), Franklin D. Roosevelt (1940), Dwight D. Eisenhower (1953) and Jimmy Carter (1980).

Meanwhile, the idea of consolidating federal food safety functions into a single agency has been floating around Washington (the city) since at least President Nixon’s first term (maybe this should be referred to as reconsolidating federal food safety functions, since FDA’s origins are in USDA).

Indeed, according to a 1994 report from the General Accounting Office (GAO, which is now known as the Government Accountability Office), the concept of consolidating food safety activities was debated in 1972 in connection with a proposed bill to transfer FDA’s responsibilities, including its food safety activities, to a new independent agency called the Consumer Safety Agency.

The GAO’s position in 1994 was similar to the one it voiced in 1972; that is, it believed that a single independent food safety agency was the preferred approach, but also recognized the difficulties in establishing a new government agency.

The GAO also believed in 1994, as it did in 1972, that it is important for the federal food safety mission to be housed in an agency that is not charged with responsibilities that might conflict, or appear to conflict, with its willingness to aggressively administer its public health protection responsibilities.

That meant keeping food safety from being consolidated into USDA. For example, the GAO in 1993 testified before a House subcommittee that food safety inspections should not be consolidated under USDA because of the real or perceived conflict of interests with its role of promoting agriculture. Moving responsibility for all food safety to agriculture “would likely compound this problem.”

All of this brings us to June of 2018, when (as reported on our front page last week) President Trump proposed reorganizing USDA’s Food Safety and Inspection Service and the food safety functions of FDA into a single agency within USDA (by contrast, President Obama had proposed, in 2015, to consolidate FSIS with FDA’s food safety components to create a new agency at HHS).

Trump deserves credit for at least recognizing that a problem exists with federal food safety oversight. Indeed, he deserves credit for recognizing that the entire executive branch of the federal government needs to be reorganized, which is why his reorganization plan ran some 132 pages (and most of the reorganization proposals, including the food safety proposal, only took up three or four pages).

But it doesn’t seem like moving FDA’s food safety functions to USDA is the way to go. Among other things, as the GAO concluded long ago, housing a new Federal Food Safety Agency within USDA would present a potential conflict, given USDA’s role of promoting agriculture. The public is already skeptical enough of food safety, and the federal government, without putting food safety in the hands of the agency who’s main mission is to promote agriculture.

The GAO itself has believed, for decades, that a single, independent food safety agency is the preferred approach to reorganizing USDA and FDA food safety functions. Support for an independent food safety agency has also been voiced by some consumer organizations.

Legislation has also been introduced in both the House and Senate in recent years that would have created an independent Food Safety Administration, but since the bills have been introduced by Democrats, with only Democrats co-sponsoring the measures, they’ve gotten nowhere.

Trump’s proposal is also probably heading nowhere, given that Congress already has other, more pressing priorities, including passing a farm bill. Maybe what’s needed is for a President to propose what the GAO recommends: an independent food safety agency.

25 Years Of Dairy Futures Success

It’s kind of hard to believe, but (according to an item under “25 Years Ago” in our “From Our Archives” column in last week’s issue) it’s been 25 years since the modern era of dairy futures was launched in the US. And it’s also kind of hard to believe how successful dairy futures have become in the past quarter-century.

We refer to this as the “modern” era of dairy futures because dairy futures were actually traded as far back as the late 19th century. The Chicago Butter and Egg Board was founded in 1898 and changed its name to the Chicago Mercantile Exchange in 1919. Not only were butter futures contracts traded there, cheese futures were as well, at least for a couple of decades.

But by the early 1970s, dairy futures were dead, at least in part due to a lack of price volatility in the dairy markets. We’ve mentioned in this space from time to time the relative lack of cheese price volatility back in the early to mid 1980s, when there were maybe half a dozen or fewer price changes all year on the old National Cheese Exchange.

Things started to change, in the price volatility arena, around 1989. That year, among other things, the NCE market opinion for 40-pound Cheddar blocks reached a record high of $1.5450 per pound in the final two months of the year (after bottoming out at $1.1775 a pound earlier in the year) and California nonfat dry milk prices rose from around 80 cents a pound early in the year to close to $1.50 a pound late in the year.

By comparison, and in contrast to today’s dairy markets, the CME cash market Grade AA butter price back in 1989 stayed at $1.3050 per pound from the beginning of the year until July, increased all the way to $1.3350 a pound, then fell to $1.0775 a pound at the end of the year.

Exactly half of the eight price changes for Grade AA butter at the CME in 1989 took place in December (keep in mind that trading was conducted just once a week back then).

Against that price volatility backdrop, management of the New York-based Coffee, Sugar and Cocoa Exchange recommended to the CSCE’s new products committee in 1992 that the CSCE go forward with trading in futures contracts for Cheddar cheese and nonfat dry milk. Trading officially got underway on June 15, 1993.

Things were a bit different in the dairy futures market back then, to put it mildly. Not only was trading conducted only at the CSCE (the CME got involved in the “modern” dairy futures a couple of years later), but both the Cheddar and NDM futures contracts required delivery of the commodity (for example, the Cheddar contract originally called for delivery of 40,000 pounds of cheese in 40-pound blocks; delivery months were February, May, July, September and November).

Things got off to a pretty slow start with the CSCE’s Cheddar cheese and NDM futures and options contracts, which is understandable given the industry’s lack of familiarity with futures and options trading (and with price volatility, for that matter).

There were also numerous changes to the dairy futures market in those early years, including the introduction of the fluid milk futures both at the CSCE and the CME (in late 1995 and early 1996, respectively), the launch of several other futures contracts on both the CSCE and the CME, and the switch from delivery contracts to cash-settled contracts.

In addition, in 1997, the NCE closed its doors, and the cheese industry’s cash market moved from Green Bay, WI, to the CME. In 1998, the CME went from a weekly cash cheese market to a daily cash cheese market.

And then in June of 2000, seven years after the modern era of dairy futures was launched, the CSCE’s new parent company, the New York Board of Trade, decided to close its dairy futures and options markets. At that time the vast majority of dairy futures trading was taking place in the form of milk and butter futures at the CME.

Today, the dairy futures markets appear to be thriving, as indicated by at least three different measures. First, the CME now offers several dairy futures and options contracts, including Class III milk, Class IV milk, cheese, butter, dry whey and nonfat dry milk. These contracts trade almost 24 hours a day on CME Globex.

Second, open interest in these dairy futures and options contracts is pretty impressive. For example, open interest in cash-settled cheese futures is currently around 24,000, while open interest in Class III milk futures is over 22,000.

And third, the growth in dairy futures and options trading hasn’t just been limited to the US in recent years. For example, NZX, New Zealand’s exchange, launched a whole milk powder futures contract back in October 2010, followed by skim milk powder and anhydrous milkfat futures contracts in early 2011. Butter futures were added in late 2014, and milk futures (based on kilograms of milk solids) were most recently added.

Meanwhile, in the European Union, the European Energy Exchange currently offers butter, skim milk powder and whey powder futures, and plans to launch a liquid milk futures contract in August.

Some 20 years ago in this space, when marking the fifth anniversary of the modern dairy futures, we offered the following conclusion: “Five years after they were launched, dairy futures have begun to find some success, and recent activity — both on and off the exchanges’ floors — indicates that the next five years will see the dairy futures become a much more important and integral part of dairy pricing and risk management strategies.” Maybe we should have said “next five decades.”

Vegan ‘Butter’ And Other Strange Foods With Lots Of Potential

It was another record-setting IDDBA show in New Orleans this week, and another opportunity to see some of the new and innovative products and packages being launched by cheese and other companies from around the US and around the world.

Scattered around the record-setting exhibits were several companies cashing in on the plant-based foods craze. Several of these companies were sampling vegan dairy alternatives ranging from cheese to butter to yogurt.

So the IDDBA show offered an interesting opportunity to take a look at some of these products, and also to take a taste or two of a few of them. And in turn we arrived at a couple of conclusions about these products.

First, it is somewhat surprising that these dairy alternatives are doing as well as they are. Among the selling points for at least a couple of these products are relatively simple ingredient lists and the sustainability of those products.

Well, when it comes to simple ingredient lists, it’s difficult if not impossible to beat the real thing. For example, The “European Style Cultured Vegan Butter (Organic)” from Miyoko’s (based in Sonoma, CA) lists the following ingredients: organic coconut oil, filtered water, organic sunflower oil, organic cashews, organic sunflower lecithin, sea salt and cultures.

By contrast, Organic Valley’s cultured unsalted butter contains pasteurized organic sweet cream, and microbial cultures. That’s it.

Of course, it’s hard to get overly creative when producing real dairy butter, since Congress decided, way back in 1923, to define butter as being made exclusively from milk or cream, or both, with or without salt, with or without additional coloring matter, and containing not less than 80 percent milkfat.

So when it comes to ingredient statements, it seems like it will be pretty difficult for plant-based dairy alternatives to compete with real dairy products in terms of simplicity.

Plant-based dairy alternatives are also being touted as more sustainable than traditional dairy products, and by more sustainable, the implication seems to simply be that these alternatives aren’t derived from animals. But are they really that sustainable?

Last time we checked, there wasn’t a whole lot of coconut oil being produced in the US, so the leading ingredient in some of these vegan products is imported from tropical regions. Meanwhile, milk is still produced in all 50 US states, so real dairy butter could be at least somewhat more sustainable than its vegan competitors.

Terminology is another area where dairy products have a long-term advantage. As noted earlier, butter was actually defined by an act of Congress almost 100 years ago. Many cheese products are covered by standards of identity, USDA grade standards, USDA Commercial Item Descriptions, and more.

Plant-based dairy alternatives? At this point, these products are mostly just “borrowing” terminology from real dairy products.

That’s a somewhat risky proposition, from at least two perspectives. First, FDA Commissioner Scott Gottlieb has stated at least once in recent months that his agency will be taking a closer look at plant-based foods labeled with dairy-specific terms.

And second, legislation introduced in both the US Senate and House early last year would, among other things, prohibit the sale of any food that uses the name of a dairy product, is not the milk of a hooved animal, is not derived from such milk, and does not contain such milk as a primary ingredient.

In other words, there is at least a small chance that sometime in the not-too-distant future plant-based foods will no longer be allowed to use dairy terms on their products. And then products like “Vegan Butter” will have to be marketed as something like “Vegan Non-Dairy Spread,” or some other appetizing nomenclature.

Finally, at least some of these plant-based foods have another problem: they don’t taste all that great. For example, the aforementioned “vegan butter,” whose first ingredient was coconut oil, had an interesting aftertaste: coconut. Not exactly what long-time butter lovers are looking for.

At least some of these products also have textures that might diplomatically be described as “different.” A cheese alternative didn’t exactly have a creamy texture, which might be a negative for at least a few consumers.

All of these negatives aside, we have little doubt that plant-based foods will continue to do well, and continue to grow, in the future. There are several reasons for this conclusion, but we’ll mention just a couple of them here.

First, the exhibitors that were sampling and selling plant-based dairy alternatives seemed to be attracting some pretty nice crowds at the IDDBA show this week.
Granted, some of the folks visiting these exhibitors were just curious, but others are responding to consumer demand and exploring the products that are now available for those trying to avoid dairy and other animal-based products.

Second, consumers are, to a large extent, pretty illogical. For many of us, a coconut aftertaste in a spread is a pretty big negative, but for others, it’s a small price to pay to avoid any food product with direct ties to an animal.

Someday, maybe consumers will start to figure out that these plant-based dairy alternatives aren’t all they’re cracked up to be, particularly in the nutrition department, where good old cow’s milk offers much more nutrient density per glass than do the plant-based milks made from everything from almonds to oats.

But for now, plant-based dairy alternatives have plenty of negatives, and lots of potential.

EU vs. New Zealand, Australia On GIs Should Be Interesting

When it comes to protecting its many geographical indications for cheese, the European Union has done a pretty nice job in several of its recent trade agreements. That means upcoming trade talks between the EU and both Australia and New Zealand should be mighty interesting when it comes to the subject of GIs.

The EU arguably started its recent momentum on GIs when it finalized its Comprehensive Economic and Trade Agreement (CETA) with Canada. CETA includes protections for a number of EU agricultural GIs in Canada.

Among other things, CETA won’t affect the ability of current users of Asiago, Feta, Fontina, Gorgonzola and Munster in Canada to continue using those names, but future users will be able to use the names only when accompanied by expressions such as “kind,” “type,” “style,” “imitation” or the like.That’s a nice accomplishment for the EU (but not for anyone else).

Following CETA, the EU has negotiated new or renegotiated old trade agreements with, among other countries, Japan and Mexico.

As far as Japan is concerned, the Consortium for Common Food Names last December welcomed the Japanese government’s decision to assure the continued general use for many generic food terms as part of its trade agreement with the EU, even as CCFN seeks further assurances on several common terms still at risk. And Japan will provide a transition period of seven years for prior users of certain terms, including cheese names Asiago, Feta, Fontina and Gorgonzola, after which the EU could have sole rights to these names.

Meanwhile, the EU and Mexico back in April reached a new agreement on trade that will ensure the protection of some 340 EU GIs. While full details of that agreement haven’t yet been released, the CCFN and others said Mexico appears poised to enact new restrictions on the use of common cheese names such as Parmesan, Munster and Feta for products sold in Mexico.

What Canada, Japan and Mexico have in common is that they aren’t exporters of cheese or other dairy products (with the notable exception of Canada’s recently expanding exports of skim milk powder), and therefore appear willing to trade away some dairy market access (in the form of GI protections, reduced tariffs, etc.) in exchange for concessions in other areas. But that’s not always going to be the case for the EU.

Case in point: the Transatlantic Trade and Investment Partnership (TTIP), which is being negotiated between the EU and the US. Well, it was being negotiated between the EU and the US.

According to a recent US-EU joint report on TTIP progress to date, the EU and US “have made considerable progress” in negotiating the TTIP agreement since the talks were launched in July 2013. But arguably the most important point to note here is the date of that joint report: Jan. 17, 2017, three days before President Trump took office. It’s safe to say these talks aren’t going any further anytime soon.

And that’s too bad, because the GI issue was shaping up to be a key issue in the TTIP talks. For example, in 2014, numerous members of both the US House and Senate urged Ag Secretary Tom Vilsack and US Trade Representative Michael Froman to work aggressively against the EU’s global efforts to impose restrictions on the use of many common food names under the guise of GI regulations.

GIs were included in TTIP, as the EU believed that it would have been beneficial for both parties to provide adequate protection to this essential intellectual property right, the European Commission noted in a March 2016 guide to the EU’s GI proposal in TTIP.

But there wasn’t exactly unanimity in the EU as far as GIs and the TTIP were concerned; GIs “are of no value for Irish dairy exports,” the Irish Farmers Association noted, adding that it is of “critical importance,” from an Irish dairy perspective in particular, that negotiations on GI recognition are undertaken without impacting negatively on the parallel discussions on access to the US market.

While EU-US trade talks have ended, at least for now, the EU did recently decide to move forward with negotiations on trade agreements with New Zealand and Australia, and it appears that GIs will be a pretty contentious issue in those talks.

According to the EU, Australia currently maintains some measures that negatively impact EU dairy exports (including “insufficient protection” of GIs), while New Zealand also currently “does not provide sufficient protection” of GIs for EU dairy products. The EU’s free trade agreements with those countries are expected to provide the necessary frameworks to address such issues more effectively. We shall see.

Dairy Companies Association of New Zealand noted that the New Zealand dairy industry has an interest in ensuring the “ongoing ability to use common cheese names,” and has been disappointed at the loss of New Zealand’s ability to export Feta, Parmesan and Gruyere to the EU.

Of “particular concern” to the Australian Dairy Industry Council are efforts to restrict the use of common cheese names, “which could put Australian dairy producers at a disadvantage to their European counterparts.”

Obviously, the EU, New Zealand and Australia have different positions when it comes to GIs. It will be mighty interesting to see how GIs are dealt with in these upcoming trade negotiations
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Does More Dairy Trade Really Mean Less Price Volatility?

In recent years, we’ve heard the following observation several times: increased dairy trade will mean less price volatility.

For example, a couple of years ago, Dairy Companies Association of New Zealand had this to say about a proposed New Zealand/European Union free trade agreement (which is closer to becoming a reality, as reported on our front page last week): “A high quality EU-New Zealand FTA would also contribute to a deepening of the globally traded market for dairy products, which is critical for easing dairy market volatility.”

But does increased dairy trade really ease dairy market volatility? Frankly, we’re skeptical.

One (probably overly simplistic) way of looking at this, from a US perspective is to go back maybe 30 years or so and see how dairy trade and price volatility have evolved.

So, for example, back in 1985, US dairy exports were valued at under half a billion dollars, while dairy imports were valued at slightly over $600 million.

Cheese imports that year totaled just over 300 million pounds, which was a pretty hefty volume considering that US cheese production that year was just over 5 billion pounds (in 2017, to put this in some perspective, US cheese imports totaled just over 400 million pounds, while cheese production was a record 12.7 billion pounds). Cheese exports back in 1985 totaled all of about 34 million pounds.

So how volatile were cheese prices back in 1985? Not very. The “market opinion” for 40-pound Cheddar blocks at the old National Cheese Exchange that year ranged from a low of $1.2125 per pound to a high of $1.3450 per pound. That low of $1.2125 was first reached on June 21, 1985, and lasted until Sept. 27, when the price “jumped” to $1.2175 for three weeks (the NCE traded just once a week, on Friday mornings), then fell back to $1.2175 until the last trading session of the year, when prices again “jumped” all the way up to $1.2325 a pound.

And the federal order Class III price that year (when the Class III price was still known as the Minnesota-Wisconsin price) ranged from a low of $11.08 per hundredweight in August to a high of $12.40 per hundred in January.

Fast-forward to 2014, when US dairy exports reached a record $7.1 billion in value, cheese exports reached a record 810 million pounds, cheese imports totaled about 363 million pounds (the highest level since 2008), and US cheese production was a record 11.5 billion pounds.

How volatile were prices in that record-shattering year for US dairy exports? Pretty volatile. The CME 40-pound Cheddar block price was above $2.00 a pound for a good chunk of the year, including $2.3600 a pound in early February, $2.4325 in late March and a record $2.4500 in September.

The block price eventually bottomed out in 2014 at $1.4950 for a couple of days in late December, so the block price range that year was almost $1.50 a pound from high to low. And the Class III price ranged from a low of $17.82 per hundred in December to a high of $24.60 per hundred in September.

So from that we can conclude that US prices were pretty volatile in the record-setting export year of 2014. Okay, they were extremely volatile.
So is it fair to say that increased trade leads to greater market volatility? Well, not really. And last year provides a pretty nice illustration.

In 2017, US dairy exports reached about $5.4 billion in value, the highest level since 2014, while cheese exports totaled 750.3 million pounds, the second-highest level ever, after 2014. As noted earlier, US cheese imports last year totaled just over 400 million pounds.

As far as price volatility is concerned, the CME 40-pound Cheddar block cash market price last year ranged from a low of $1.3600 a pound in March to a high of $1.8500 a pound in February. And the Class III price last year ranged from a low of $15.22 per hundred in April to a high of $16.88 per hundred in both February and November.

In other words, despite pretty impressive export numbers last year, US cheese and milk prices weren’t really all that volatile (from a 21st century perspective, not a 1985 perspective).

So what does all of this prove as far as dairy trade and market volatility are concerned? Well, in addition to the obvious (that you can pick out statistics from any specific year or two to prove a point), there are at least three points that are worth keeping in mind here.

First, no matter what dairy trade is doing, prices are going to be volatile. Just since the beginning of this year, the CME block Cheddar price has ranged from a low of $1.4375 a pound back in January to a high of $1.7025 a pound in May. It’s been pretty common lately for the block price to both increase and decrease during a single week.

Second, no matter what prices are doing, dairy trade is going to be fairly volatile. Just in the last six years, US dairy exports have ranged in value from $4.7 billion in 2016 to $7.1 billion in 2014, while cheese exports have ranged from a low of 572 million pounds in 2012 to a high of 810 million pounds in 2014.

Third, it appears likely that dairy trade will continue to increase in the future, if for no other reason than because leading dairy exporters such as New Zealand and the European Union continue to negotiate and conclude trade agreements with leading dairy importers such as Japan and Mexico.

The US seems to be falling behind on the trade pact front, which may or may not bode well for US dairy exports, and dairy imports, in the future.
Price volatility is here to stay, as is a pretty volatile, and vibrant, dairy trade environment.

Midwest Cheese Manufacturing Makes A Nice Comeback

When we started publishing our Dairy Production Extra supplement back in 1995, one of our goals (in addition to tracking key statistical dairy trends) was to track the ongoing westward shift in US dairy product manufacturing.

That’s pretty much what was happening then, and for the next decade or so. For example, in 2007 we reported that the West in 2006 produced more than 4 billion pounds of cheese and increased its share of US cheese output to almost 44 percent. The West outproduced the Central region by 145 million pounds in 2006.

But things have slowly started to turn around in the US cheese manufacturing sector in recent years. Evidence of that can be seen in numerous places in this year’s Dairy Production Extra, at both the regional and state levels.

At the regional level, the Central region’s share of US cheese production last year was 46.2 percent. That was up not only from 2016’s share of 45.1 percent and 2015’s 44.7 percent, but also up from 2007’s 42.0 percent. Yes, it’s still below where it was in 2000 (48.4 percent) and 1991 (64.9 percent), but the Central region’s share of US cheese production has certainly rebounded from where it was a decade ago.

Meanwhile, the Central region’s share of American-type cheese production last year climbed back above 50 percent, after falling to 42.5 percent a decade ago. Again, it’s not as high as it was in 2000 or in 1991, but it’s rebounded pretty significantly over the last decade.

Cheddar production in the Central region jumped 16.7 percent last year, and its share of US Cheddar output rose above 50 percent, to 50.3 percent. Back in 2006, it was under 45 percent.

Cheese plant numbers in the Central region have also bounced back in recent years. Last year, the region was home to 239 cheese plants, 10 more than in 2014 and 36 more than in 2005. The region’s cheese plant numbers have experienced both ups and downs in recent years, but right now there’s a definite upswing.

At the state level, Wisconsin set yet another cheese production record last year, at 3.366 billion pounds. That was the third straight year in which Wisconsin’s cheese output topped 3 billion pounds. The state’s cheese production has increased by more than a billion pounds since 2004, and hasn’t declined since 2001.

To put that in a bit of historical perspective, Wisconsin’s cheese production first topped 2 billion pounds back in 1992, but by 2005, had only increased by 353 million pounds. So a 1-billion-pound-plus cheese production increase between 2004 and 2017 is pretty impressive.

Another way to look at how Wisconsin’s cheese production has fared in recent years is that, in 2017, its share of US output was 26.6 percent, unchanged from 2000. Suffice it to say that in most if not all years between 2001 and 2017, Wisconsin’s share of US cheese output was under 26.6 percent (for example, 24.9 percent in 2011 and 25.2 percent in 2007).

Also last year, Wisconsin’s American-type cheese production totaled 1.017 billion pounds, the first time the state’s American-type cheese output topped a billion pounds since way back in 1987. As recently as 2011, Wisconsin’s American-type cheese output was under 800 million pounds.

Italian cheese production in Wisconsin last year reached a record high of 1.702 billion pounds. The state’s Italian cheese production has more than doubled since 1996, and has risen by more than a billion pounds since 1990. Within the Italian cheese category, Wisconsin’s Parmesan output has more than tripled just since 2009.

Meanwhile, Minnesota last year set a new cheese production record, at 713 million pounds. That was the first time Minnesota ever produced more than 700 million pounds, and it broke the state’s cheese production record of 693.1 million pounds, set in 2000.

South Dakota also set a new cheese production record last year, at 282.3 million pounds. And while Iowa’s 2017 cheese production, at 256.7 million pounds, remained well below its record output of 293.2 million pounds, the state’s production has definitely been on the upswing after falling to 147.2 million pounds in 2007.

While there are certainly some encouraging and even impressive signs of cheese production growth in the Central region of the US, it should be kept in mind that the West region is hardly fading away. Indeed, three of the top five cheese-producing states are located in the West region: California, ranked second behind Wisconsin; Idaho, ranked third; and New Mexico, ranked fifth.

Yes, cheese production did decline in two of those three states in 2017 (California and New Mexico). But those three states still managed to produce over 4.2 billion pounds of cheese last year, which is more than the entire US produced as recently as 1980.

One interesting policy note is worth mentioning here: while pretty much all the milk produced in the Central region is regulated under the federal order program, the three top cheese-producing states in the West are regulated, or not regulated, in different ways: California has its own state order, New Mexico is part of the Southwest federal order, and Idaho is largely unregulated.

That will change later this year, when California becomes the 11th federal order. It will be interesting to see how California’s cheese production is faring after five or 10 years under the federal order system. The state’s history of cheese production growth while regulated by its own state order is pretty impressive, to say the least.

The US cheese production landscape continues to change, and will look as different 10 years from now as it did 10 years ago.

 

Drop In Class I Use Points To Need For Federal Order Reforms

There are few guarantees in the dairy business, but there’s at least one thing that’s pretty close to guaranteed: Class I will continue to become less important in the federal milk marketing order program. And here’s a related guarantee: the less important Class I becomes, the more important reforming the federal order system becomes.

There are at least two ways to look at the importance, or lack thereof, of Class I (beverage milk) in the federal order program: the volume of producer milk used in Class I products, and the Class I utilization percentage. Both have been declining in recent years, and at least one will continue declining in the future.

Let’s start with the volume of producer milk used as Class I. This volume actually increased for a number of years, from 40.1 billion pounds in 1970 (when the volume of milk pooled on the 62 orders in effect at that time totaled about 65 billion pounds) to 45 billion pounds in 1991 (when 103 billion pounds of milk was pooled on 40 federal orders).

For the next 20 years, the volume of milk used in Class I didn’t vary all that much, reaching a high of 46.0 billion pounds in 2002 and a low of 44.4 billion pounds in 2011. Keep in mind that this includes the period when federal order reforms were discussed, debated and eventually implemented, starting in 2000. In 1999, when USDA issued the final federal order reform rule, 45.2 billion pounds of milk was used in Class I.

But the volume of milk used in Class I milk has dropped pretty dramatically in recent years, to 42.7 billion pounds by 2013 and then to 40.642 billion last year. If that volume drops below 40 billion pounds this year, it will be the first time that’s happened since 1969.

The percentage of producer milk used in Class I has been declining for decades. It was above 60 percent every year from 1955 through 1970, and bounced back above 60 percent again in 1973.

But that Class I utilization percentage has been falling steadily since then, dropping below 50 percent in 1980, and then below 40 percent in 2000 (which, as noted earlier, was the first year in which federal order reforms were in effect).

The Class I utilization percentage did rebound in 2003 and 2004, to 41.5 percent and 43.6 percent, respectively, but both of those increases were due to the large volume of milk that was depooled in those years.

This point can be illustrated by the fact that the volume of milk pooled in federal orders fell from 125.5 billion pounds in 2002 to 110.6 billion pounds in 2003 and then to 103 billion pounds in 2004; and the volume of milk used in Class I fell from 46 billion pounds in 2002 to 45.8 billion pounds in 2003 and then to 44.9 billion pounds in 2004.

By 2005, the Class I utilization percentage was back under 40 percent, at 38.9 percent, despite the fact that the volume of milk pooled on federal orders, at 114.7 billion pounds, was still more than 10 billion pounds below the volume in 2002.

In 2010, when the volume of milk pooled on federal orders finally topped the 2002 record, the Class I utilization percentage was down to 35.4 percent. It fell under 33 percent in 2013, and then last year dropped slightly below 30 percent, to 29.99 percent.

All of these statistics come with one big caveat: the new California federal order. That federal order is expected to go into effect by Nov. 1, 2018, and will, among other things, greatly increase the volume of milk pooled on federal orders, raise the volume of milk used as Class I, and reduce the percentage of milk used as Class I (California’s Class 1 use in 2017 was just 12.8 percent).

What does all of this have to do with the need to reform the federal order program? Well, if you read through some of the federal order-related studies that have been published over the years, it becomes clear that a key purpose of federal orders is to ensure an adequate supply of milk for fluid purposes.

For example, here’s what the US GAO had to say back in 1988 (when the Government Accountability Office was known as the General Accounting Office):

The pricing policies established by milk marketing orders were intended to encourage and maintain a locally produced supply of grade A fluid milk. These policies are no longer needed.

As noted, this report was issued back in 1988, when Class I utilization was 43.1 percent and the volume of milk used in Class I was still rising (it was 43.1 billion pounds that year). Would the GAO’s conclusion be any different now?

More recently, in its final report submitted to the US secretary of agriculture more than seven years ago, USDA’s Dairy Industry Advisory Committee recommended (on a 17-0 vote) that the secretary appoint a committee to review the implications of federal orders.

As noted earlier, there are very few guarantees in the dairy industry, but there are at least a couple more near-certainties when it comes to the federal order program. First, the federal order program isn’t going to go away anytime soon; indeed, with California joining the federal order program later this year, federal orders are arguably more entrenched than they’ve ever been.

Second, federal orders also aren’t going to change anytime soon. Yes, the new California order will change some things, and expanding multiple component pricing to the Southeast and Appalachian orders will also change some things, but fundamentally the federal order system will enter the third decade of the 21st century functioning pretty similarly to the first two decades of this century.

If nothing else, declining Class I use and the passage of time mean this would be a great time to study federal order program reforms.

 

Will California Ever Get Back To A 20% Production Share?

It’s become sort of a cliche in the US dairy industry in recent years: California is the nation’s leading milk producer and accounts for more than 20 percent of US milk production.

Just to cite one example: back in February of 2015, when California Dairies, Inc., Dairy Farmers of America and Land O’Lakes petitioned USDA to call a hearing to promulgate a federal milk marketing order for the state of California, the following was the first sentence in the third paragraph (and the first sentence under the “Background” subhead) of their request to USDA:

The state of California is the largest milk producing state in the US with more than 20% of national production.

Well, a funny thing happened between the time that petition was filed and when the new California federal order becomes effective late this year (based on the fact that, as reported on our front page this week, the three co-ops all voted in favor of a California federal order): California’s share of national milk production slipped below that 20 percent level.

In fact, based on figures released last week by USDA’s Economic Research Service (and reported in a separate story on our front page this week), California’s share of US milk production was actually below 19 percent last year, the first time that’s happened since 1999.

Before getting into the question of whether California can ever get back to producing 20 percent of the nation’s milk, it’s worth looking back to see how impressively California’s share of US milk production has grown over the years.

We went back to 1980, when California’s milk production, at 13.6 billion pounds, was roughly a third of what it is today. That year, California’s share of US milk production stood at 10.6 percent.

From there, of course, California’s milk production increased impressively, if not spectacularly, for almost three decades.

Indeed, California’s milk production rose every year between 1980 and 2009, reaching 20 billion pounds in 1990, topping 30 billion pounds in 1999 and then surpassing 40 billion pounds in 2007.

As its milk production grew, so did California’s share of US milk production. In 1990, when it first topped 20 billion pounds of output, California’s share of US milk production had risen to 14.1 percent, a pretty impressive increase since 1980.

Three years later, in 1993, California passed Wisconsin to become the leading milk-producing state. That year, its share of US milk production was 15.2 percent. And in 1999, when California’s milk output first topped 30 billion pounds, the state’s share of US milk production was up to 18.7 percent.

Two years later, California’s share of US milk production topped 20 percent for the first time, at 20.1 percent. The significance of that milestone can’t be understated, since we can’t seem to find any time over the many years in which Wisconsin led the US in milk production that its share topped 20 percent.

Back in 1941, for example, Wisconsin’s milk production totaled 13.6 billion pounds, exactly the same as California’s production in 1980. Wisconsin’s share of US milk output that year was 11.8 percent. By 1950, Wisconsin’s share of US milk production had climbed to 12.7 percent, and by 1960 it was 14.4 percent.

Wisconsin’s milk production first topped 20 billion pounds in 1976, and its share of US milk output was up to 16.9 percent. And in 1988, when Wisconsin set a record for milk production (25 billion pounds) that stood for over 20 years, the state’s share of US milk production was 17.2 percent.

While incomplete (our sample size was just a few years), this would appear to illustrate the point that Wisconsin’s share of US milk production never approached the 20 percent level, despite the fact that the state ranked first in milk production for probably 80-plus years in the 20th century.

So that makes California’s accomplishment all the more impressive. As noted earlier, California’s share of US milk production first reached 20 percent in 2001, and it remained above 20 percent through 2014, when it was 20.55 percent.

And during that period, it was above 21 percent six times, including a record high of 21.91 percent in 2007. But it dropped below 20 percent in 2015, fell to 19.05 percent in 2016 and then dropped to 18.47 percent last year.

So can California get back to a 20 percent share of national milk production? Keep in mind that USDA is currently forecasting that US milk production this year will reach a record 219 billion pounds, meaning California’s milk production would have to reach 43.8 billion pounds to reach 20 percent.

That’s not going to happen. Yes, California’s milk production in the first quarter of this year was up 2.7 percent from the first quarter of last year, but it was still half a billion pounds below the first quarter of 2014, when California’s milk production reached a record 42.339 billion pounds.

There are a couple of additional points to keep in mind here. First, California’s milk cow numbers in March were 18,000 head below March 2017, so it will be difficult for production to rebound significantly with cow numbers continuing to decline. And second, pretty much every forecast points to continued growth in US milk production, so reaching 20 percent of total output will only get more difficult in the future.

While it seems unlikely that California will ever account for 20 percent of US milk production again, just the fact that it did so for a number of years is mighty impressive. And California’s importance in the dairy industry remains enormous, even with an 18.5 percent share of production.

The Dairy Industry’s Plant-Based And Animal-Free Threats

It certainly is a great time to be in the dairy industry. Production and consumption continue to set new records, exports are doing quite well, milkfat has made an unbelievable comeback in the eyes of both consumers and at least some nutrition experts, etc.

Or not. It’s also a perilous time to be in the dairy industry, judging by some of the observations made by a few speakers at this week’s annual ADPI/ABI joint annual conference in Chicago. And that was just during the two Monday morning sessions.

Most notably, several speakers mentioned the rise in veganism in general and the proliferation of imitation (plant-based) dairy products specifically.
This is an area that is already having a negative impact on at least some sectors of the dairy industry, and it will probably get worse in the future.
Beth Briczinski of ABI and National Milk Producers Federation noted that imitation dairy beverages have changed considerably over the years. Back in the 1980s, the vast majority of “soymilk” was used for infant formula.

That product bore little resemblance to today’s “soymilk” products, Briczinski pointed out. It was sold in “Oriental” grocery stores or in “niche” health food markets. It was also in aseptic, shelf-stable packaging and sold in the center aisles in grocery stores. The product itself was “dark brown in color” and had a “beany off-flavor.”

That changed in 1996, when Silk began marketing its products. That’s the year it moved into the refrigerated dairy case, and that’s really what set things in motion for all the imitation dairy products we see today, Briczinski explained.

How big a threat are these products to the dairy industry? That’s difficult if not impossible to predict. Just in the fluid milk sector, it’s worth keeping in mind that sales have been flat to declining for a number of years now, so all the new “milks” made from everything from soy and almonds to rice and hemp can’t be blamed entirely for fluid milk’s problems.

But the decline in fluid milk sales has accelerated in recent years, dropping from 52.3 billion pounds in 2013 to 49.7 billion pounds in 2016 (the most recent years for which figures are available from USDA’s Economic Research Service).

During that time, and since then, we’ve read and heard that several new “milks” are going to be the Next Big Thing; these “milks” are made from such things as peas and oats. And all of these new products appear to be chipping away at milk sales, not to mention stealing space in the dairy case.

Frustratingly, these products are not only a sales threat, they also threaten dairy’s good nutrition “halo.” They use dairy terms, “milk” being the most obvious, but they fail to deliver milk’s nutrition package, starting with protein, which is lacking in most of these new “milks.”

For example, Silk Almondmilk has exactly one gram of protein per eight-ounce serving, compared to eight grams of protein in a similar serving of cow’s milk.

These new products aren’t just confined to “milks.” Check out the dairy case in a typical supermarket and you might find “Greek Yogurt” Alternative from Daiya Foods (ingredients in the plain version include Coconut Cream, Pea Protein Isolate, Creamed Coconut, Potato Protein, and over a dozen others) or Vegan Mozz from Miyoko’s (ingredients include organic coconut oil, organic cashews and organic tapioca).

Along these same lines, Briczinski was one of several speakers who specifically mentioned Perfect Day, the company that’s on a mission to “create a world of delicious animal-free dairy products.”

In addition to going after dairy’s markets, many of these products have something else in common: financial backing. Perfect Day, for example, announced back in late February that it has raised $24.7 million in funding, which the company said underscores that industry leaders and top global investors share their vision for “creating a future-proof source of nutrition and dairy delight for everyone in the world.”

Meanwhile, the Plant Based Foods Association late last year launched a new membership opportunity for investment firms supporting this food industry sector, with 10 investment firms having signed on as founding members. Oh, and the PBFA recently welcomed its 100th member, Blue Diamond Growers, the world’s leading almond marketer and processor. PBFA itself was founded in March of 2016 with exactly 18 founding members.

So how does the dairy industry fight these plant-based and animal-free products? There are at least a couple of approaches that were suggested by Briczinski and her NMPF colleague, Chris Galen.

First, the dairy industry needs to continue to hammer away at the nutritional inferiority of these products, and continue touting the nutritional superiority of dairy products. For example, NMPF’s “Dairy Imitators: Exposed” aims to unmask imitations of real nutritious dairy foods by comparing products such as Kite Hill’s Artisan Almond Milk Yogurt to real vanilla yogurt.

And speaking of real, NMPF also licenses use of the REAL Seal, which can be used by dairy product manufacturers, food processors, retailers, and food service operations to help differentiate their products from imitations.

The other thing needed in this battle is some regulatory enforcement. NMPF has been pushing FDA, as well as Congress, to enforce the labeling laws that already exist, and this is definitely needed now more than ever.
If you don’t believe that, check out the Plant Protein Milk being marketed by Bolthouse Farms; you have to look pretty hard to see “non-dairy” on the principal display panel.

Cheese Industry Attracting Some Impressive Technology

One thing about producing over 12 billion pounds of something: it seems to attract quite a bit of research, development and new technology to an industry. Such is the case for cheese and related industries, and the record-setting International Cheese Technology Expo last week in Milwaukee, WI.

It’s difficult if not impossible to sum up how impressive the ICTE was, not only in size (more than 300 companies exhibited at the record-breaking show), but also in scope (exhibits covered everything from air or water treatment to whey processing equipment).

Such is life in an industry that has now topped 12 billion pounds of production for two consecutive years, including a record 12.659 billion pounds in 2017, according to figures released Thursday by USDA’s National Agricultural Statistics Service.

Not only that, but the cheese industry in 2017 also produced, among other things, 484 million pounds of whey protein concentrate, 1.1 billion pounds of lactose, 1.0 billion pounds of dry whey, and 117 million pounds of whey protein isolates.

To put this year’s ICTE in a bit of historical perspective, we went back to 1980, when the Wisconsin Cheese Makers Association (which hosts the ICTE in partnership with the Wisconsin Center for Dairy Research) held its annual convention in La Crosse, WI. According to a front-page story in this newspaper back on Nov. 7, 1980 (the WCMA held its annual convention in the fall back then), “this year’s new Biennial Trade Show opened with about 100 booths of equipment, services and supplies, in the brand new La Crosse Center Exhibition Hall, completed in just the past few weeks.”

If nothing else, the La Crosse location of that 1980 show should help put things in perspective. The Wisconsin Cheese Industry Conference, co-hosted by the WCMA and CDR and held in odd-numbered years (the ICTE is held in even-numbered years), was last held in La Crosse in 2013; the event basically outgrew the city and the convention center, and has been held in Madison since 2015 (with the ICTE having grown to the point that only Milwaukee can host it).

So what was the industry like back in 1980? For one thing, cheese production that year totaled just under 4 billion pounds. Interesting; over the past 38 years, both cheese production and the WCMA’s biennial full-size trade show have roughly tripled in size.

But the cheese industry has diversified a bit since then, to put it mildly. Cheddar production back in 1980 totaled around 1.75 billion pounds, or about 44 percent of total US cheese output. Last year, Cheddar production totaled around 3.7 billion pounds, and accounted for under 30 percent of US cheese output.

Meanwhile, the state of Wisconsin started tracking specialty cheese production in 1993 (another change since 1980), and since then, production of these cheeses — which range from Asiago to Yogurt cheese — has grown from 83.1 million pounds to 773.7 million pounds (as of 2016, the most recent year for which production figures are available).

Also back in 1980, dry whey production totaled 691 million pounds, while lactose output was around 140 million pounds. Whey protein concentrate and whey protein isolate? They were not yet reported by NASS (NASS statistics on WPC production date back to 1983, while WPI production figures date back to 2003).

That brings us back to 2018, and all the amazing technology on display at last week’s ICTE. Keep in mind that today’s cheese industry doesn’t just produce 12.659 billion pounds of cheese every year in bulk sizes ranging from 640-pound blocks and 500-pound barrels to individual strands of String cheese — it also reduces that cheese to make it more user-friendly, by shredding it, slicing it, dicing it, or grating it, among other things.

The cheese industry is also a heck of a lot more regulated today than it was back in 1980, thanks in part to the Food Safety Modernization Act but also due at least in part to the fact that the US now exports more than twice as much cheese (750 million pounds in 2017) as it sold to the government under the dairy price support program back in 1980 (350 million pounds), meaning it not only has to satisfy US regulators but it also has to satisfy regulators in close to 100 other countries.

Yet another factor propelling growth in the amount of technology being attracted to the cheese and dairy industries concerns the employment situation. Back in 1980, the oldest Baby Boomers were in their mid-30s and the youngest were still in high school. Today, Baby Boomers are retiring, while Millennials (especially the youngest of the Millennials) are proving to not always be reliable employees.

So we’ve gone from a situation in 1980 where unemployment was relatively high and there were more than enough employees to fill available positions to a situation in 2018 where pretty much everybody is looking for more reliable help and robots are becoming more important everywhere from the dairy farm to the cheese plant to the warehouse.
And these aren’t exactly your vintage “Lost in Space” robots (we’re referring to the 1960s TV series, which featured a rather primitive robot that bears little resemblance to today’s astonishingly skilled robots).

This year’s record-breaking International Cheese Technology Expo served as a great reminder of how much the cheese industry has progressed and grown over the past four decades.

It also helped serve notice that the industry is attracting the kind of R&D, technology and talent to continue propelling growth for many years to come.

 

Some Good, Lots Of Bad In Food Labeling Bills

Legislation recently introduced in both the US House and Senate would impact food labels in several ways. The bills appear to contain more negatives than positives, which is why it’s a good thing they’ll go nowhere this year.

As reported on our front page last week, the Food Labeling Modernization Act was introduced by three Democrats in the Senate and three Democrats in the House. That alone spells doom for this legislation, since Democrats have almost zero clout in either chamber and Republicans don’t exactly appear to be lining up to support this measure. It’s worth noting that similar legislation was introduced by Democrats in both 2015 and in 2013, and went nowhere.

It’s also worth remembering that this is an election year, and Congress isn’t expected to get a whole lot accomplished between now and Nov. 6. It’s a safe bet that “modernizing” food labels isn’t going to be a very high priority for Congress for the next several months.

That said, there’s at least a possibility that this legislation could gain some traction sometime in the not-too-distant future if Democrats regain control of the House and/or the Senate in this fall’s election. And that wouldn’t be all that good for the food industry in general or the dairy industry in particular.

For starters, the centerpiece of this legislation is the establishment of a “single, simple, standard” front-of-package labeling system that would display calorie information along with information related to the content of saturated and trans fats, sodium, added sugars, and any other nutrients that FDA determines are “strongly associated with public health concerns.”

This system would have to employ an approach that “clearly distinguishes” between products of greater or lesser nutritional value, and may include a warning symbol or symbols for products high in saturated or trans fats, sodium, added sugars, or other nutrients the consumption of which should be limited or discouraged; or a stop-light, points, star, or other signaling system to rank foods according to their overall health value.

We roundly criticized front-of-package labeling in this space just a few weeks ago (please see Front-Of-Package Labeling Isn’t The Answer To Anything, in our Mar. 30th issue), so we won’t repeat our earlier criticisms of this idea, except for the legislation’s mention of a “star.”

Such a system already exists: the Guiding Stars® program, a point-based system that awards credit points to products for nutrients to encourage and assigns debit points for nutrients to limit. The net score of a product is then translated into a Guiding Starts rating of 0, 1, 2, or 3. Only foods with a score above 0, indicating that the positive nutrient contribution outweighs the negative nutrition contribution, receive stars.

“Debits” include saturated fat and sodium, so guess how cheese fares in this system? A random check of Cheddar and Parmesan cheeses finds that these products are awarded no stars. Apparently nutrient density doesn’t matter in this particular system, and might not matter in a system mandated by FDA either.

The legislation also includes requirements for the format of ingredient information on food labels. This would include requirements for upper- and lower-case characters, serif and noncondensed font types, high-contrast between text and background, and bullet points between adjacent ingredients.

These proposed changes are intended to improve readability and assist consumers in maintaining healthy dietary practices.

Well, ingredient statements have been required for years, but consumers still choose to eat Hostess Twinkies, just to name one product with a relatively long ingredient list. This is just going to create more headaches, and costs, for food companies.

On top of that, the FLMA would require food manufacturers and importers to submit to the agency all information to be included in the label, including the Nutrition Facts panel, a list of ingredients, an image of the primary display panel, and other information. Again, this would appear to add costs for food companies with no benefit for consumers.

There is one somewhat intriguing section of the FLMA, and that is the section that deals with the use of a couple of specific terms. Not later than two years after the FLMA is signed into law, FDA would have to promulgate a final rule relating to use of the term “natural” on food labels.

It may be recalled that FDA, back in November 2015, asked for input on the use of the term “natural” on food labels. Apparently there’s some interest in this, given that the agency received over 7,500 comments from the public.

In its request for comments, FDA explained that it had been petitioned by the Grocery Manufacturers Association to issue a regulation authorizing statements such as “natural” on foods that are or contain foods derived from biotechnology; that it had been petitioned by Consumers Union to prohibit the use of the term “natural” on food labels altogether; and that it had been petitioned by The Sugar Association to define the term “natural.”

Since the comment deadline ended, FDA doesn’t appear to have done anything. Meanwhile, bipartisan legislation introduced in both the House and Senate earlier this year (the “Codifying Useful Regulatory Definitions Act,” or “CURD Act”) would define the term “natural cheese.”

Maybe some future version of the Food Labeling Modernization Act could require FDA to not only define the term “natural,” but also to define the term “natural cheese.” The CURD Act already enjoys bipartisan support, unlike the FLMA itself.

 

Extending Multiple Component Pricing Makes Sense, And Cents

Last week, 14 dairy cooperative associations, along with several state and national dairy producer trade associations, asked the US Department of Agriculture to hold a hearing to consider adoption of uniform multiple component pricing plans for the Southeast and Appalachian federal milk marketing order markets, along with adjustment for somatic cell count.
This proposal makes sense for today’s dairy industry, and it also will make cents for the industry.

As noted in last week’s front-page story on this proposal, MCP has been used in the federal order program for 29 years, and is also employed in California, Canada, the European Union and other countries. The federal order reform final decision, released 19 years ago this month, provided a uniform, protein-based MCP plan for all seven markets outside of the southeast and Arizona (that is, outside of the Southeast, Appalachian, Florida and Arizona-Las Vegas federal orders).

Since federal order reform went into effect on Jan. 1, 2000, things have changed a bit in the dairy industry, to put it mildly. As the MCP proposal notes, the Southeast and Appalachian markets in the 1990s had high Class I use and were largely supplied by milk originating in or near the markets.

But milk production within that southeast region has declined since order reforms went into effect, the proposal points out. Specifically, milk output in the 10 states that largely comprise the Southeast and Appalachian orders fell by 18 percent from 2000-05, another 12 percent from 2006-11 and 1 percent from 2012-16. Of those 10 states, only Georgia posted a milk production increase over the 2000-16 period.

Today, the southeast region relies on milk supplies from dairy producers who have access to MCP markets, the proposal explains. Milk originating in MCP markets would “rationally” be reluctant to supply fluid milk needs in the southeast if that meant giving up greater revenue from MCP in the market of origin. A high component producer within or near the southeast market would rationally seek an MCP market buyer, rather than serve southeast fluid needs, to enhance farm revenue from the payment for protein.

The proposal illustrated half a dozen examples of the “costly marketing inefficiencies” due to the adjoining MCP and skim-butterfat markets. For example, high protein milk in or near the southeast markets is transported away from the southeast to MCP market plants, while lower protein milk from more distant sources is shipped to the southeast for fluid use, adding unnecessary transportation costs on the outbound as well as on the inbound milk as tanker trucks pass each other going in opposite directions.

Interesting. In recent years, the US dairy industry has committed considerable resources to becoming more sustainable, yet we still have situations where, as the MCP proposal explains, milk marketing and movement in the southeast is being directed by the unequal regulated pricing systems in adjacent federal orders rather than serving market needs and promoting “marketing efficiencies.”

Put bluntly, if the US dairy industry is truly interested in becoming as sustainable as possible, it will embrace this proposal to extend multiple component pricing to the Southeast and Appalachian orders just to reduce milk marketing inefficiencies. This is just common sense.

It also makes “cents” to embrace this MCP proposal. As the above example notes, transporting high protein milk out of the southeast markets and lower protein milk into the southeast markets adds “unnecessary transportation costs,” both for the outbound as well as the inbound milk.

But that’s just one of several indirect mentions of economics in the MCP proposal.

Here’s another example from the proposal: “Fluid milk suppliers to the southeast markets must bear extra costs from transportation, component content, and source of supply when procuring milk for fluid use.”

And then there’s this: The proposal is expected to benefit producers by “reducing costs associated with supplying fluid markets in the southeast, and enhance average regulated revenue to producers under an MCP plan.” And some producers with lower than average protein will experience less regulated revenue, while other producers experience more. “The cross-subsidy to low protein producers by high protein producers will end.” Sounds fair to us.

Finally, “it is expected that adoption of an MCP plan for the two southeast markets will decrease costs to handlers and cooperatives supplying the southeast fluid milk market and possibly increase costs to manufacturing plants (if any) that do not now pay for the value of skim milk solids used in manufacturing.”

The proposal also points out that average protein in producer milk in MCP markets has increased following adoption of an MCP plan, while somatic cell count levels have dropped “significantly.” A similar response can logically be expected from southeast producers who do not have prior experience with MCP or SCC adjustments.

So from an orderly marketing standpoint, extending multiple component pricing to the Southeast and Appalachian federal orders would appear to make a great deal of sense. And from an economic standpoint, extending MCP to those two orders will benefit southeast region pool producers based on the enhanced market value of skim solids over the value of skim milk under the current pricing system.

Extending MCP to the southeast region is an idea with little or no downside. This proposal should go forward ASAP.

The Significance Of A California Federal Order

With USDA’s release last Friday of its final decision to establish a federal milk marketing order encompassing the entire state of California, the US dairy industry moved one giant step closer to a California federal order becoming a reality. And the significance of this is starting to sink in.
California dairy producers could begin voting Monday on whether they favor a new federal order for the state; the referendum runs through May 5, 2018.

The result of the referendum may well be a foregone conclusion; the California federal order would become effective if approved by two-thirds of the voting producers, or by producers of two-thirds of the milk represented in the voting process.

In may be recalled that the three dairy cooperatives that petitioned USDA to call a hearing to promulgate a California federal order — California Dairies, Inc., Dairy Farmers of America and Land O’Lakes — represent over 75 percent of the milk produced in California (or at least they did when they submitted their petition to USDA back in February 2015).

Co-ops can elect to bloc vote in this referendum, so if CDI, DFA and LOL all decide to bloc vote in favor, the referendum will pass with flying colors.
So how significant will this new California federal order be? Here’s a sentence from USDA’s final decision that puts it in some historical perspective: “While in recent history FMMOs have been consolidated, amended and expanded, it has been decades since a new order has been promulgated.”

Indeed, USDA statistics indicate that the number of federal orders in the US peaked back in 1962, at 83. And the last time USDA actually promulgated a new federal order was back in 1990 (the proceeding took place in 1989 and 1990), when the new Carolina federal order (encompassing all the territory in North Carolina and South Carolina) was established.

By the time federal order reforms went into effect, there were 31 orders, which were consolidated down to 11 (including the aforementioned Carolina order, which is now part of the Appalachian order). The Western order was terminated in 2004, so there have been just 10 federal orders for almost a decade and a half.

And now the California federal order will bump the total back up to 11.
Another area in which the California federal order will have great significance is the amount of milk pooled under federal orders. In 2017, 135.5 billion pounds of milk was received from federally pooled producers, which represented about 62.9 percent of total US milk production.

Add in California’s 2017 milk production of 39.8 billion pounds, and there would have been 175.3 billion pounds of milk pooled on federal orders last year, or 81.4 percent of US milk production. That would appear to be the highest percentage ever; according to USDA’s annual “Measures of Growth in Federal Milk Orders” report, the highest percentage of all milk sold under federal orders was 76, back in 2002. So the addition of California’s milk production to the federal order system is pretty significant.

Class utilization is another area in which a California federal order will have great significance. Last year, Class I utilization was about 30 percent, while in California, Class 1 utilization was 12.8 percent. Obviously, the federal order Class I utilization percentage will take a big drop once the California federal order takes effect.

Meanwhile, federal order Class IV utilization last year was around 15 percent, while California’s Class 4a utilization was 32.5 percent. So in this case, the Class IV utilization percentage will increase pretty significantly once the California federal order takes effect.

Arguably the most significant aspect of a California federal order is the impact it will have on the rest of the US. This is also an area where there is a significant level of uncertainty.

For example, in USDA’s “Regulatory Economic Impact Analysis” of its final decision, the agency noted that the pooling provisions in the proposed California federal order are similar to those in the Upper Midwest federal order which, like California, has a high share of manufacturing milk. In the proposed California federal order, the pooling decision lies with the handlers, which is a “significant change,” since under the current California State Order, nearly all milk must be pooled.

Since no California data are available to estimate the volume of milk that handlers would elect to pool, a separate pooling analysis was conducted to estimate monthly volumes of milk-not-pooled using data from the
Upper Midwest order. This milk pooling analysis found that manufacturers in the Upper Midwest chose to pool less Class II, III, or IV milk when the respective price was high relative to the uniform price. That is, handlers collectively elect to pool less milk when their pool draw is lower and they elect to pool more milk when their pool draw is higher.

For the proposed California FMMO, milk pooled annually in Classes II, III and IV decreases by an average of 1.100, 9.274, and 6.291 billion pounds, respectively, USDA said. The declines in these class utilizations largely reflect milk produced and processed in California that, under the proposed California FMMO, would no longer be pooled.

Finally, a new California federal order will mark the end of an era in the state of California, for dairy producers, processors and everyone else involved in the state’s dairy industry. California’s state milk order has been around for decades, but it will soon be relegated to the scrap heap of dairy policy history.

A new California federal order will be significant, indeed.

Front-Of-Package Labeling Isn’t The Answer To Anything

The idea of front-of-package nutrition labeling has been around for quite a few years now, and is actually gaining momentum in at least a couple of countries. But front-of-package nutrition labeling won’t do what its supporters claim it will do, and will probably harm dairy consumption along the way.

It’s been more than a decade since the Center for Science in the Public Interest petitioned the US Food and Drug Administration to create a front-of-package labeling system. At this point, that petition hasn’t gone very far, if anywhere.

Meanwhile, just last week, Dr. Peter G. Lurie, CSPI’s president, criticized President Trump’s trade negotiators for using the North American Free Trade Agreement modernization talks “as an excuse to pour cold water on front-of-package labeling.” According to Lurie, the New York Times has “convincingly demonstrated” that the US Trade Representative’s hostility to front-of-package labeling “has already had a chilling effect throughout the Americas.”

That’s a good thing, actually, for several reasons. As Lurie points out, NAFTA member Canada is currently developing its own front-of-package nutrition labeling system. As we reported back in our Feb. 16th issue, Health Canada is accepting comments on the front-of-package nutrition labeling through Apr. 26, 2018.

What that agency is proposing is a new symbol on food; the symbol would provide a visual cue that a food is high in nutrients of public health concern, such as saturated fat, sodium or sugars. Not surprisingly, the proposal drew criticism from both the Dairy Processors Association of Canada and from Dairy Farmers of Canada.

There are at least two major problems with front-of-package nutrition labeling, and those two problems are closely related. First, as FDA noted in industry guidance released in 2009, the agency’s own research has found that with front-of-package labeling, consumers are less likely to check the Nutrition Facts label on the information panel of foods. And no matter what type of information would be required in any front-of-package labeling, it wouldn’t be as detailed as the information in that Nutrition Facts label.

Second, the Nutrition Facts label itself is a flawed, if not failed, piece of information. It emphasizes nutrients to avoid, such as saturated fat, dietary cholesterol and sodium, while ignoring or downplaying nutrients that actually provide health benefits, such as protein (which is listed below the aforementioned saturated fat, cholesterol and sodium), phosphorus and magnesium (neither of which is mandatory; both are provided by dairy products).

CSPI and many other health groups are big fans of the Nutrition Facts label. Last November, some 20 public health and consumer groups called on FDA not to delay the updates to the Nutrition Facts labels.

Those updates included, among other things, putting the calorie content of foods in larger and bolder type, putting serving size and servings per container in larger and/or bolder type, using updated Daily Values for nutrients, listing added sugars, and requiring the listing of Vitamin D and potassium.

Among the groups urging FDA to maintain the original timeline for requiring updates to the Nutrition Facts label was the American Heart Association, which said the rise in obesity rates and the prevalence of heart disease, stroke, diabetes, and cancer “underscore the need to provide consumers with up-to-date and easy to understand nutrition information as soon as possible.”
Keep in mind that obesity rates and the prevalence of type 2 diabetes have actually increased since the Nutrition Facts label became mandatory on most food packages back in the mid-1990s. So are we really to believe that the changes being made to the Nutrition Facts panel will help reverse those trends?

FDA wisely decided to drop the “Calories from Fat” line from the Nutrition Facts label because, as FDA points out, research shows the type of fat consumed is more important than the amount. FDA now requires the listing of total fat, saturated fat and trans fat (which wasn’t required until about a decade or so ago), but it doesn’t seem like the science is anywhere near settled when it comes to dietary fat in general or saturated fat specifically.

As noted earlier, 20-plus years of emphasizing fat on the Nutrition Facts label has resulted in higher levels of obesity and type 2 diabetes, so why would anyone think putting some sort of “high in fat” warning on the front of food packages will provide any public health benefit?
Indeed, if anything, the science regarding dietary fats is far less “settled” than it was when the Nutrition Labeling and Education Act (which mandated nutrition labeling on most packaged food) was passed by Congress back in 1990. Today, numerous studies and books, including Nina Tiecholz’s highly regarded bestseller, The Big Fat Surprise, have cast doubts on all the anti-fat rhetoric of the past 60-plus years.

Related to that point, while organizations like CSPI have been waging war on sodium for decades, the science on sodium and its health impacts is also far from settled. Several studies have found that low sodium consumption can be just as harmful as high sodium consumption, so why should high-sodium foods carry a front-of-package warning?

The science is far from settled on the nutritional importance of the current Nutrition Facts label. So health experts should fix what’s on the back of food labels (and make meaningful adjustments to what’s required) before putting warnings on the front of food packages.

 

TheUS Dairy Exports And Global Export Prices

By pretty much any measure, US dairy exports in recent years have grown impressively in both value and in volume terms. For example, dairy exports grew from under $1 billion in 2000 to a record $7.1 billion in 2014, and have been over $5 billion in five of the last six years (2016 was the exception; exports that year were valued at $4.7 billion). And US cheese exports have risen from under 100 million pounds in 1999 to over 600 million pounds in each of the last five years, including a record 810 million pounds in 2014.

Dairy exports have become such a “fixture” in the US dairy business that they’re almost taken a bit for granted, but every once in a while we read something that reminds us of just how much things have changed on the dairy export front over the last few decades.

That “something” was the following sentence in the March Livestock, Dairy, and Poultry Outlook, which was released last week by USDA’s Economic Research Service: “It appears that US domestic prices have been competitive with foreign export prices.”

Indeed, it appears that US prices are a bit below Oceania and Western European export prices for dairy products such as cheese, butter, skim milk powder and dry whey, according to figures cited in the ERS report.
For example, in February, the Oceania export price for Cheddar cheese was $1.69 a pound, while the CME 40-pound Cheddar block price in February averaged $1.5157 per pound.

So how much have things changed over the years in the dairy industry, from a US-vs.-the-world price perspective? Coincidentally, it was 36 years ago this week that USDA held a “Dairy Economics Symposium” in Kansas City, MO, on the situation facing the US dairy industry at that time; specifically, milk supplies were in excess of demand, which had led to substantial government purchases of surplus dairy products to support the price of milk.

The purpose of that 1982 symposium, USDA explained at the time, was to provide the dairy industry with an opportunity to provide input to the agency regarding alternative courses of action that might be taken to work out of the current excess supply situation. Total symposium attendance was 250 people, with 50 presenting their views.

A couple of things from that symposium help illustrate how much things have changed in the dairy business, at least export-wise, since 1982. For one thing, of the 250 people in attendance at that gathering, there were exactly zero from foreign countries. There were attendees from all around the US, but none from outside the US.

Compare that to attendance at, for example, the annual ADPI/ABI meeting, which draws attendees not only from around the US but also from countries ranging from New Zealand and Australia to China and Japan.
That’s how “worldly” the US dairy industry has become in recent years.

The other thing that stands out from that 1982 symposium is how little attention was paid to dairy exports. Bryant Wadsworth, with USDA’s Foreign Agricultural Service, offered the following assessment of export prospects for US dairy products in 1982: “To export significant quantities of US dairy products would require a subsidy since world market prices are much lower than ours.”

To be sure, it was a very different world market back then. Among other things, the European Community (as the European Union was known back then, when there were far fewer member countries than there are today) was spending over $4 billion a year to support its dairy industry, including around $2 billion annually in export “restitutions” (subsidies), Wadsworth explained.

Also, the US ran a healthy dairy trade deficit back then. Just to cite one example mentioned by Wadsworth: the US in 1981 had imported 248 million pounds of cheese, while exporting all of about 13 million pounds of cheese. And a fair amount of those US cheese imports were subsidized by the EC.

After that 1982 symposium, the US itself started subsidizing dairy exports. More specifically, the Dairy Export Incentive Program was initially authorized under the 1985 farm bill, and was utilized to varying degrees to export surplus US dairy products until it was terminated by the 2014 farm bill.

This brief history brings us back to the earlier point made by ERS, that domestic dairy prices are competitive with foreign export prices. And that brings up an interesting question: In this current period of depressed US farm milk prices, is it really in the best interest of dairy farmers for US dairy prices to be at or below world prices?

At first blush, it would appear that the answer to that question is no. That’s just simple math; if, for example, the US cheese price was 10 cents a pound higher, the federal order Class III price would be roughly a dollar per hundredweight higher.

But it’s not quite that simple. If US cheese prices were 10 cents a pound higher, the US would be at least somewhat less competitive on the international market. So, for example, instead of exporting almost 60 million pounds of cheese in January at “competitive” prices, the US would maybe have exported 50 million pounds at less-competitive prices. That in turn would have likely delayed any recovery in US cheese and milk prices (which don’t appear on the verge of recovering anytime soon).

Unlike back in 1982, there is no dairy price support program to buy up unlimited surpluses of US dairy products. Products either get consumed domestically, get exported, or go into warehouses.

With US prices at or below international prices, the US is able to export a pretty healthy volume of dairy products, keeping prices from dropping even further.

 

The Dairy Industry’s New Cash Market

The US dairy industry entered a new pricing era this week with the launch of a new cash (spot) market for dry whey at the CME (Chicago Mercantile Exchange). It will be interesting to see how this new cash market fares in the months and years ahead.

To put this in a bit of historical perspective, it’s been almost 20 years since the dairy industry welcomed its last new cash market. Specifically, the CME began trading a dairy spot market in nonfat dry milk back on Sept. 1, 1998.

It may be recalled that it was also on Sept. 1, 1998, that the CME shifted from weekly to daily trading for its cash cheese and butter markets. Prior to that date, the cash cheese and butter markets had traded weekly.

It may also be recalled that the late 1990s was a period of considerable volatility for the dairy industry’s cash markets. The cheese industry’s longtime cash market, the National Cheese Exchange, closed in 1997 and the industry’s cash market moved to the CME. Less than a year and half later, cash market trading shifted from weekly to daily and the new NDM market was added.

There are also a couple of other noteworthy dates to remember when it comes to dry whey prices. First, it was back in November of 1998 when the CME initially launched cash-settled dry whey (and nonfat dry milk) futures and options contracts. Those contracts were delisted in December 2001 due to inactivity, then relaunched in March 2007.

And second, dry whey prices have been used in the federal milk marketing order program’s Class III price formula since 2000, when federal order reforms were implemented.

So what are the prospects for this new CME cash market for dry whey? There are at least a couple of things to keep in mind when assessing dry whey’s prospects.

The first is the overall size of the market. From a production standpoint, US production of dry whey last year totaled 1.034 billion pounds, up 8.3 percent from 2016 and the first time the US produced more than a billion pounds of dry whey since 2011.

By comparison to the CME’s other cash markets, US production of Cheddar cheese last year totaled about 3.6 billion pounds, while butter production was 1.84 billion pounds and nonfat dry milk output was slightly above 1.8 billion pounds.

But the CME cash markets also have age limits on what can be traded. On the date of sale, cheese cannot be less than four days nor more than one month (30 calendar days) of age, which implies a market size of around 300 million pounds at any given time (that’s average monthly Cheddar production, roughly).

For butter, to be eligible for sale on or after March 1 of a given year, the butter can’t have been produced or stored prior to December 1 of the previous year, implying a market size of maybe 500 million pounds at its smallest (this is, roughly, butter production in December, January and February). Nonfat dry milk has to be less than 180 days old, implying a market size of about 900 million pounds at any given time.

And for the new dry whey market, on the day of sale, the dry whey has to be less than 120 days old, which implies a market size of maybe 350 million pounds at any given time (that’s roughly four months of dry whey production).

One additional way to assess the potential size of this cash market is to look at the National Dairy Products Sales Report released weekly by USDA’s Ag Marketing Service. This program consists of 101 reporting entities selling 1 million pounds or more of dairy products; there are 17 plants reporting 40-pound Cheddar blocks, 13 plants reporting 500-pound barrels, 22 plants reporting butter, 31 plants reporting NDM and 18 plants reporting dry whey.

Weekly sales volumes for that report, during a recent period, ranged from around 11 to 12 million pounds of Cheddar blocks, 11 to 13 million pounds of barrels, 5 to 7 million pounds of butter, 17 to 25 million pounds of nonfat dry milk and 5.7 to 10.5 million pounds of dry whey.

So the new cash market for dry whey is perhaps a bit “thinner” than some other cash dairy product markets, but not by much. And the cash market for cheese has been characterized as “thin” since at least the late 1970s, when monthly Cheddar production was between roughly 100 million and 150 million pounds.

One other interesting point to remember about the current CME cash markets: the nonfat dry milk market was pretty inactive for a number of years, until activity started to increase just in the past several years. The NDM cash market started out with a fair amount of activity; there were half a dozen price changes for both grades of NDM that were traded at that time just during the first month of trading (September 1998).

But there were also long periods with no trading activity at all on NDM, or at least no price changes. Just to cite one example: the Grade A NDM price rose to 98.25 cents a pound on Mar. 30, 2005, and remained at that price until Oct. 24, 2005, when it rose 1.25 cents to 99.5 cents a pound and remained there until January 2006. This was reminiscent of some years at the old NCE in the 1980s.

Dry whey got off to a relatively active start this week, with unfilled bids for 5 cars and uncovered offers of 2 cars just on the opening day of trading. One car of dry whey was sold this week (today).

Given the dynamics of the dry whey business (the size of production, the global nature of dry whey markets), our guess is that there will be at least a fair amount of activity on the dairy industry’s newest cash market for the foreseeable future.

 

Disappearance Statistics Illustrate Importance Of Exports

Let’s face it, the US dairy industry has certainly seen better years than 2017 when it comes to domestic disappearance of dairy products.

Fortunately, it’s seen very few years that have been better when it comes to exports — and also very few years that better illustrate the importance of dairy exports to the growing US dairy industry.

As reported on our front page last week, domestic use of dairy products declined for all of the dairy products tracked by USDA’s Economic Research Service except for American-type cheese, butter, and lactose.

The flip side of that is that domestic disappearance declined for other-than-American-type cheese, nonfat dry milk/skim milk powder, dry whey and whey protein concentrate (these are the other dairy products tracked by ERS).

Also according to ERS, domestic use last year increased only 0.3 percent from 2016 on a milkfat basis, but dropped 0.7 percent on a skim-solids basis.

So how did the dairy industry cope with these relatively poor domestic disappearance statistics coupled with an extra 3 billion pounds of milk (that’s how much milk production in 2017 increased over 2016)?
Exports. US dairy exports didn’t turn negative total disappearance figures positive in all instances, but it did turn at least some of them positive, and it helped improve the others.

For example, domestic commercial disappearance of other-than-American cheese last year totaled 7.179 billion pounds, down 0.1 percent, or 8.7 billion pounds, from 2016’s record high. The total supply of other-than-American cheeses last year included beginning stocks of about 472 million pounds, production of around 7.6 billion pounds and imports of 272 million pounds, for a total supply of 8.3 billion pounds.

The US exported 607.3 million pounds of other-than-American cheese last year, which is significant in several respects.

For one thing, that was a record for exports of non-American cheeses; the previous record, 590 million pounds, was set back in 2014, when overall US cheese exports reached a record high of 810 million pounds.

That year, exports of American-type cheeses reached a record high of 222 million pounds. So non-American cheeses last year accounted for about 81 percent of total US cheese exports, up from just under 73 percent back in the record year of 2014.

Exports of non-American cheese have grown quite impressively over the last two decades, from under 50 million pounds back in 1997 to 607 million pounds in 2017. Yes, there have been some ups and downs — exports actually fell in both 2015 and in 2016 — but overall exports of these cheeses have more than doubled just since 2010.

Then there’s nonfat dry milk and skim milk powder, domestic disappearance of which fell 6.7 percent, or almost 66 million pounds, in 2017, compared with 2016. Exports totaled a record 1.34 billion pounds.
That wasn’t quite enough to turn total disappearance positive last year (it was down about 36 million pounds from 2016), but things could have been a lot worse without those record NDM/SMP exports.

Even with record exports, commercial stocks of NDM/SMP at the end of last year, at 330.4 million pounds, were up more than 100 million pounds from the end of 2016. But that increase was due to an increase in production (47 million pounds) and a decline in domestic disappearance (66 million pounds). Just imagine how large US stocks of NDM/SMP would have been had exports not set a record last year.

Domestic disappearance of dry whey last year, at 530 million pounds, was down 1.7 percent, or 9.2 million pounds, from 2016, but exports, at 471.5 million pounds, were up 48.5 million pounds, or 11.5 percent, from 2016.
That helped boost total disappearance of dry whey to just over 1 billion pounds, the first time total disappearance was over a billion pounds since 2011. That was probably a good thing, since last year was also the first time since 2011 that the US produced more than a billion pounds of dry whey.

The one product where exports didn’t turn total disappearance positive in 2017 was whey protein concentrate. Domestic disappearance of WPC last year, at 212 million pounds, was down 7 percent, or almost 16 million pounds, from 2016, and exports, at 322 million pounds, were down 1.2 percent, or almost 4 million pounds. Thus, total disappearance of WPC in 2017, 534 million pounds, was down 3.6 percent, or almost 20 million pounds, from 2016.

Finally, as noted earlier, overall domestic use last year increased 0.3 percent from 2016 on a milkfat basis but actually declined 0.7 percent on a skim-solids basis. But when exports are included, total disappearance last year was up 0.7 percent on a milkfat basis and up 0.2 percent on a skim-solids basis.

That’s because, as ERS noted, exports increased from 8.4 billion to 9.3 billion pounds (10.7 percent) on a milkfat milk-equivalent basis and from 39 billion to 40.8 billion pounds (4.6 percent) on a skim-solids milk-equivalant basis.

Notably, ERS further noted that US import quantities actually declined last year on both a milkfat basis and on a skim-solids basis. Indeed, if you want to see how much things have changed in recent years in the dairy industry, look no further than disappearance statistics for exports versus imports. In short, imports have declined since their peak more than a decade ago, while exports were a record high on a skim-solids basis and more than triple their 2006 level on a fat basis.

 

US Dairy Industry Can Expect More Milk, More Opportunities

A couple of weeks ago, the US Department of Agriculture released its long-run projections for the US agricultural sector to 2027 and, as reported on our front page last week, the agency expects milk production to increase 1.5 percent per year over the next decade.

That would increase US milk production to 250.1 billion pounds, or 34.6 billion pounds higher than 2017’s record milk output. In short, the US dairy industry can expect a whole lot more milk to be produced in the coming years.

Historically speaking, that’s a pretty impressive milk production increase. But it’s not really unheard of in recent years. For example, US milk production grew from 170.8 billion pounds in 2004 to 201.2 billion pounds in 2013, an increase of some 30.4 billion pounds.

So how did the US deal with all that additional milk? Well, one way in which the industry didn’t deal with it was by selling more fluid milk, sales of which fell from 54.7 billion pounds in 2004 to 52.3 billion pounds in 2013.

In its long-term projections, USDA said it expects the decline in per capita consumption of fluid milk products to continue. So fluid milk products (at least traditional beverage milk products) aren’t likely to absorb any additional milk, and in fact continued declines in fluid milk sales would end up making even more additional milk available for other purposes.

When looking over production statistics, it’s pretty easy to see where a lot of the additional milk produced between 2004 and 2013 ended up. For example, Italian cheese production grew by more than a billion pounds during that period, from 3.66 billion pounds in 2004 to 4.74 billion pounds in 2013. Mozzarella output during that period grew by almost 800 million pounds, from just over 2.9 billion pounds to 3.7 billion pounds.

American-type cheese production grew less spectacularly, but still grew pretty impressively over the 2004-13 period. Specifically, American cheese output rose by some 681 million pounds, from about 3.7 billion pounds in 2004 to 4.4 billion pounds in 2013, while Cheddar output grew from 3.0 billion pounds to 3.2 billion pounds.

Notably during that period, Italian cheese surpassed American cheese in total production, and Mozzarella output surpassed Cheddar production.

Finally in the cheese category, at the state level, Wisconsin’s specialty cheese production grew from 332.1 million pounds in 2004 (accounting for 15 percent of the state’s total cheese output) to 640.2 million pounds in 2013 (accounting for about 22 percent of the state’s total cheese output).

Based on this recent history, it’s probably safe to say that a significant amount of the expected additional milk that will be produced in the next decade will end up being made into every type of cheese from Mozzarella and Cheddar to, well, to specialties that haven’t even been developed yet.

Yogurt was another major success story in the dairy industry over the 2004-13 period, with production rising by over 2 billion pounds, from 2.71 billion pounds to 4.72 billion pounds. This was, of course, the period during which Greek yogurt was introduced on a large scale, so it may be difficult over the next decade for the yogurt category to grow like it did during the 2004-13 period.

One other area worth mentioning when it comes to dealing with growing milk production over the 2004-13 period is the export market. It’s one thing to increase production of everything from Mozzarella to whey protein concentrate; it’s another thing to find a market for all of these additional products, given the relatively slow growth in the US population.

That’s where the export market came in. US dairy exports grew in value from just under $1.5 billion in 2004 to just over $6.7 billion in 2013 — an astonishing increase by pretty much any measure.

Within some major dairy product categories, over the 2004-13 period, nonfat dry milk/skim milk powder exports increased by almost 450 million pounds, cheese exports grew by about 560 million pounds, dried whey exports rose by almost 200 million pounds, whey protein concentrate exports increased by about 167 million pounds, and lactose exports grew by over 350 million pounds.

Basically, when it comes to absorbing additional volumes of milk, growth in cheese production illustrates the importance of growing domestic demand, while growth in exports illustrates the importance of growing international demand. Both will be key in the future, given USDA’s projections.

USDA, it should be noted, explains that its long-term projections are not an agency forecast about the future; instead, they are a conditional, long-run scenario about what would be expected to happen under a continuation of current farm legislation and other specific assumptions.

So there are a number of caveats when considering how much US milk production could grow in the next decade. For example, as USDA pointed out, the projections assume continuation of the 2014 farm bill, but in fact a new farm bill is due out this year and two more farm bills could be passed by the end of the projection period.

USDA’s agricultural trade projections assume that current trade agreements remain in place. At this point, with NAFTA seemingly hanging on by a thread, keeping current trade agreements in place appears to be a best-case scenario. But there are two presidential elections in the projection period, either or both of which could mean a change in direction for US trade policy.

The US dairy industry will be dealing with a lot more milk, and more opportunities, in the future.

 

Disappearance Statistics Illustrate Importance Of Exports

Let’s face it, the US dairy industry has certainly seen better years than 2017 when it comes to domestic disappearance of dairy products.

Fortunately, it’s seen very few years that have been better when it comes to exports — and also very few years that better illustrate the importance of dairy exports to the growing US dairy industry.

As reported on our front page last week, domestic use of dairy products declined for all of the dairy products tracked by USDA’s Economic Research Service except for American-type cheese, butter, and lactose.

The flip side of that is that domestic disappearance declined for other-than-American-type cheese, nonfat dry milk/skim milk powder, dry whey and whey protein concentrate (these are the other dairy products tracked by ERS).

Also according to ERS, domestic use last year increased only 0.3 percent from 2016 on a milkfat basis, but dropped 0.7 percent on a skim-solids basis.

So how did the dairy industry cope with these relatively poor domestic disappearance statistics coupled with an extra 3 billion pounds of milk (that’s how much milk production in 2017 increased over 2016)?
Exports. US dairy exports didn’t turn negative total disappearance figures positive in all instances, but it did turn at least some of them positive, and it helped improve the others.

For example, domestic commercial disappearance of other-than-American cheese last year totaled 7.179 billion pounds, down 0.1 percent, or 8.7 billion pounds, from 2016’s record high. The total supply of other-than-American cheeses last year included beginning stocks of about 472 million pounds, production of around 7.6 billion pounds and imports of 272 million pounds, for a total supply of 8.3 billion pounds.

The US exported 607.3 million pounds of other-than-American cheese last year, which is significant in several respects.

For one thing, that was a record for exports of non-American cheeses; the previous record, 590 million pounds, was set back in 2014, when overall US cheese exports reached a record high of 810 million pounds.

That year, exports of American-type cheeses reached a record high of 222 million pounds. So non-American cheeses last year accounted for about 81 percent of total US cheese exports, up from just under 73 percent back in the record year of 2014.

Exports of non-American cheese have grown quite impressively over the last two decades, from under 50 million pounds back in 1997 to 607 million pounds in 2017. Yes, there have been some ups and downs — exports actually fell in both 2015 and in 2016 — but overall exports of these cheeses have more than doubled just since 2010.

Then there’s nonfat dry milk and skim milk powder, domestic disappearance of which fell 6.7 percent, or almost 66 million pounds, in 2017, compared with 2016. Exports totaled a record 1.34 billion pounds.
That wasn’t quite enough to turn total disappearance positive last year (it was down about 36 million pounds from 2016), but things could have been a lot worse without those record NDM/SMP exports.

Even with record exports, commercial stocks of NDM/SMP at the end of last year, at 330.4 million pounds, were up more than 100 million pounds from the end of 2016. But that increase was due to an increase in production (47 million pounds) and a decline in domestic disappearance (66 million pounds). Just imagine how large US stocks of NDM/SMP would have been had exports not set a record last year.

Domestic disappearance of dry whey last year, at 530 million pounds, was down 1.7 percent, or 9.2 million pounds, from 2016, but exports, at 471.5 million pounds, were up 48.5 million pounds, or 11.5 percent, from 2016.
That helped boost total disappearance of dry whey to just over 1 billion pounds, the first time total disappearance was over a billion pounds since 2011. That was probably a good thing, since last year was also the first time since 2011 that the US produced more than a billion pounds of dry whey.

The one product where exports didn’t turn total disappearance positive in 2017 was whey protein concentrate. Domestic disappearance of WPC last year, at 212 million pounds, was down 7 percent, or almost 16 million pounds, from 2016, and exports, at 322 million pounds, were down 1.2 percent, or almost 4 million pounds. Thus, total disappearance of WPC in 2017, 534 million pounds, was down 3.6 percent, or almost 20 million pounds, from 2016.

Finally, as noted earlier, overall domestic use last year increased 0.3 percent from 2016 on a milkfat basis but actually declined 0.7 percent on a skim-solids basis. But when exports are included, total disappearance last year was up 0.7 percent on a milkfat basis and up 0.2 percent on a skim-solids basis.

That’s because, as ERS noted, exports increased from 8.4 billion to 9.3 billion pounds (10.7 percent) on a milkfat milk-equivalent basis and from 39 billion to 40.8 billion pounds (4.6 percent) on a skim-solids milk-equivalant basis.

Notably, ERS further noted that US import quantities actually declined last year on both a milkfat basis and on a skim-solids basis. Indeed, if you want to see how much things have changed in recent years in the dairy industry, look no further than disappearance statistics for exports versus imports. In short, imports have declined since their peak more than a decade ago, while exports were a record high on a skim-solids basis and more than triple their 2006 level on a fat basis.

 

California Federal Order Proceeding Continues To Drag On

Just when you think you’ve seen it all in the dairy industry, along comes USDA last week with the announcement that it will be delaying, for several months, its final decision on a California federal milk marketing order as it awaits a US Supreme Court decision on a related legal matter.

So it now appears that the California dairy industry has little choice but to sit, and wait (some more). And the same thing applies to the entire US dairy industry, albeit to a somewhat lesser extent.

That this is happening in February should probably come as no surprise to those who have been following the California federal order proceeding. It was three years ago, in February 2015, when three dairy cooperatives — California Dairies, Inc., Dairy Farmers of America and Land O’Lakes — requested that USDA call a hearing to promulgate a federal order for California.

Almost exactly two years after USDA received that petition, in February 2017, the agency released a recommended decision proposing that a California federal order be established. Comments had to be submitted by May 15, 2017, which then seemed to set USDA up for announcing a final decision this month, give or take a month or two.

Instead, California’s dairy industry is stuck in limbo. On the one hand, it seems inevitable that California’s dairy producers will vote, once a final decision is finally released, to join the federal order program, especially in light of the overwhelming support that California dairy producers gave to the proposed Quota Implementation Plan (87.2 percent of those eligible producers who voted were in favor of the QIP).
On the other hand, California’s dairy industry remains stuck, for the time being, in the state’s longstanding milk order.

The frustration of this situation is pretty obvious, especially in light of the recent petition, submitted by California Dairy Campaign and Western United Dairymen, seeking an emergency hearing to raise milk prices in the state.

As reported on our front page last week, the California Department of Food and Agriculture denied that hearing request, specifically citing the pending California federal order proceeding. Now that proceeding has been delayed.

While it was dairy producers who sought the emergency hearing in California, dairy processors also expressed dissatisfaction with current milk pricing in the state. Several cheese companies asked the CDFA to deny the hearing request, but if the agency did grant a hearing, to open that hearing up to possible changes in the Class 4b and 4a pricing formulas.

As Dairy Institute of California pointed out, the cheese make allowance in the Class 4b pricing formula hasn’t been adjusted in 10 years, while the butter and nonfat dry milk make allowances in the Class 4a formula haven’t been adjusted in seven years.

But California manufacturing costs continue to rise; as reported on our front page two weeks ago, the average cost to manufacture Cheddar cheese in California in 2016 was a record-high 24.54 cents per pound, almost a nickel a pound higher than the current 4b make allowance of 19.88 cents a pound.

Things won’t improve much for California processors if and when California joins the federal order system. The cheese make allowance in the federal order Class III formula, 20.03 cents per pound, has been in effect for almost a decade now.

And, it may be recalled, USDA’s decision to set the cheese make allowance at 20.03 cents found that the CDFA 2006 survey of average cheese manufacturing costs was the best available information representing the manufacturing cost of producing a pound of Cheddar cheese (that cost was actually 19.88 cents per pound; the 20.03 cents per pound make allowance includes a 0.15-cent per pound marketing cost adjustment).

So now, the entire US dairy industry is effectively in limbo while USDA delays the California federal order proceeding, in at least two ways.

First, there is no doubt that California joining the federal order system will have some significant impacts on the US dairy industry as a whole.
Among other things, according to USDA’s own analysis of its recommended decision, a California federal order will raise blend prices in some orders while lowering them in other orders, and will also boost milk production nationally.

Second, the problems being experienced with California milk pricing formulas are also the problems being experienced with federal order pricing formulas. One of those problems was noted earlier: inadequate make allowances that haven’t been adjusted (raised) for almost a decade.
But make allowances are going to remain unchanged for the foreseeable future.

Another problem is the continued use of the dry whey price in the Class III formula. This is impacting both California cheese makers (Farmdale Creamery, San Bernardino, CA, mentioned the “dysfunctional” whey factor that is “completely dissociated from the realities of realizable end product prices in the marketplace” when it asked the CDFA to deny the recent hearing petition) as well as cheese makers in federal orders (when USDA, three years ago this month, asked for comments in its regulatory review of federal orders, the use of the dry whey factor in the Class III formula was roundly criticized by the Wisconsin Cheese Makers Association).

Maybe the dairy industry has gotten this whole California proceeding backwards. Maybe the US dairy industry should have tried to join the California system; at least then changes could be made more quickly than they are now.

 

Storm Clouds On The US Dairy Export Horizon

For the most part, the last several years have been pretty good years for the US dairy industry from an export standpoint. Whether these positive trends continue in the future remains to be seen.

As reported on our front page this week, US dairy exports in 2017 were valued at $5.383 billion, up 15 percent from 2016 and the highest level since 2014’s record $7.1 billion. Considering that US dairy exports as recently as 2003 were under $1 billion in value, last year’s export level should be considered a great success story.

But, when looking over the list of leading US dairy export markets, we can’t help but feel more than a bit concerned about what the future holds for US dairy exports in general and exports of some key products in particular.

Let’s start right at the top, with Mexico. That country has been the leading US dairy export market for years, and last year marked the seventh consecutive year in which US dairy exports to Mexico topped $1 billion in value. Mexico is also the leading destination for US exports of cheese and nonfat dry milk, to mention just two products.

But there are at least three reasons to be concerned about the future of US dairy exports to Mexico. First, the US, Mexico and Canada are currently renegotiating the North American Free Trade Agreement, but there is some speculation that the talks will fail and the US will end up withdrawing from NAFTA.

Without NAFTA, the duty-free access the US enjoys into Mexico could evaporate and be replaced by WTO MFN (most-favored nation) tariff levels, according to the National Milk Producers Federation and US Dairy Export Council. This would “dramatically undermine a core advantage” of US suppliers as the only major dairy supplier to Mexico currently benefitting from free trade.

Second, Mexico and the European Union are currently working on an update to their trade agreement, and according to the European Commission, the EU and Mexico remain strongly committed to achieving an ambitious and balanced deal. Eucolait (the European Association of Dairy Trade) sees significant potential to increase EU dairy exports to Mexico if tariff protection is removed.

Third, Mexico was part of the original Trans-Pacific Partnership agreement (as was the US), and remains part of the recently concluded Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP). So are New Zealand and Australia, two key US dairy trade competitors.

Malcolm Bailey, chairman of the Dairy Companies Association of New Zealand, said the CPTPP “does not go as far as we would like in terms of dairy access,” but adds that there are “some useful gains in markets such as Japan and Mexico.” Could New Zealand’s gains become the US dairy industry’s losses?

The number two market for US dairy exports over the last three years has been Canada, so the first and third points noted earlier (about the renegotiated NAFTA and the CPTPP) apply. Also, Canada and the EU are implementing their Comprehensive Economic and Trade Agreement, which gives the EU considerably more access to the Canadian cheese market (among other things).

That makes it at least somewhat less likely that Canada will give the US much more access to its cheese and dairy markets under a renegotiated NAFTA.

Ranking third as a US dairy export market last year was China. Last year was the third time in five years that US dairy exports to China topped half a billion dollars in value.

Last month, President Trump approved recommendations to impose safeguard tariffs on solar cells and modules imported from China.
According to a recent report from the Congressional Research Service, which provides nonpartisan policy and legal analysis to Congress, the bilateral economic relationship between the US and China has “become increasingly complex and often fraught with tension.”

Meanwhile, New Zealand entered into a free trade agreement with China back in 2008, and recently the two launched talks to upgrade that FTA. For the year ended March 2017, China accounted for 24 percent of New Zealand’s dairy exports by value, and China was New Zealand’s number one market for cheese and whole milk powder exports, among other products.

What might a renegotiated New Zealand-China FTA do to US dairy exports to China?

Japan ranked fourth as a US dairy export market last year. Japan is one of the leading dairy importers in the world, and is also part of the recently concluded CPTPP. As noted earlier, DCANZ sees some useful dairy access gains in Japan as a result of the CPTPP.

Meanwhile, the EU and Japan last year reached an agreement in principle on an Economic Partnership Agreement. Under that pact, which hasn’t yet been implemented, for cheese and dairy products, significant market access improvements were agreed for the EU’s core export products to Japan. For example, the agreement will provide for full liberalization of tariffs for hard cheeses (Cheddar, Gouda, Parmesan, etc.). And a tariff-rate quota will grant meaningful access for other cheeses, according to the European Commission.

We could go on and on here about the potential problems that could arise with key US dairy export markets. Just to cite one more example, Chile, Singapore, Malaysia and Vietnam are all among the top 20 US dairy export markets, and they are also included in the recently concluded CPTPP.

Last year was another impressive year for US dairy exports. But the road ahead appears bumpier.

Federal Orders Have Many Problems, Including Their Existence

Federal milk marketing orders are plagued with several ongoing problems, ranging from declining Class I utilization to reliance on product price formulas that either need to be updated or should be ditched altogether.

At the same time, federal orders remain quite popular among dairy producers. Indeed, they are so popular that, sometime this year, California dairy producers will probably vote to join the federal order program, greatly expanding the volume of milk priced and pooled under federal orders.

In other words, federal orders aren’t going away anytime soon. But every once in a while, we’re prompted to take a broader look at the federal order program and wonder why the heck we still have this program here
in 2018.

This “broader look” was prompted by a paper written by Daniel A. Sumner, director of the University of California Agricultural Issues Center and professor in agricultural and resource economics at the University of California, Davis. His paper, Dairy Policy Progress: Completing the Move to Markets, is one of a series of ag policy papers written for the American Enterprise Institute (for more details, please see the front-page story in this week’s issue).

AEI is a public policy think tank that is committed to, among other things, strengthening the free enterprise system in the US and globally.
Sumner sprinkles his dairy policy paper with some pretty colorful language about the federal order program. And this has us wondering why we still have this program, let alone why the program continues to grow more popular.

As Sumner points out, the federal order system dates from early in the New Deal era of the Great Depression in the 1930s. After the US Supreme Court ruled a first version of the program unconstitutional, the Agricultural Agreement Act of 1937 authorized USDA to intervene in the dairy markets only if requested by dairy farms in a given region.

And USDA, with the dairy industry’s blessing (at least the blessing of dairy producers and/or their cooperatives), has been intervening in the dairy markets ever since. In 2016 (the most recent year for which full-year statistics are readily available), almost 134 billion pounds of producer milk was pooled on the 10 federal orders. That’s about 63 percent of total US milk production that year.

Sumner wastes little time in criticizing the federal order system, noting, in the fifth paragraph of the executive summary of his paper, that US milk pricing “is dominated by an 80-year-old array of price regulations of mind-boggling complexity.”

That’s just the start. Sumner notes that there are several stated objectives of the federal order program, but that some of those objectives suffer from “vagueness of terms.” For example, one objective is to promote orderly marketing conditions in fluid milk markets, but what exactly is “orderly marketing?”

Well, among other things, it’s part of USDA’s recommended decision to establish a California federal order. Specifically, USDA’s recommended decision “finds that a FMMO for California would provide more orderly marketing conditions in the marketing area, and therefore promulgation of a California FMMO is warranted.”

But not everyone believes that California’s current marketing conditions are disorderly, or that they will become more orderly once a California federal order is established. We shall see.

Sumner goes on to describe the federal order system as an “elaborate and sophisticated set of complicated rules and regulations,” and adds that it is “hard to see how they make milk markets more ‘orderly’ except in the sense that they are now controlled by active government agents rather than forces of supply and demand.”

He also said it’s “hard to picture that milk producers and processors would fail to assure an adequate supply of beverage milk products for consumers.” That’s a valid point, given that Class I utilization has fallen from over 60 percent as recently as 1970 to under 31 percent in 2016.
That percentage will drop if California becomes the 11th federal order, given that, in 2016, California’s Class 1 utilization was just 13 percent.
Marketing orders don’t “simply gum up the gears of progress for the dairy industry, which is bad enough; they cause higher prices for consumers of beverage milk products (notably children).”

Sumner’s observation reminded us of a study, published in the journal Applied Economic Perspectives and Policy back in 2010, that found that federal order regulations are “highly regressive,” and that virtually all major groups of consumers would benefit from eliminating milk marketing orders. “Poorer families with young children gain more from eliminating this policy-induced price discrimination than do richer families with no children or older children.”

It’s hard to believe that not a single member of Congress will pick up on that point and decide that consumers would be better off without federal orders.

Finally, Sumner offers the following: “The bottom line is why, 30 years after the fall of the Berlin Wall and decades after China abandoned rigid Mao-style central planning, the United States maintains Soviet-style milk pricing. The most likely answer is that some farms and even some processors gain from the system at the expense of other producers and consumers. These winners take advantage of political inertia and fatigue among those who would benefit from change.”

If President Trump is really serious about getting rid of onerous regulations, he could do far worse than pushing for the termination of the federal order program.

 

Innovate, Innovate, Innovate

If we heard it once, we heard it 100 times at this week’s Dairy Forum 2018 in Palm Desert, CA: innovation is one of the keys to a prosperous future for the dairy industry.

Indeed, innovation is why the dairy industry has gotten to where it is today — producing over 215 billion pounds of milk, up almost 30 billion pounds from just a decade ago, and selling zero pounds to the government — and it’s also how the dairy industry will deal with a projected 34 billion pounds of additional milk by the year 2027.

How important has innovation been for dairy industry growth in recent years? Pretty important, although sometimes success has been achieved by just sticking with the basics. More on that point later.

The cheese industry has certainly benefitted greatly from innovation over the years, with everything from more specialty cheese production to resealable packaging. And more recently, cheese has become available in an almost mind-boggling array of packaging and flavor options, ranging from single-serving snack sticks and slices to dried cheese and unique added flavors.

And how has all of that innovation worked out for the cheese industry? Pretty nicely, at least from a statistical standpoint, with cheese production rising from about 8.3 billion pounds in 2000 to somewhere around 12.4 billion pounds in 2017, and per capita cheese consumption rising from about 29.8 pounds in 2000 to somewhere around 37 pounds in 2017.

Then there’s the yogurt category, which has grown from 1.8 billion pounds in 2000 to over 4 billion pounds for eight consecutive years (although, when the 2017 production numbers are released, they will show that yogurt output declined for the third straight year).

How much has innovation helped boost yogurt sales? Quite a bit. Obviously the best-known example here is Greek yogurt, which was virtually unknown outside Greece a decade ago and now accounts for a somewhere in the neighborhood of 40 percent of total US yogurt production.

But innovation has continued well beyond Greek yogurt. For example, Icelandic yogurt has only been widely available on the US market for a few years, but it’s prospects are considered bright enough that Lactalis, one of the largest dairy companies in the world, recently announced plans to acquire Icelandic yogurt producer siggi’s.

Then there’s Australian-style yogurt which, again, was hardly known outside its home country a decade ago. But Colorado’s noosa (which has been owned by private equity firm Advent International since late 2014) has gained quite a following in recent years, and appears to have a very bright future, as does the overall yogurt category, despite its current struggles (generally attributed mainly to General Mills, which has been posting double-digit percentage declines in yogurt sales in some recent quarters).

One dairy industry segment that hasn’t been all that innovative is the fluid milk sector, which still derives the bulk of its sales from plastic gallon jugs.
And so, in 2016, beverage milk sales fell below 50 billion pounds for the first time in several decades, and per capita fluid milk consumption has dropped from 247 pounds back in 1975 to 154 pounds in 2016.

Yes, there’s been some interesting innovation in the beverage milk business in recent years — particularly single-serve containers, which make milk as convenient as competitive beverages such as soda and water.

But those single-serve containers haven’t been enough to reverse the declines in sales and per capita consumption. And it’s worth noting that single-serve containers have now been around for a couple of decades, meaning they really aren’t a new innovation any more.

Still, there’s reason for some optimism with respect to milk because of its growing use outside the jug. Among other products, there’s fairlife, a partnership between Select Milk Producers and The Coca-Cola Company. And there are also a growing number of products made from coffee combined with milk, available everywhere from Starbucks to convenience stores.

There is one interesting fluid milk statistic that illustrates that it isn’t always innovation that helps boost sales; sometimes it’s just changing consumer tastes and perceptions. That is, whole milk sales, after declining steadily for decades, suddenly started to increase in 2014, and also posted increases in both 2015 and in 2016.

This is undoubtedly due at least in part to the fact that recent nutrition research has found that saturated fat isn’t the dietary villain it was long perceived to be, and also due to the fact that whole milk simply tastes better than any other type.

On a related note, butter has also been faring quite well in recent years, with per capita consumption rising from 4.5 pounds in 2000 to 5.7 pounds in 2016. Given that the majority of butter is still sold either in one-pound retail packages or to industrial or foodservice users, it would appear that innovation hasn’t been the main driver of rising butter consumption (the aforementioned reduction in fat-phobia undoubtedly has helped).

One interesting aspect of the rise in per capita butter consumption is that butter production actually declined slightly in 2014, 2015 and 2016. So for butter, one of the “innovations” that’s helped boost sales in recent years has been to import more butter from Ireland (US butter imports from Ireland rose from 5.3 million pounds in 2012 to almost 30 million pounds in 2016 and 41 million pounds in the first 11 months of 2017).
Innovation is key to the past, present and future of dairy.

 

Memo To Trump, Congress: Ditch The Dietary Guidelines

It’s been just over two years since the US Departments of Agriculture and Health and Human Services released the 2015-2020 Dietary Guidelines for Americans, which means planning for the next edition of the Dietary Guidelines is probably already underway.

Here’s hoping that President Trump, in his zeal to reduce the federal regulatory burden (or at least the federal government burden) will decide to pull the plug on that next update. And that Congress will go along with the idea.

First, a bit of background to put both the timeline and the federal “obligation” on the Dietary Guidelines into perspective. Under a law passed back in 1990, the secretaries of HHS and USDA are directed to issue, at least every five years, a report titled Dietary Guidelines for Americans.

So that’s where Congress comes in. Congress would have to amend or repeal the National Nutrition Monitoring and Related Research Act of 1990 so that the federal government was no longer obligated to publish Dietary Guidelines every five years. Of course, the federal government could still publish Dietary Guidelines without the law; they were issued voluntarily by USDA and HHS in 1980, 1985 and 1990.

As far as the timeline for development of the guidelines is concerned, one step in the process involves a Dietary Guidelines Advisory Committee, which started meeting back in mid-2013 and released its scientific report in February 2015. And establishment of the 2015 Dietary Guidelines Advisory Committee was announced by HHS in early February, 2013.

So we are conceivably just weeks away from when the process of developing the 2020-2025 edition of the Dietary Guidelines for Americans gets underway. That makes this an ideal time for Congress and the Trump administration to pull the plug on these guidelines for at least the foreseeable future.

And why should they do that? There are at least two compelling reasons.

First, a recent study examined national dietary guidelines that were introduced in 1977 and 1983 by the US and United Kingdom governments to reduce coronary heart disease mortality by reducing dietary fat intake.

The study examined randomized controlled trial evidence available to the dietary committees at the time, and found “no support” for the recommendations to restrict dietary fat (for more details on this study, please see “Evidence Didn’t Support Recommendations To Limit Intake Of Dietary Fat, Saturated Fat,” on page 3 of our Dec. 29, 2017 issue).

The public health dietary advice announced by the Select Committee on Nutrition and Human Needs in 1977 was followed by the first edition of the Dietary Guidelines for Americans in 1980. And the third of seven recommendations in the 1980 Dietary Guidelines was: avoid too much fat, saturated fat, and cholesterol.

But the review released late last year found that the evidence available at the time did not support the introduced dietary fat guidelines. And yet those dietary fat guidelines were not only introduced, they have been repeated every five years.

And let’s face it, these dietary fat guidelines have not been friendly for dairy products. Indeed, to avoid too much fat, saturated fat, and cholesterol, here’s a bit of advice from that first edition of the Dietary Guidelines: limit your intake of butter, cream, hydrogenated margarines, shortenings and coconut oil, and foods made from such products.

Five years later, in the 1985 edition of the Dietary Guidelines, the anti-fat advice was expanded a bit to include the following: use skim or lowfat milk and milk products. And while the latest edition of the Dietary Guidelines dropped the advice about dietary fat in general, it still stuck with the advice to limit intake of saturated fat.

A second reason the federal government should stop publishing Dietary Guidelines is because the science is still very unsettled. For example, the aforementioned review released late last year noted that the latest edition of the US Dietary Guidelines maintained the advice to restrict saturated fat, but the “pool of evidence does not support this recommendation,” and that the UK advice has not changed since 1983. Dietary advice in the UK and the US at least, needs “re-examination.”

Also, that review noted that diabetes and obesity “have increased since guidelines to restrict fat intake. This association needs examination.”
Just for the heck of it, we took a look at a couple of recent nutrition-related studies involving dairy products to see if their conclusions reflected the fact that the science is still unsettled.

A 2017 review found that high compared with low cheese consumption was significantly associated with 10 to 14 percent lower risks of cardiovascular disease, but also concluded that future large prospective studies “are warranted.”

Another study released last year found that a ketogenic (high-fat, low-carb) diet extends lifespan and slows age-related decline in physiological function in mice, but added that future studies “are warranted to further investigate the mechanisms through which this diet works and to optimize diet composition and feeding approaches to further extend healthspan.”

The federal government has, for over four decades, been recommending a reduction in dietary fat intake while lacking evidence to support that advice. Enough is enough. It’s time for the government to stop publishing dietary advice based on flawed, inconclusive research and to wait until more research can be conducted and better advice can be provided.

 

The Illogical World Of Retail Milk Prices

Fluid milk sales have been in the doldrums for many years now, and from time to time we can’t help but wonder if sales would improve, at least somewhat, if retail milk prices were lower.

Yes, fluid milk represents a pretty nice bargain these days. Specifically, the average retail price for a gallon of whole milk back in November, as reported by the US Bureau of Labor Statistics, was $3.15 per gallon, the lowest average November price since 2009 and more than 70 cents lower than November 2014.

Also according to the BLS, the Consumer Price Index for whole milk was 199.611 in November (1982-84=100), the fourth straight month in which the whole milk CPI was under 200. To put that in a bit of recent historical perspective, the whole milk CPI was above 200 every single month in 2012, 2013, 2014 and 2015, reaching a record high of 231.574 in September 2014.

So by these measures, fluid milk prices are quite a bargain these days. But by at least one other measure, retail milk prices are, well, they’re kind of illogical. And if they were more logical, maybe milk sales would be at least a little better.

We’re talking here about retail prices for whole and reduced fat (2 percent) milk as collected by federal milk order market administrators.
They conduct their retail milk price survey one day between the 1st and 10th of each month in 29 selected cities or metro areas located in federal order markets. One outlet of the largest and second largest food store chains and the largest convenience store chain are surveyed.

In November 2017, retail whole milk prices in the market administrators’ survey averaged $3.41 per gallon, or 26 cents higher than in the BLS survey (keep in mind that the federal order survey doesn’t include California, at least not yet, nor does it include Idaho, among other states).

What’s remarkable about the market administrators’ survey isn’t the average price per se, but rather how much those retail prices vary from city to city. And the illogical nature of some of those prices.

Back in November, average retail whole milk prices ranged from a low of just $1.99 per gallon in Cincinnati, OH, to a high of $4.38 per gallon in both Baltimore, MD, and in Boston, MA.

Between those extremes, there are cities where whole milk is a pretty good bargain, and cities where whole milk is kind of a ripoff.

For example, last November, there were eight cities (in addition to Cincinnati) in which retail whole milk prices averaged under $3.00 per gallon (and thus below the BLS average of $3.15 per gallon). And three of those cities had average retail whole milk prices under $2.50 per gallon; those cities were Houston, TX, Indianapolis, IN, and Wichita, KS.

Those four cities all make sense as far as relatively low fluid milk prices are concerned. They make sense because they’re located in or near areas that have high per capita milk production.

Per capita milk production is a data series reported every year by the Central federal order market administrator’s office. A comparison of per capita production to per capita consumption data may reflect the aggregate supply and demand balance for individual states and regions.

So, for example, Ohio in 2016 ranked 20th in per capita milk production, but is adjacent to four states that rank higher, including Michigan (which ranked 9th), Pennsylvania (12th), New York (13th) and Indiana (19th). In other words, there’s a lot of inexpensive milk moving around the Cincinnati area.

At the other extreme, retail whole milk prices averaged above $4.00 per gallon in November in not only Baltimore and Boston but also in Kansas City, MO, and in Minneapolis, MN. Based on their locations, none of these cities should really have exceedingly high retail milk prices.

Yes, Baltimore and Boston are in states with relatively low per capita milk production (Maryland and Massachusetts in 2016 ranked 33rd and 44th, respectively, in per capita milk production), but they are both located in the Northeast, where there’s been a surplus of milk in recent years. And Kansas City is right across the border from Kansas (which ranked 8th) and not all that far south of Iowa (which ranked 7th).

And Minneapolis? Good grief, why does Minneapolis have some of the highest average retail milk prices in the US? Minnesota itself ranked 6th in per capita milk production in 2016, while neighboring Wisconsin ranked second and neighboring South Dakota ranked fifth. Iowa is another neighbor.

It’s hard to believe that retail whole milk prices last year averaged 42 cents per gallon higher in Minneapolis than in New Orleans and 18 cents per gallon higher than in Miami.

So what’s going on here? According to a 2001 report from the US Government Accountability Office (then known as the General Accounting Office), a number of factors influence the price of milk at all levels of the fluid milk marketing chain, including, among others the degree of competition existing in the marketplace.

Interestingly, that GAO study looked at average retail prices for 2 percent milk in 15 cities and, in 2000 (the first year federal order reforms were in effect), the average price for all 15 cities was $2.66 per gallon. Cincinnati was lower than average, at $2.52 per gallon.

Two cities tied for the highest price, at $3.11 per gallon: Miami and Minneapolis.

Some things never change. Milk is a bargain in some areas and a ripoff in other areas, and per capita fluid milk consumption keeps declining. Isn’t that interesting?

 

Dairy Industry Isn’t Very Predictable, But In 2018...

Making predictions about the dairy industry is never an easy undertaking, but at this early stage there are at least one or two things we feel can be safely predicted about 2018 from a dairy industry perspective.

For starters, 2018 will in all likelihood be the year in which California joins the federal order system, or at least California dairy producers will have a unique opportunity to vote on joining the federal order system. Interestingly, we made a similar prediction a year ago (substituting 2017 for 2018).

Instead, we got a recommended decision from USDA in February, a comment deadline that ended in May, and then...basically nothing. But a final decision should be announced sometime soon, followed by a producer vote and then, possibly, California will become the 11th federal order.

The dairy industry can also expect to see a new farm bill this year, if for no other reason than because many key provisions of the 2014 farm bill, including the Margin Protection Program and the Dairy Product Donation Program, expire this year.

On the other hand, the dairy industry can expect to see no new farm bill this year, if for no other reason than because Congress just doesn’t pass farm bills because of expiring provisions. Just in this century, the 2012 farm bill didn’t get passed by Congress until early 2014, the 2007 farm bill didn’t get passed until 2008 and the 2001 farm bill became the 2002 farm bill.

So the dairy industry can expect a lot of talk about the 2018 farm bill, but in the end will probably see an extension of the 2014 farm bill, followed a lot of talk about a 2019 farm bill. And quite possibly some tweaks to the much-criticized Margin Protection Program.

What about prices in 2018? A couple of weeks ago in this space, we noted that prices haven’t been as volatile over the last couple of years as they were in, say, 2014, but also noted volatility might be more of an even-numbered-year phenomenon, specifically mentioning not only 2014 but also 2012 and 2016 (specifically, CME cash market prices for Cheddar blocks).

So will we see greater price volatility here in 2018? That is, of course, impossible to predict. The dairy industry is always one drought away from higher prices, and one mild summer away from lower prices. And in today’s global dairy business, those droughts could occur anywhere from New Zealand to Wisconsin, while those mild summers could occur anywhere from New York to Germany.

One point worth keeping in mind: it’s now been over three years since the block price was above $2.00 a pound. The block market first topped the $2.00 mark back in 2004, and since then also topped the $2.00 mark in 2007, 2008, 2011, 2012, 2013 and 2014. In other words, we’re overdue for a block price of $2.00 or higher.

For what it’s worth (probably not much), blocks reached $2.00 a pound after starting the year lower than they started 2018 (blocks fell to $1.5250 on Tuesday) three times: in 2011, when blocks stood at $1.3425 on Jan. 3 and reached $2.00 less than two months later; in 2007, when blocks stood at $1.3300 on Jan. 3 and reached $2.00 by mid-June; and in 2004, when blocks were $1.3050 on Jan. 5 and reached $2.00 on Mar. 19.

Prices here in 2018 will depend on many, many factors, two of which will be domestic milk production and international dairy trade. On the production front, 2017 will long be remembered for exposing problems with milk processing capacity in the Upper Midwest and the Northeast.

How will that impact production in 2018? It could be that dairy producers will be more reluctant to expand their herds now than a year or so ago.
Just to cite one statistic: milk cow numbers for the US rose from 9.331 million head in September 2016 to 9.354 million head in December 2016, but in 2017 they fell from 9.401 million head in September to 9.397 million head in both October and November.

Meanwhile, the trade front will bear very close watching in 2018. As noted in this space last week, the US basically backpedaled on trade agreements last year, withdrawing from the Trans-Pacific Partnership and launching talks to modernize the North American Free Trade Agreement.

According to President Trump’s trade policy agenda, the administration believes its trade policy goals can be best accomplished by focusing on bilateral negotiations rather than multilateral talks. That’s all well and good, but at this point it doesn’t appear that the US is actually engaged in any bilateral talks.

And even if talks with a major dairy importer such as Japan were to be launched this year, it would undoubtedly take several years before those negotiations were successfully completed and more liberalized dairy trade policies were implemented. Meanwhile, US dairy trade competitors such as the European Union continue to move ahead on successfully concluding new trade agreements.

On the regulatory front, the dairy industry in 2018 can probably expect...not much. There is at least one exception to these low expectations: under a law passed in July 2016, USDA this year has to establish a national mandatory bioengineered food disclosure standard with respect to any biengineered food and any food that may be bioengineered.

Finally, here’s a prediction that’s guaranteed to come true: Consumers will continue to be irrational in 2018. The bad news is that plant-based foods will continue to steal market share from real dairy products, despite their nutritional, taste and other shortcomings.

The good news is that, in 2018 as in every other year, consumers have to eat, and dairy products offer unparalleled value.

2017 From A Dairy Perspective: The Year Of Trump

Trying to figure out some sort of dairy-related “theme” for any given year is seldom if ever an easy undertaking, save for the occasional year when prices reach record highs, such as in 2014, or historic lows, such as in 2009; or when a far-reaching farm bill is passed, such as in 2014 (there’s that year again), when the farm bill terminated the Dairy Product Price Support Program, the Milk Income Loss Contract program and the Dairy Export Incentive Program and created the Margin Protection Program for dairy producers.

What about 2017? Was there an overriding theme this year? Well, we think so; this past year has clearly been the year of President Trump.
It’s difficult if not impossible to recall a President having more influence over the dairy industry in his first year in office. President Trump’s influence spanned the spectrum from domestic to international issues.

On the domestic front, Trump’s first year will be remembered for several regulatory initiatives. For one thing, back in August, the US Food and Drug Administration issued guidance to industry stating that it will exercise enforcement discretion regarding the use and labeling of fluid ultrafiltered milk to make standardized cheeses and related cheese products.

To say this was a long-awaited decision would be an understatement; FDA was first petitioned on the fluid UF milk issue some 18 years ago, during the Clinton administration. So the new FDA guidance represented some mighty welcome progress on an issue of great importance to the dairy industry.

Meanwhile, the Trump administration slowed the progress of at least a couple of FDA initiatives.

First, during President Obama’s final year in office, FDA had published final rules on the updated Nutrition Facts food label and on serving sizes.
Compliance dates were set at July 2018 and July 2019, depending on the size of the food company.

Several months ago, FDA proposed to extend the Nutrition Facts and serving size final rules by about a year and a half, to Jan. 1, 2020, for larger companies and to Jan. 1, 2021, for smaller companies.

Second, FDA last spring decided to extend the compliance date for menu labeling requirements from May 5, 2017, to May 7, 2018. Those menu labeling rules apply to restaurants or similar retail food establishments that, among other things, sell restaurant-type foods.

Finally on the domestic front, FDA has invited comments and information to help the agency identify existing regulations that could be modified, repealed, or replaced to achieve meaningful burden reduction while still allowing the agency to achieve its public health mission. Comments are due by Feb. 5, 2018, after which the agency might decide to scrap some of its less-popular regulations (of which there are probably many).

It is arguably on the international front that the Trump administration has had the most dairy-related impact this year, in both positive and negative ways.

Trump’s international activities began almost on day one of his administration. It was actually on Jan. 23, 2017, that Trump signed a memorandum directing the US Trade Representative to withdraw the US as a signatory to the Trans-Pacific Partnership.

The TPP, it may be recalled, included the US along with major dairy exporters such as New Zealand and Australia and major dairy importers such as Japan and Mexico. A 2016 report from the US International Trade Commission concluded that, under the TPP, US dairy exports to TPP member countries would increase $2.0 billion relative to the baseline, while dairy imports from all TPP members would increase $369 million after full implementation. Now, we’ll never know.

The TPP will continue without the US, and it can be expected that some US competitors will take advantage of reduced trade barriers in some countries. For example, New Zealand will gain new dairy market access to Japan, Mexico and Canada under the new Comprehensive and Progressive Agreement for TPP.

Several months after withdrawing from the TPP, the Trump administration announced its intention to renegotiate and modernize the North American Free Trade Agreement. This is of course huge for the US dairy industry, since Mexico and Canada are the two largest markets for US dairy exports (on a value basis).

Five rounds of NAFTA talks have taken place so far, with another round scheduled for January 2018. There is some speculation that the US will eventually withdraw from NAFTA, which would be a highly unfavorable development for a US dairy industry that is increasingly reliant on exports.

Specifically regarding Canada, Trump himself mentioned Canada’s dairy pricing policies on at least a couple of occasions last April, a real rarity for any President. The US is attempting to resolve this issue in the ongoing NAFTA negotiations, but Canada appears intent on keeping its Class 7 pricing policy.

While the US has backpedaled on trade, many of its dairy competitors have continued to move forward. As noted earlier, the TPP (now the CPTPP) will move ahead without the US. Meanwhile, the European Union recently concluded trade talks with Japan, and just last week the EU and Mexico concluded the seventh round of talks on a new trade agreement.
President Trump and his administration generated many dairy- and food-related headlines in 2017, and set the stage for much more to come. And he’s still got more than three years to go before his first term is finished.

 

Price Volatility? What Price Volatility?

The phrase “price volatility” has become kind of a cliche here in the 21st century dairy industry. Prices go up, prices go down, sometimes pretty substantially — and sometimes in a single week.

But a funny (or not so funny, depending on your perspective) thing has happened here in 2017: prices haven’t really been all that volatile, by some 21st century measures. It’s actually been kind of a boring year, dairy price-wise.

To put this in some historical perspective, we thought we’d compare two years, one from the era of little or no volatility and one from the current era of sometimes extreme volatility.

The year 1982 was certainly lacking in price volatility; there were exactly four Cheddar 40-pound block price changes at the old National Cheese Exchange that year, two of which were one-cent changes and the other two of which were quarter-cent changes. The block market that year ranged from a low of $1.3525 per pound (for the first eight and a half months of the year) to a high of $1.3725 per pound.

And the Minnesota-Wisconsin price (predecessor of today’s Class III price) in 1982 ranged from a low of $12.42 per hundredweight to a high of $12.62 per hundred.

Fast-forward to 2014, and the block price on the CME (which trades every day, as opposed to the weekly trading at the old NCE) ranged from a low of $1.4950 per pound to a record high of $2.4500 per pound (and that was all in the last four months of the year), a difference of almost a dollar.
And the Class III price ranged from a low of $17.82 per hundred to a record high of $24.60 per hundred.

How about here in 2017? Cheddar blocks at the CME have ranged from a low of $1.3600 per pound back in mid-March to a high of $1.8500 per pound in early February (that was the only day this year that the block market was above $1.80 per pound), a range of less than 50 cents from low to high.

As noted earlier, that’s considerably less volatile than in 2014, but also less volatile than in 2016 (when the block price ranged from $1.2700 to $1.9425 per pound, a difference of 67.25 cents), or in 2012 (when the block price ranged from $1.4600 to $2.1200 per pound, a difference of 66 cents per pound).

Maybe volatility is more of an even-numbered-year phenomenon. Not only have blocks traded in a fairly narrow range this year, that was also the case in 2015 (a low of $1.4000 and a high of $1.8000 per pound) and in 2013 (a low of $1.5500 and a high of $2.0000 per pound).

The CME cash butter market has also been lacking in price volatility, relatively speaking, this year. Again, let’s use 2014 as an example of extreme volatility. That year, the CME butter price ranged from a low of $1.5400 per pound to a high of $3.0600 per pound, an astonishing difference of $1.52 per pound.

This year, the CME cash butter price has ranged from a low of $2.0625 a pound back in mid-April to a high of $2.7375 a pound in early August, a difference of 67.5 cents per pound.

The butter price range this year is actually notable for a couple of reasons. First, it’s far narrower than in at least a couple recent years — specifically, in 2014 and in 2015, when the butter price started the year around $1.55 and eventually soared above $3.00.

Also, barring a last-minute collapse, this will end up being the first year ever that the CME butter price remained above $2.00 per pound for the entire year. Or any other CME cash market price, for that matter.

The lack of volatility in CME cheese prices has translated into a lack of volatility in the Class III price, which has ranged from a low of $15.22 per hundred to a high of $16.88 per hundred, a difference of just $1.66. The last time the Class III price range for an entire year was under $2.00 was back in 2005, when it ranged from a low of $13.35 to a high of $14.70 per hundred.

These relatively stable farm milk and dairy commodity prices in 2017 have translated into relatively stable consumer prices as well. Through the first 11 months of this year, the Consumer Price Index for dairy products has ranged from a low of 215.192 (1982-84=100) to a high of 220.552.
By contrast, back in the extremely volatile year of 2014, the CPI ranged from 219.362 to 229.87.

There are several caveats to all of this price volatility, or lack of price volatility, here in 2017. First, comparisons going back before 1998 can be somewhat misleading, since prior to September of that year cash trading took place just once a week. There are now over 250 chances for prices to change every year, compared to 52 chances (or 53, depending on the year) back in the old days.

Second, weekly averages matter as much if not more than daily price changes. So, for example, the block price did reach $1.8500 a pound back in early February, but the average block price that week was $1.7475, indicating that the $1.8500 price was kind of an anomaly.

Third, federal order prices are established using cheese, butter, dry whey and nonfat dry milk prices from the AMS “National Dairy Products Sales Report,” rather than CME prices. Those prices aren’t quite as volatile as CME cash market prices (even comparing them to weekly average cash market prices).

Despite the relative lack of price volatility this year, cheese, butter and milk prices remain highly volatile from a historical perspective. After all, any time the block price changes five times in a single week (which it did most recently during the week of Nov. 13-17), it can be said that block prices changed more during one week than during all of 1982. That’s pretty volatile.

 

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