To Meet Evolving Consumer Demands, Dairy Supply Chains Will Be Reshaped

Dairy consumers are increasingly removed from the farm and are seeking transparency when it comes to how and where their food was made and are forming opinions about farm practices such as animal welfare and the use of GMO feed, according to a report from CoBank’s Knowledge Exchange Division.

To meet these demands, brands and retailers are seeking certifications and adding labels touting claims like non-GMO and organic. But procuring the milk that meets these standards often requires contracting with farms directly and offering a premium to incentivize farmers to alter their practices.

This is a shift from the traditional model of buying from a larger pool of commoditized milk from dairy cooperatives.

Short of seeking specific information about farming practices, some consumers want to feel a stronger connection to the farms that produce their milk. Some co-ops have been able to tap into this demand by highlighting their family farm members and co-op ownership structure, and some farms have been able to benefit from direct marketing to consumers.

Producers, co-ops and processors adept at marketing, advertising, and supply chain logistics, and who are in close proximity to the consumer, stand to benefit the most from these constantly evolving and growing transparency trends.

Challenges In Milk Sourcing
As consumers indicate preferences for specific and often costly farm management practices, sourcing milk that fits those preferences presents challenges, the report noted. One example is organic milk, which involves a three-year transition period for a conventional farm followed by ongoing higher feed costs.

In order to incentivize a producer to go through this transition, buyers of organic milk typically pay a higher and less volatile milk price than conventional milk, driven by the higher price organic milk captures at the retail level.

Non-GMO dairy products are another category that is gaining traction, according to the report. Danone North America is one of the largest examples, seeking to provide yogurt made from milk from cows fed non-GMO feed in three of its largest US brands: Dannon, Oikos, and Danimals.

Due to the higher costs and greater uncertainty non-GMO milk are set on a cost-plus basis in which the farm is paid a fixed premium over their production cost.

One of the newest and fastest growing milk brands in the US that reflects the trend for transparency at a genetic and micronutrient level is a2 milk. In the second half of 2018, US distribution of a2 milk increased to more than 9,000 stores. The a2 Milk Company plans to spend $22 million on marketing in fiscal 2019 to rapidly build distribution and brand awareness.

Some farms have already begun transitioning the genetics of their herds in anticipation of continued growth in the a2 milk market, the report said. Depending on existing herd genetics, the transition to a2-only production can be less burdensome and expensive than organic or non-GMO.

With any of these specific new product categories, the challenge to the supply chain is that there is no longer one commoditized pool of milk to be distributed efficiently into different products and brands, the report explained. Rather, there are a number of brands which now need to work back to the farm level to contract directly for a segregated milk supply.

As a result, co-ops may see members seeking out these direct contracts for a premium elsewhere. Many farms will still prefer the stability of co-op membership in the wake of highly publicized contract cancellations in the past between producers and the milk processors who had contracted directly with them for their milk.

Some co-ops may look for opportunities to segment portions of their member milk supply which can meet some of these new criteria and handle premiums internally, adding a logistical benefit to customers.
Often, a consumer’s ability to buy directly from a farm overrides their concerns about many other labels they may seek out because of the trust and direct connection they feel to the farm, the report stated.

Many metro areas now have at least one farm or milk bottler engaged in home delivery of milk in glass bottles. While this can command a substantial premium, it connects the consumer to a nostalgic sense of directly supporting local farms.

Another growing direct marketing opportunity for producers or artisan cheese makers is farmers markets, which are concentrated in urban centers, the report said. While often commanding a premium price, farmers markets have grown in popularity as an opportunity for consumers to interact directly with farmers, ask questions, build trust and feel a connection.

In 2015, there were 8,750 dairy operations with sales directly to consumers, representing nearly 20 percent of the 43,584 licensed dairy farms in the US that year, the report noted.

Co-ops often benefit from being able to tap into existing value in their family farm owned structure and story.

Cabot Cheese, Tillamook, and Prairie Farms Dairy are three examples of cooperative-owned brands that have benefited from actively promoting their farmer-owner structure and highlighting their farmer members in advertising, promotions, and product labels.

The report is available at www.cobank.com.

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