Dick Groves
Editor, Cheese Reporter




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Checking Out The Latest Non-Dairy Alternatives

Last week, while a record 3,667 real (animal-derived) dairy product entries from around the world were being evaluated at the 2020 World Championship Cheese Contest in Madison, WI, the Plant Based Foods Association and the Good Food Institute released new data showing that US retail sales of plant-based foods reached $5 billion last year.

More specifically as far as dairy products are concerned, sales of plant-based “milks” grew 5 percent to reach $2 billion in sales, while sales of plant-based “cheese” grew 18.3 percent to $189 million, sales of plant-based “ice cream” grew 5.7 percent to $336 million, and sales of various other plant-based “dairy” products also increased.

In fact, if you add up all the “dairy” categories broken out by PBFA and GFI, sales last year topped $3.2 billion. And while there are few if any guarantees in the food business, we can pretty much guarantee that sales of these products will keep growing.

One reason we’re confident in making that prediction is because of all the new products that companies operating in the plant-based food space have been introducing lately. These new products serve at least two purposes: they draw attention to the new products themselves and the plant-based foods category in general; and they at least potentially create opportunities for retailers to give these products more shelf space, at the expense of traditional dairy products.

So, as sales of these plant-based products continue to rise, and as these products proliferate and potentially eat up shelf space previously devoted to real dairy products, we thought it might be interesting to take a quick look at a few of the new alternative products being introduced by various companies.

Melt Organic is introducing two plant-based “cheese” spreads that are made from chickpeas (also known as garbanzo beans): Mozzarella Garlic Herb and Jalapeno Queso. Melt also said it will nearly triple the number of products sold, from three to eight, by summer 2020 and plans to launch Cheddar and Mozzarella hard “cheese” and spreads later this year. Also available from the company: various types of “butter” products made from an “Organic Oil Blend.”

Miyoko’s Creamery is introducing what it is calling “game-changing” new Cheddar and Pepper Jack “cheeses,” as well as a new spreadable “oat milk butter.” The Cheddar and Pepper Jack cheeses will be the first in a new line of everyday “cheeses” from Miyoko’s. Made using cultured legumes and oats, the new Cheddar and Pepper Jack cheeses will be the company’s first nut-free vegan “cheese” options.

Rucksack Foods doesn’t appear to have introduced any new products, but did recently announce that its plant-based “cheese,” OATzarella, has become third-party certified as gluten free. OATzarella is an organic plant-based “cheese” hand-crafted using domestic steel cut oats and extra virgin olive oil.

Kite Hill is launching a couple of new products: Kite Hill Blissful, which the company describes as a “thick, creamy and indulgent line of tasty coconut milk-based yogurts”; and Kite Hill Sour Cream Alternative, a plant-based “sour cream” made with a blend of creamy coconut and almond milk.

Laird Superfood, which makes assorted plant-based food products, has introduced its new family of plant-based liquid creamers for consumers who want to ditch dairy. Made from real, plant-based ingredients with no artificial flavors or colors, the new Superfood Liquid Creamer line also features three functional mushrooms: Lion’s Mane, Cordyceps and Chaga.

Finally, we have to mention a new line of “cheese” products being launched by Tofurky, which has been known since its founding in 1980 for plant-based meat-type products, such as roasts, burgers and sausages.

Now, the company is introducing Moocho dairy-free products, including Dairy-Free Cheddar Style Shreds, and Just Plain Yum spreads. The Cheddar Style Shreds are described as “Melty, Savory, Wisconsin-y,” and are made from water, expeller pressed coconut oil, faba bean protein, modified food starch, modified potato starch, tapioca flour and less than 2 percent of several other ingredients.

So what should the dairy industry make of all these new plant-based “dairy” products? Well, on the one hand, the traditional dairy industry should probably be flattered, as in “imitation is the sincerest form of flattery.”

Regardless of the nomenclature used on these products, they are clearly copying, or nearly copying, traditional dairy products. That’s why it can be somewhat difficult, in some supermarkets, to tell where the real dairy products end and the plant-based alternatives begin.

It’s amazing, and frustrating, to see some of the language used to promote these products, whether it’s Tofurky using the term “Wisconsin-y” or Miyoko’s stating that, with “a nod to the finest European cheeses, we’re applying modern innovation to elevate vegan cheese and butter to a whole new level.”

These product descriptions aside, we find it somewhat possible that, one of these days, the bubble is going to burst on at least some of these products. That’s because, beyond their vegan and/or dairy-free claims, they don’t appear to have all that much to offer.

Among other things, some of these products contain very little protein compared to real dairy products, have lengthy and unappetizing-sounding ingredient lists compared to real dairy products, and their flavors wouldn’t win any awards in the World Championship Cheese Contest.

But, at least in the short term, their sales will still keep rising.

Depooling Is Distorting Some Federal Order Statistics

USDA’s Ag Marketing Service has released its “Market Summary and Utilization 2019 Annual Report” for federal milk marketing orders and, as we reported last week, the volume of milk pooled on federal orders last year reached a record high of 156.5 billion pounds.

There were many other interesting numbers in this AMS report, including, among other things, that California’s federal order ranked third in terms of milk volume last year, and that the federal order Class III utilization percentage last year, 41 percent, was actually down from 43 percent back in 2000, the first year federal order reforms were in effect.

These two facts have at least one thing in common: they both occurred due at least in part to the depooling of milk.

Let’s start with the California federal order. That order became effective in late 2018, so 2019 was the first full year in which the California federal order was in effect.

And a mighty big federal order it is: last year, the volume of milk pooled on the California order totaled 24.27 billion pounds, meaning that the California federal order trailed only the Upper Midwest (32.3 billion pounds) and Northeast orders (26.8 billion pounds) in terms of producer milk receipts.

But the California order should really be the largest federal order in terms of producer receipts, and in fact the next-largest order shouldn’t even be close. That’s because California’s milk production last year totaled 40.6 billion pounds and the California federal order covers the entire state.

But, as we noted in our story last week, about 16.3 billion pounds of milk was depooled from the California federal order last year, which is why the California order trailed both the Upper Midwest and Northeast orders in terms of producer milk volumes. Some milk was depooled from those orders during certain months as well — for example, the volume of milk pooled on the Upper Midwest order last year ranged from a high of 3.25 billion pounds in June to a low of 1.6 billion pounds in November — but the fact that the volume of milk topped 3.2 billion pounds three times indicates that there were at least some months in which there was very little milk depooled.

That certainly wasn’t the case in California, where there was just one month last year in which less than 1 billion pounds of milk was depooled; that was in May, when the volume of milk pooled totaled 2.58 billion pounds and milk production totaled 3.56 billion pounds.

Then there’s Class III milk utilization for all federal orders, which, as noted earlier, was 41 percent last year, down from 43 percent in 2000 and also down from 43 percent as recently as 2018. That percentage would have been higher last year, and the Class I utilization percentage would have been lower, had it not been for a considerable volume of Class III milk being depooled.

There’s a pretty simple way to illustrate the volume of Class III milk that was depooled last year: look at the wide variation of milk pooled, or not pooled, in Class III on several federal orders.

California is the most obvious example here. In 2019, the volume of milk pooled in Class III on the California order ranged from a high of more than 1.4 billion pounds in March to a low of just 32 million pounds in November. More broadly on the California order, more than 1.2 billion pounds of milk was pooled in Class III in four months (January, February, March and June) and less than 100 million pounds of milk was pooled in three months (October, November and December).

Even conservatively estimating that Class III volumes should average 1.2 billion pounds a month brings total 2019 Class III volume on the California order to 14.4 billion pounds, or 6.7 billion pounds higher than was actually the case. And that would in turn raise federal order Class III utilization above 44 percent.

Then there’s the Upper Midwest order, which leads all other orders in Class III utilization by a wide margin, both in terms of utilization percentage and also total volume.

Last year, about 27.3 billion pounds of milk was pooled in Class III on the Upper Midwest order, and the monthly volume ranged from a high of 2.93 billion pounds in March to a low of 1.1 billion pounds in November.
Conservatively estimating that Class III volumes should average 2.6 billion pounds a month brings Class III volume up to 31.2 billion pounds, or almost 4 billion pounds more than was actually pooled last year.

Adding that 4 billion pounds to California’s extra 6.7 billion pounds delivers an extra 10.7 billion pounds to 2019’s Class III volume (and to total volumes pooled), and pushes the Class III utilization percentage close to 45 percent.

Four other federal orders had significant volumes of milk depooled from Class III late last year, including the Southwest, Central, Mideast and Pacific Northwest orders. A rough estimate is that, had there been little depooling of Class III milk in those four orders last year, another 7.5 billion pounds of milk would have been pooled in Class III, bumping the Class III utilization percentage above 47 percent.

Add all this depooled milk up, then add in Class IV utilization (also including several billion pounds of milk that was depooled from Class IV in California last year), add in Class II utilization and you would likely see the overall Class I utilization percentage drop below 25 percent.

That’s something to keep in mind as federal order reforms are debated. Back in the late 1990s, when federal order reforms were also being debated, Class I utilization was still above 42 percent.

Cheese Production Just Keeps Growing And Growing

The third decade of the 21st century is now underway, and there’s no reason to expect this new decade to bring any less uncertainty than the previous two decades did. The dairy industry will continue to experience more than its share of ups and downs.

Well, with one notable exception: US cheese production, which has risen every single year thus far in the 21st century (and will in all likelihood continue growing in the years ahead). And in fact cheese production increased almost every year in the final decade of the last century as well; the last time cheese production actually declined was in 1991.

So what has this 21st-century cheese production increase looked like? Back in 1999, US cheese production totaled 7.9 billion pounds, and last year it totaled 13.12 billion pounds; thus, cheese production has risen by about 5.2 billion pounds so far in the 21st century.

Some of those cheese production increases were pretty small; for example, 2001’s output of 8.261 billion pounds was up all of 3 million pounds from 2000, and 2003’s production of 8.56 billion pounds was up 10 million pounds from 2002.

By contrast, some of the other production increases were pretty large; for example, 2014’s output of 11.5 billion pounds was up 410 million pounds from 2013, and 2017’s production of 12.64 billion pounds was up 458 million pounds from 2016.

These 21st-century cheese production increases led us to wonder: What types of cheese production increases (or decreases) took place during two-decade periods in the 20th century? So we checked some statistics from USDA’s National Ag Statistics Service to find out.

NASS cheese production statistics unfortunately only report cheese production starting in 1919, so we can’t do a comparison of the first two decades of the 21st century with the first two decades of the 20th century.

We can, however, report that, according to NASS, US cheese production has increased from 479.4 million pounds back in 1919 to 13.12 billion pounds in 2019. Not bad for a century of progress: cheese production rose by 12.6 billion pounds from 1919 to 2019.

But while cheese production has experienced nothing but increases since 1991, it experienced quite a few declines in the years and decades before then.

Indeed, cheese production in 1920, at 417.9 million pounds, was down more than 61 million pounds from 1919, so the Roaring 20s didn’t exactly get off to a roaring start as far as cheese production was concerned.

Between 1920 and 1939, cheese production declined six times: in 1922, when output of 428.5 million pounds was down 1.7 million pounds from 1923; in both 1926 and 1927, after production had reached a record high of 501 million pounds in 1925; in both 1931 and 1932, after production had reached a record high of 509.6 million pounds in 1930; and in 1939, after output reached a record 726 million pounds in 1938.

Between 1940 and 1959, there were almost as many declines as increases in cheese production. Specifically, cheese production declined eight times during that period, including in both 1958 and in 1959. The peak year for cheese production during that period was in 1957, at 1.41 billion pounds.

Cheese production increases were much more frequent from 1960 through 1979. Indeed, there were only two declines during that period: in 1962, when output of 1.6 billion pounds was down 43 million pounds from 1961; and in 1975, when output of 2.81 billion pounds was down 126 million pounds from 1974.

As might be expected when there are just two production declines over a two-decade period, the 1960s and 1970s saw total cheese production increase impressively, from just under 1.5 billion pounds in 1960 to 3.7 billion pounds in 1979.

Finally, the last two decades of the 20th century also saw just two declines in cheese production. Those declines occurred in 1984, when output of 4.67 billion pounds was down 145 million pounds from 1983 (it may be recalled that the Milk Diversion Program, which aimed to prompt dairy farmers to reduce their milk production, was in operation in 1984 and early 1985); and in 1991, when output of 6.055 billion pounds was down 4 million pounds from 1990.

And that’s it, as far as cheese production declines are concerned. Cheese output hasn’t declined in almost three decades. That’s pretty impressive, no matter how you look at it.

Indeed, looking at cheese production going back a full century helps put into perspective just how impressive this cheese production growth has been since the beginning of the 21st century. Obviously, this century has been the first time ever that cheese production didn’t decline once over a 20-year period.

Also, as can be seen from what happened in the 20th century, the last two decades have been the only two decades in which there were zero declines in cheese production. Certainly, cheese production declines have been pretty rare since 1960; there was just one decline in each of the last four decades of the 20th century. But never before had there been a decade with nothing but cheese production increases, until both the first and second decades of the 21st century.

So, what does this tell us about cheese production in the future? Well, on the one hand, perhaps the US is overdue for a cheese production decline. On the other hand, another 80 years of production increases and we’ll have our first full century in which US cheese output never declined.

Toddler ‘Milks’ Appear To Be Hurting Sales Of Real Milk

Toddlers aren’t exactly a huge market for the dairy industry, probably due in part to the fact that there aren’t a lot of them. By one definition, toddlers are 12 to 36 months of age, and since just under 4 million babies are born in the US every year, that means that the toddler market consists of fewer than 8 million youngsters.

So at first blush, what’s happening at the “toddler level” when it comes to milk maybe doesn’t amount to all that big a deal. But there’s some new evidence that what’s happening with the toddler milk market should be concerning for the dairy industry.

As reported on our front page two weeks ago (to locate our February 7th issue), aggressive marketing of toddler milks has likely contributed to rapid sales increases of these products in the US, according to a paper published in Public Health Nutrition.

As the study explained, toddler milks are typically produced by formula manufacturers and are marketed for toddlers as the “next step” after infant formula. They consist primarily of powdered lowfat milk, corn syrup solids or other caloric sweeteners, and vegetable oil.

The next sentence in the study is the one that really caught our eye: “Compared with plain whole cow’s milk (which is recommended for young toddlers), they contain added sugar, more sodium and less protein.”

So, what’s the problem here? Well, for toddlers, the answer is, as noted in the study: plain whole cow’s milk is what’s recommended for young toddlers, not “toddler milks.”

But instead of real milk, toddlers are getting beverages that come up well short of milk’s advantages. That should be particularly concerning when it comes to protein content, as well as fat. In the case of several toddler milks we looked at, the number one ingredient was nonfat milk (which we assume is nonfat dry milk, since these toddler milk products are powders), followed by various forms of oil (for example, Go and Grow from Similac contains, in order, nonfat milk, lactose, high oleic safflower oil, soy oil, and coconut oil, among other ingredients).

These toddler milk products don’t exactly have short ingredient lists, either. That’s pretty obvious, given the above list, which includes sources of milk, sweetener (lactose) and fat (three different vegetable oils). These ingredients in whole milk are listed as follows: “milk.”

When it comes to “selling” nutrition, we have to give a little credit to the toddler milk companies: in addition to listing required micronutrients and macronutrients, at least some of them list such things as riboflavin, phosphorus and magnesium, which are also prevalent in milk but don’t seem to be voluntarily listed in many “Nutrition Facts” statements.

So the bottom line for toddlers is that toddler milks are a product that contains a long list of ingredients, a fair amount of nutrients (many of them added in the form of ingredients, rather than occurring “naturally”), and a sweeter taste than plain whole milk.

For the dairy industry, these toddler milks are potentially causing at least three problems. First, for that particular market (toddlers), toddler milk sales are “growing rapidly,” the study noted, as evidenced by a more than doubling of sales over the 10-year period examined (2006-15).

That’s an interesting observation, given that whole milk sales during that same period fell from 16.7 billion pounds in 2006 to 14.6 billion pounds in 2015, according to statistics from USDA.

That decline in whole milk sales can apparently be explained in part by the sharp rise in toddler milk sales.

A second problem these toddler milk sales appear to be causing for the dairy industry is that, according to the study, serving these toddler milks “may also contribute to conditioned preferences for sweet drinks over plain drinks, including plain milk, and less-sweet foods.”

In other words, toddlers served these beverages when they are one and two years old might never develop a taste for good old plain milk, meaning they will be non-consumers for the rest of their lives. And that’s certainly going to hurt milk sales in the long run.

Yet another dairy industry problem with these toddler milk products is in the area of money. Specifically, these toddler milks start with nonfat dry milk, a Class IV product, and are apparently hurting sales of whole milk, a Class I product. It’s not too difficult to see what this means for farm milk prices.

So what’s the solution here? The study says there are several opportunities to address the public health concerns raised by the “rapid increase” in toddler milk sales and associated marketing practices. For example, the study said countries need to incorporate marketing of toddler milks in regulations that prohibit direct-to-consumer breast-milk substitute marketing, including TV advertising and retail promotions. It also called on health-care and nutrition professional organizations to publish policy statements and provide clear guidance for parents about serving these products.

The study also said the US Food and Drug Administration should establish a statement of identity and other labeling requirements for toddler milks to address consumer confusion about these products. Yes, these products may need to be regulated more strictly, given that, among other things, they seem to be sold under different terms, such as “Dairy Toddler Formula” and “Toddler Nutritional Drink.”

Finally, maybe the dairy industry needs to step up the marketing of whole milk to parents of toddlers, including more direct comparisons of whole milk to toddler drinks.

Trade Wars Just Starting To Impact US Cheese, Butter Imports

While US dairy exports appear to have weathered the trade war storms en route to posting some nice statistics for 2019 (as noted in this space last week), the same can’t necessarily be said for US dairy imports. At least not at the end of 2019, and likely in 2020.

As we reported last week, US dairy imports actually reached a new record high last year, at $3.16 billion. Cheese imports, despite being some 79 million pounds below their record high of 474.6 million pounds set back in 2002, topped $1.3 billion in value for the first time last year (cheese imports in that record year of 2002 were valued at $788 million), while other dairy imports topped $1.8 billion for the first time ever.

But these figures don’t really reflect what was taking place over the final few months of 2019. In this case, the trade war that impacted US dairy imports involves a long-running US-European Union dispute over aircraft subsidies (Airbus).

As a result of that dispute, the US began imposing 25 percent tariffs on various imports from the EU, including numerous cheese and other dairy products, beginning on Oct. 18, 2019, and continuing today (and for the foreseeable future).

The US originally proposed some of those tariffs last April, held a hearing on them in May, proposed tariffs on more dairy products in July, then held a hearing on the additional proposed tariffs in August before finally pulling the trigger on the tariffs in October.

In other words, EU exporters and US importers had a fair amount of time to prepare for these tariffs. And from the limited statistics that are available at this time, it appears that these 25 percent tariffs had at least two impacts on US dairy imports from the EU during the final months of 2019.

First, they appear to have lead to a sharp increase in dairy product imports from the EU, mainly in September but also in August and a little bit in October as well. Specifically, US cheese imports from the EU in August totaled 28.9 million pounds, up more than 4 million pounds from August 2018 and the highest level of US cheese imports ever from the EU for the month of August.

Then in September, US cheese imports from the EU totaled 34.6 million pounds, up almost 11 million pounds from September 2018 and, again, the highest level of US cheese imports ever from the EU for the month of September.

Finally, in October (when the tariffs were implemented mid-month), US cheese imports from the EU totaled 32.6 million pounds, up about a million pounds from October 2018 and, once again, the highest level of US cheese imports ever from the EU for the month of October.
Also in August and September, US butter imports from the EU were up more than a million pounds each month from a year earlier, although October butter imports were down 1.3 million pounds from October 2018.

Second, the tariffs imposed by the US last October appear to have lead to a sharp drop in dairy imports from the EU in November and December. Specifically, US cheese imports from the EU in November totaled 22.9 million pounds, down more than 5 million pounds from November 2018 and the lowest level for US cheese imports from the EU for the month of November since 2009; and US cheese imports from the EU in December totaled 21 million pounds, down 7 million pounds from December 2018 and the lowest level of US cheese imports from the EU for the month of December since 1990.

Also, US butter imports from the EU in November totaled 3.4 million pounds, down about 3.5 million pounds from November 2018; and US butter imports from the EU in December totaled 2.1 million pounds, down about 3.4 million pounds from a year earlier.

So what does this mean for the future of US dairy imports in general and imports of dairy products from the EU specifically?

For one thing, barring a settlement of the Airbus dispute in the near future, it would appear that last year’s US dairy import record of $3.16 billion will stand for a little while.

The EU in 2019 accounted for almost 60 percent of total US dairy imports on a value basis.

Yes, US cheese imports did reach a record high in value last year, but that value was down 16 percent in December after falling 17 percent in November.

The value of cheese imports from the EU during those two months, $142 million, was down more than $42 million from a year earlier, an indication of what can probably be expected as 2020 progresses and US tariffs on cheese imports from the EU continue.

Also, it looks like US cheese imports will remain under 400 million pounds in 2020 and perhaps beyond. As noted earlier, US cheese imports reached a record high of 474.6 million pounds back in 2002, and were above 400 million pounds every year from 1999 through 2007 and again from 2015 through 2017.

Last year, United States cheese imports totaled 395.5 million pounds, up 2 percent from 2018, but were down 14 percent in December after falling 13 percent in November.

Continued monthly declines in US cheese imports are likely in 2020, making it doubtful that US cheese imports will top 400 million pounds this year.

Given the trade deals that the US has achieved recently, it appears that the impact of trade wars on dairy exports will slowly decline in the future. But the ongoing Airbus dispute pretty much ensures that the 25 percent tariffs being imposed on EU dairy exports to the US are just starting to impact US importers, distributors, retailers, consumers and others.

In Tough Times, US Dairy Exports Show Some Nice Resiliency

The phrases “trade wars” and “tariff wars” have been tossed around so frequently over the past couple of years that they’ve sort of become cliches. And they’ve brought with them a general feeling that the export business in general and the dairy export business in particular will have a pretty tough time as long as these wars continue.

But the final 2019 US dairy trade statistics, released Wednesday by USDA’s Foreign Ag Service and reported on our front page this week, indicate that US dairy exports have proven to be pretty resilient during the ongoing trade wars. Kind of makes us wonder what those export numbers would have looked like had these trade wars not broken out a couple of years ago.

In 2019, US dairy exports were valued at $5.9 billion, up 8 percent from 2018 and the highest level since 2014’s record $7.1 billion.
This level of dairy exports was accomplished despite a couple of huge obstacles. One was the aforementioned trade wars, which have included a number of countries but which are particularly noticeable in two areas.

First, Mexico had been applying retaliatory tariffs on US cheese exports from roughly the middle of 2018 up until about the middle of 2019. And so US cheese exports to Mexico last year were down 1 percent from 2018’s record.

And second, China has been applying retaliatory tariffs on US dairy exports since 2018. In 2019, US dairy exports to China were down 25 percent from 2018 and down 35 percent from 2017, the last full year before China began applying tariffs to US dairy products.

The second obstacle the US dairy exporters have been facing is the lack of any new market access. Yes, things have improved considerably on that front in recent months, but that bodes well only for the future; it didn’t help in 2019. Just to cite one example: The US could have gained some access to dairy markets in countries such as Japan, Malaysia, Singapore and even Canada under the Trans-Pacific Partnership agreement, and that access might have started increasing a couple of years ago. But President Trump withdrew the US from the TPP in early 2017.

Since then, the US has negotiated new dairy market access with Japan and Canada, but that access either hasn’t gone into effect yet or is just starting to go into effect. And countries that remained in and ratified the TPP’s successor, the Comprehensive and Progressive Trans Pacific Partnership, have been enjoying the benefits of that trade agreement since it became effective at the end of 2018.

Beyond the CPTPP, other US dairy trade competitors have also been negotiating and implementing new trade agreements in key export markets. Just to cite one example: Feb. 1, 2020, marked the first anniversary of the entry into force of the European Union-Japan Economic Partnership Agreement and EU dairy exports to Japan in the first 10 months following the implementation of that agreement were up by 10.4 percent from a year earlier (including a 47 percent increase in butter exports).

So how is it that the US can become embroiled in numerous trade wars over the last couple of years, and not benefit from any new trade agreements, and still increase its dairy exports? At least a couple of points come to mind.

First, it’s worth noting that the figures reported here are for dairy export values, which tended to be pretty high last year. To illustrate this point, the UN Food and Agriculture Organization’s Dairy Price Index averaged 198.7 points last year, up 3 percent from 2018, as skim milk powder, whole milk powder and cheese prices rose while butter prices fell.

To put this in some historical perspective, since 2012, the lowest annual average for the FAO Dairy Price Index was in 2016, when it averaged 153.8. That year was also the low point since 2012 for US dairy exports, when they were valued at $4.7 billion. So US dairy export values last year were boosted by strong global prices.

Second, it would appear that US dairy exports are showing strength during these turbulent times in part because the US dairy industry has done a great job in recent years of diversifying its portfolio of export markets.

To put this point in some historical perspective, we went back 25 years (from last year), to 1994. That year is significant because, among other things, it was the year before the US Dairy Export Council was established; and it was also right around the time both NAFTA and the Uruguay Round were beginning to be implemented.

Back in 1994, US dairy exports were valued at $762 million, or more than $5 billion less than in 2019. In 1994, US dairy exports topped $100 million in value to exactly one country: Mexico. In 2019, US dairy exports topped $100 million in value to 13 different countries.

Also in 1994, US dairy exports topped $10 million in value to a total of 15 countries. Last year, US dairy exports topped $10 million in value to 49 countries.

And finally, in 1994, the US was exporting dairy products to a total of 131 countries, ranging from Mexico to Samoa. Exports to over half of those countries were valued at under $1 million.

In 2019, the US exported dairy products to 147 countries, and exports to over half of those countries (77 to be exact) were valued at over $1 million.

US dairy exports posted some impressive numbers last year, in the face of some noteworthy obstacles. Imagine what will happen in 2020 and beyond as, among other things, new market access is implemented, and relations with trading partners improve.

Despite Problems, Dairy Industry Brimming With Optimism

Let’s face it, these have not exactly been the best of times for the US dairy industry. Among other things, within the last three months, two industry giants filed for bankruptcy, dairy farms arere going out of business at record or near-record rates, trade wars are posing major problems for expanding dairy exports, and plant-based dairy alternatives are garnering heaping amounts of praise, not to mention some nice increases in sales.

The Dean Foods Company and Borden Dairy Company bankruptcy filings were especially troublesome. For one thing, these weren’t just dairy companies, they were sort of iconic companies — Dean Foods was the largest fluid milk processor in the US and has a history dating back to 1925, while Borden’s roots date all the way back to the 1850s.

And the Dean Foods and Borden bankruptcy were tied, at least in some media stories, to the growth of plant-based dairy alternatives. Several months before Dean Foods filed for bankruptcy, the Plant Based Foods Association reported that sales of plant-based “milks” grew 6 percent for the 52-week period ending in April 2019, to $1.9 billion, and now make up 13 percent of the entire milk category.

And this point is inevitably tied in with the fact that fluid milk sales have been declining rapidly in recent years, and that per capita fluid milk consumption has been dropping for decades.

But despite these and numerous other problematic issues, the dairy industry actually appears to be brimming with optimism in many ways these days. That optimism became apparent during this week’s 2020 Dairy Forum in Scottsdale, AZ.

For example, the Dairy Forum itself attracted record attendance of over 1,100 people. Michael Dykes, president and CEO of Dairy Forum host International Dairy Foods Association, said he senses “a level of enthusiasm and energy” and an embrace of change that he doesn’t think he’s sensed at the Dairy Forum since joining IDFA four years ago.

During his Dairy Forum presentation Monday morning, Dykes made some great points about why things are looking positive for the dairy industry. For example, despite all the negative headlines about fluid milk sales, Dykes pointed out that the dairy business in the US at the consumer level has never been bigger, never been stronger, and it continues to grow. Indeed, since USDA began tracking per capita dairy consumption in the 1970s, the trend has continued upward for five straight decades, increasing 22 percent since 1975.

Yes, the commodity fluid milk business is in decline, but that’s not the case with the value-added milk beverage business. As noted in this space just a couple of weeks ago, it’s a promising sign for that business when the Coca-Cola Company buys the remaining shares of Fairlife, a brand that’s skyrocketed to $500 million in sales in just a few short years.

And in another sign of industry growth, as we reported just last week, US milk production hit a record 218.3 billion pounds in 2019. US milk production hasn’t declined since 2009, and in fact has grown by over 29 billion pounds since that last decline. That’s hardly an indication of an industry in decline.

Moreover, thanks to the efficiency of farmers and innovation throughout the supply chain, the US produces twice as much milk today as it did 50 years ago with half as many dairy cows on much less land, Dykes pointed out. Over the past 30 years alone, milk production has grown 51 percent while carbon dioxide output has declined 9 percent.

Trade is another area where there’s reason for optimism in the US dairy industry. The past three years haven’t exactly been positive on the trade policy front, starting with President Trump pulling the US out of the Trans-Pacific Partnership agreement during his first week in office. The US then stood by and watched the other TPP countries move ahead with the Comprehensive and Progressive Trans Pacific Partnership (CPTPP), an agreement that included some nice dairy access gains for US competitors such as New Zealand and Australia.

That was just the beginning of trade-related problems for the US dairy industry. Ongoing tariff wars with major US dairy export markets ranging from Mexico to China have seen at least short-term declines in cheese and other dairy exports to those countries, and it remains to be seen what the long-term implications of these tariff wars will be.

This is especially true with China, which has such enormous potential that there was an entire Dairy Forum session devoted to “The Power of China.”
But things are starting to look up on the trade front. For one thing, the US has approved the new US-Mexico-Canada Agreement, which will replace the old North American Free Trade Agreement when it is ratified by Canada.

Also, the US and China recently reached agreement on a Phase I deal that’s expected to provide some benefits to US dairy exporters. For example, under the agreement, China will recognize the US system of oversight for dairy products as providing the same level of protection as China’s, thereby eliminating the need for China-specific inspections of US dairy facilities. And the US and Japan have also reached a phase one trade deal with some dairy benefits.

Yes, the dairy industry has been through a particularly troubling period in recent years, but it somehow continued to grow during that period and, here at the beginning of the third decade of the 21st century, the dairy industry appears to be brimming with optimism about its future prospects.

Dairy Price Volatility Returns With A Vengeance

Just over two years ago in this space (Dec. 22, 2017, to be exact), we noted that there had been a “relative lack of price volatility” in 2017, with, among other things, a range of less than 50 cents from low to high for the Cheddar block price on the CME cash market. That year also saw a narrow range for the federal order Class III price, with a low of $15.22 per hundredweight and a high of $16.88 per hundred.

The following year also saw a relative lack of price volatility in the dairy markets. The CME Cheddar block price in 2018 ranged from a low of $1.33 per pound to a high of $1.7475 a pound, or a range of less than 42 cents from low to high. CME butter prices in 2018 fell into a fairly narrow, albeit relatively high, range of $2.0275 to $2.4500 per pound. And the Class III price ranged from a low of $13.40 per hundred to a high of $16.09 per hundred, a range of less than $3.00.

What about 2019? By pretty much any measure, dairy price volatility returned, with a vengeance.

Let’s start with the CME Cheddar block price. Last year, that price ranged from a low of $1.3750 to a high of $2.2375, a range of 86.75 cents. Notably, just from Aug. 1 to Sept. 16, the block price increased 41.75 cents, equal to the block price range for all of 2018.

But CME barrel cheese price volatility greatly exceeded block price volatility last year, with barrel prices ranging from a low of $1.16 per pound to a high of $2.39 per pound, a range of $1.23.

And the Class III price saw considerable volatility last year, ranging from a low of $13.89 per hundred in February to a high of $20.45 per hundred in November, a range of $6.56. The last time there was more volatility in the Class III price was in 2014, when it ranged from a low of $17.82 per hundred to a high of $24.60 per hundred (a record that still stands).

Another way to look at cheese price volatility in 2019 is to look at monthly averages. For blocks, the monthly average rose from a low of $1.4087 per pound in January to a high of $2.0703 a pound in October, a range of more than 66 cents a pound. By contrast, in 2018, the monthly average block price ranged from a low of $1.3764 per pound in December to a high of $1.6438 per pound in September, a range of less than 27 cents.

When it comes to monthly averages, it was the barrel price, again, that really exhibited volatility last year, ranging from a low of $1.2379 a pound in January to a high of $2.2554 a pound in November, a difference of over a dollar a pound ($1.0175, to be exact).

To put that in some historical perspective, the last time the monthly barrel price average varied by more than a dollar during a single year was...never. The average monthly barrel cheese price had never varied by more than a dollar a pound from low to high in a single year, until 2019.

There are a couple of additional points worth noting about 2019’s extreme dairy price volatility. First, while prices were indeed very volatile, they actually moved in a fairly “smooth” manner; that is, once they started going up, they kept going up for a number of months.

For example, the CME Cheddar block price averaged $1.4087 a pound in January, then increased for nine straight months, to $2.0703 a pound in October, before falling for two consecutive months to close out the year.

How does that compare with some previous years? In 2018, when the monthly block price average ranged from $1.3764 a pound to $1.6438 a pound, the block price average was above $1.60 a pound in both April and May and then again in August and September. In other words, the price reached two “peaks” that year.

The previous year saw two block price “troughs.” After averaging almost $1.69 a pound in January 2017, the block price average fell to $1.4342 a pound in March before rising (with a couple of dips along the way) to $1.7305 per pound in October, then falling again to $1.4900 a pound in December.

Another point to keep in mind when examining 2019 price volatility is that the dairy industry saw several “extremes” that hadn’t been reached in several years, which sort of guaranteed that volatility would be greater than it had been for a few years.

For example, both block and barrel cheese cash market prices at the CME topped $2.00 a pound last year, something that hadn’t been seen since 2014. Closely related to that point is that the federal order Class III price topped $20.00 per hundredweight last year, the first time that happened since 2014.

On the flip side of that, the CME butter price fell below $2.00 a pound last year for the first time since November of 2016. And the monthly average CME butter price in December 2019 was $1.9736 a pound, the first time the monthly butter average was under $2.00 a pound since November 2016. That’s a remarkable run of 36 straight months in which the CME butter price averaged above $2.00 a pound.

Finally, all this discussion about price volatility reminds us of some comments made by then-US Secretary of Agriculture Clayton Yeutter at the 1990 Dairy Forum. Dairy producers will generally realize higher overall prices in a volatile market, whereas with greater stability they’ll probably wind up with lower overall prices, he noted.

Recent history would appear to back up that observation. Just to cite one illustration of this: the Class III price in 2014 and in 2019 had far wider ranges than the years in between, and also averaged higher in those two years than the years in between.

Price volatility certainly has its downsides, but lower overall prices doesn’t appear to be one of them.

Coca-Cola’s Confidence In Dairy Is Encouraging

Things weren’t looking all that great seven months ago for Fairlife, the joint venture between Select Milk Producers cooperative and The Coca-Cola Company. An animal rights group released graphic video showing animal abuse at Fair Oaks Farms, which supplies milk to Fairlife. That prompted a police investigation and also reportedly prompted some retailers to pull Fairlife products from their shelves.

This wasn’t exactly familiar territory for Coca-Cola, which has been around since 1886 but has only been involved directly with milk (at least in the US) since 2012. In response to the Fairlife incident, The Coca-Cola Company announced several actions, including conducting its own independent investigations of all Fairlife’s dairy suppliers to ensure they uphold the highest standards of animal welfare.

At that time, it would have made sense to wonder if Coca-Cola was rethinking its involvement in the dairy business. But here at the beginning of 2020, as we reported last week, The Coca-Cola Company has actually shown its confidence in dairy by acquiring the remaining stake in Fairlife LLC from Select Milk Producers. Coca-Cola had previously owned a 42.5 percent minority stake in Fairlife.

In announcing the acquisition, Fairlife noted that Fairlife brand ultrafiltered milk debuted in 2014 and surpassed $500 million in retail sales last year. That’s pretty impressive, considering that beverage milk sales during that period fell from about 50.8 billion pounds in 2014 to 47.7 billion pounds in 2018 (and probably dropped some more in 2019).

And dollar sales of beverage milk likely dropped even more dramatically over that period, given that average retail whole milk prices in 2014 were more than 50 cents higher than in 2018, according to the US Bureau of Labor Statistics.

But of course Fairlife doesn’t really sell “milk,” if you define milk in the traditional sense of whole milk, 2 percent, 1 percent, skim, etc. It sells ultrafiltered milk, Core Power protein shakes and other value-added dairy beverages.

And its ultrafiltered milk is different from traditional milk in several important ways. For one thing, Fairlife’s milk package stands out in the dairy case because it’s colorful; for example, Fairlife whole milk comes in a bright red plastic container. It’s pretty hard to miss, even given its limited shelf space.

Further, Fairlife products contain more protein and less sugar than regular milk, and are lactose-free. The products also come in non-traditional sizes, such as 52-ounce bottles and 11.5-ounce bottles.
Fairlife products also have an impressive shelf life (at least until they’re opened), which means consumers can buy more than just what they expect to consume over the next couple of weeks.

While Fairlife’s sales growth and product attributes are pretty exciting in the context of a steadily declining overall beverage milk category, perhaps what’s most exciting is the confidence that The Coca-Cola Company has with the future of the Fairlife business. That confidence was demonstrated, of course, by Coca-Cola buying the remaining stake in Fairlife.

That confidence is also demonstrated by some of the things being said by both Tim Doelman, Fairlife’s CEO, and Jim Dinkins, president of Coca-Cola North America.

For example, Coca-Cola believes the acquisition of Fairlife “helps ensure that we continue to build on Fairlife’s success by combining its entrepreneurial spirit with the resources, reach and expertise of Coca-Cola,” Dinkins said.

Yes, Coca-Cola does have some pretty impressive resources, reach and expertise. As noted earlier, the company’s signature product dates back to 1886, so it has 134 years of expertise in the beverage business. Some 60 years ago, Coca-Cola acquired Minute Maid, extending its expertise beyond soft drinks in what the company describes as its first step toward becoming a total beverage company.

Today, Minute Maid has more than 100 different flavors and varieties from orange juice to apple juice, and lemonades to punches, so imagine what The Coca-Cola Company might be able do for milk, or at least value-added milk-based beverages.

As far as reach is concerned, Coca-Cola’s 500-plus brands are offered in more than 200 countries. Oh, and The Coca-Cola Company reported net operating revenues of almost $32 billion in 2018.

Fairlife “also plays an important part in our strategy to continue growing as a total beverage company as we innovate to bring people more new products that meet their changing lifestyles and needs,” Dinkins said.

The operative words there are “innovate” and “new products.” That’s the key to growing beverage milk sales in the future. As we’ve seen in the recent past, beverage milk sold in gallon plastic jugs isn’t exactly jumping off dairy case shelves, even at the very low retail prices of the last two years.

Finally, Doelman remarked that Fairlife sees “so much opportunity ahead,” and that “we’ve really just crossed the starting line.” Fairlife looked at the declining fluid milk category “as an opportunity to take a superfood like milk, innovate around it, and give people the kind of taste and nutrition they were looking for.”

The recent Chapter 11 bankruptcy filings by Dean Foods Company and Borden Dairy Company show that the commodity fluid milk business isn’t exactly profitable. The Coca-Cola Company’s acquisition of Fairlife shows that there are still niches, potentially very large niches, that can be successfully tapped in the value-added dairy beverage business.

20 Years Of Reformed Federal Orders: Time For Another Round

It’s kind of hard to believe, but the beginning of 2020 marked the 20th anniversary of the implementation of federal milk marketing order reforms. This anniversary serves as yet another reminder that another round of order reforms is long overdue.

By way of brief background, the last round of federal order reforms had its origins in the 1996 farm bill. That legislation called for both consolidation and reform of federal orders.

Regarding consolidation specifically, USDA was required to limit the number of federal orders to not less than 10 and not more than 14 orders (there were 31 federal orders in the late 1990s; federal order consolidation whittled that down to 11 federal orders starting on Jan. 1, 2000).

As far as other reforms were concerned, under the 1996 farm bill, among the issues USDA was authorized to implement as part of the consolidation of federal orders were the following: the use of utilization rates and multiple basing points for the pricing of fluid milk; and the use of uniform multiple component pricing when developing one or more basic formula prices for manufacturing milk.

Under the 1996 farm bill, USDA was required to implement federal order reforms within three years; however, Congress later extended the deadline and the reforms were implemented on Jan. 1, 2000.

In addition to consolidating the orders, the order reform final rule set forth a replacement for the Class I price structure and replaced the basic formula price (the predecessor of the current Class III price) with a multiple component pricing system. The final rule also established a new Class IV which includes milk used to produce nonfat dry milk, butter, and other dry milk powders; reclassified eggnog; and addressed other minor changes.

Since order reforms were implemented, they’ve been “tweaked” several times, perhaps most notably in the area of make allowances, which were increased in 2008 as a result of a proceeding that actually was launched in 2005 and was finally, mercifully terminated in 2013.

On the consolidation front, as noted earlier, there were 11 federal orders when order reforms became effective 20 years ago. That number fell to 10 when the old Western order was terminated in 2004, but went back up to 11 when the California federal order became effective in late 2018.

While federal order regulations have changed somewhat over the years, it could be argued that the dairy industry has changed considerably more.
Among other things, Class I utilization was over 40 percent in 1999, the year the order reform final rule was approved, but was under 30 percent in 2018.

So that’s where we sit at the beginning of 2020, with a federal order system that last underwent significant reforms 20 years ago. And it seems like we’re long overdue for another round of reforms, for at least a couple of reasons.

First, the US dairy industry is considerably different now than in the late 1990s. Among other things, as mentioned earlier, Class I utilization continues to decline. The Class I utilization percentage isn’t always an accurate indicator of how low Class I use really is, due to depooling, but with California and its low Class I use (12.8 percent in 2017, the last full year the California State Order was in effect) joining the federal order system in late 2018, it’s safe to say Class I utilization in federal orders won’t be above 30 percent again anytime soon (barring large volumes of milk being depooled, which was the case late last year).

Second, the aforementioned make allowances haven’t been adjusted for more than a decade. The cheese make allowance, 20.03 cents per pound, is based on California manufacturing cost data from 2007. In 2016, the weighted average cost for making a pound of Cheddar cheese in California was 24.54 cents, or more than 4.5 cents higher than the current federal order make allowance for cheese.

So at a minimum, it would seem like now is as good a time as any to adjust make allowances for cheese, as well as for butter, dry whey and nonfat dry milk.

But it’s also a good time to reconsider the wisdom of using product pricing formulas at all in federal orders. After all, among the conclusions the dairy industry has probably reached over the past 20 years is that there is no completely fair and reasonable way to use product pricing formulas that will satisfy all industry participants.

There are numerous examples of the problems with product price formulas, but we’ll mention just two. In 1999, when order reforms were finalized, Cheddar cheese accounted for more than 35 percent of US cheese production. In 2018, Cheddar accounted for less than 30 percent of cheese output. But it’s the price of Cheddar that’s used in the Class III price formula.

Also in 1999, dry whey (human) production totaled just under 1.1 billion pounds, and dry whey was included in the Class III price formula. But in 2018, despite the fact that US cheese production has grown by more than 5 billion pounds since 1999, dry whey (human) output had actually declined to under 1 billion pounds.

With all of these problems with current federal order pricing regulations, is there any hope for significant reforms in the future? Yes, there is. The International Dairy Foods Association and American Farm Bureau Federation are conducting reviews of the federal order system and, last fall, AFBF released a federal order reform proposal (for details, please see the story in our Oct. 4th issue). That’s a start.

The next round of federal order reforms can’t come soon enough.

UF Milk Rulemaking Seems To Be Taking Forever

Last Friday, the US Food and Drug Administration announced that it is reopening the comment period on its proposed rule to allow fluid ultrafiltered milk in the manufacture of standardized cheeses and related cheese products. If nothing else, FDA’s announcement served as a reminder that this UF milk rulemaking has been going on seemingly forever, with no end in sight.

The “background” section of FDA’s announcement does provide some perspective on how far back this proceeding goes. It notes that, in the Federal Register of Oct. 19, 2005, FDA proposed to amend its regulations to provide for the use of fluid UF milk in the manufacture of standardized cheeses and related cheese products.

FDA then notes that its 2005 proposed rule was issued in response to citizen petitions from the American Dairy Products Institute and the National Cheese Institute, the Grocery Manufacturers of America, Inc., and the National Food Processors Association.

And therein lie at least a couple of additional indicators of how long the cheese industry has been awaiting a final rule in this proceeding.
First, ADPI’s original petition to FDA was submitted on Dec. 2, 1999. In other words, as we enter the third decade of the 21st century, we’re dealing with a regulatory matter that dates back to the last month of the last century.

Second, none of the associations that submitted the other petition even exist any more, at least not in their current form. At the time that petition was submitted (on Feb. 10, 2000), the National Cheese Institute was a constituent organization of the International Dairy Foods Association. But a year ago, IDFA consolidated the governance structure of its constituent organizations, including the Milk Industry Foundation and the International Ice Cream Association along with NCI, and as of Jan. 1, 2019, NCI ceased to exist.

Meanwhile, the National Food Processors Association changed its name to the Food Products Association in 2005, merged with GMA in 2007 and the new organization became the Grocery Manufacturers Association in 2008. But GMA is no longer; it became the Consumer Brands Association at the beginning of this year.

As can be ascertained by reviewing the background in FDA’s announcement, developments in this rulemaking have been few and far between, to put it mildly. FDA published a proposed rule in 2005, then reopened the comment period in late 2007 on two specific issues raised by comments concerning the proposed ingredient declaration.

Most recently, in August 2017, FDA issued guidance in which it notified manufacturers of its intent to exercise enforcement discretion regarding the use of fluid UF milk in the production of standardized cheeses and related cheese products, provided that the physical, chemical, and organoleptic properties of the cheese or cheese product are not affected.
And that’s it, for the first 20 years after ADPI submitted its petition.

Now, FDA is, through Mar. 30, 2020, seeking new information and public comment on current industry practices regarding the use of fluid UF milk in the manufacture of standardized cheeses, and the declaration of fluid UF milk in the labeling of these products when used as ingredients.

So at least FDA is seeking “new” information on these issues, rather than simply issuing a final rule (or, alternatively, deciding not to proceed with such a rulemaking) based on comments it received well over a decade ago.

But this reopened comment period certainly raises concerns over the future timetable of this proceeding. After all, it’s now been 14-plus years since the original proposed rule was released and, by the time this new comment period ends (assuming the comment period isn’t extended), it will have been almost 12 years since the previous reopened comment period ended (after it was extended).

At this rate, the dairy industry can expect a final rule on the use of fluid UF milk in standardized cheeses sometime around 2035.

As far as comments to FDA are concerned, there are at least a couple of newer issues that should be addressed. First, this entire proceeding has concerned fluid UF milk, but there is also increasing interest in using microfiltered milk to make cheese. If nothing else, maybe FDA should broaden its proposal to include the use of microfiltered milk (granted, this would extend the timeframe).

Second, FDA continues to be concerned about the labeling of standardized cheeses made from UF milk. Notably, when FDA in December 2007 reopened the comment period on its 2005 proposed rule, it sought further comment on two specific issues raised by the comments concerning the proposed ingredient declaration. FDA did so because it had received comments from industry opposing the proposed requirement to declare fluid UF milk as “ultrafiltered milk” in the ingredient statement of the finished cheese.

This issue came up again in 2017 when FDA decided to exercise enforcement discretion, not only on the use of UF milk, but also with respect to the labeling of products made with UF milk. FDA still prefers that industry identify the ingredient as “ultrafiltered milk” rather than just “milk.”

We can’t help but wonder how FDA can actually be concerned about including the word “ultrafiltered” with this ingredient while it continues to allow the use of “milk” and other dairy terms on plant-based foods.
Stay tuned for the third decade of this UF milk rulemaking.

2019 Editorials

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