Archive for December, 2008

Elanco’s Posilac transition priorities center on dairy food chain

 

Elanco finalized the purchase of Monsanto’s Posilac business in early October. Dennis Erpelding, manager of Elanco’s government relations, public affairs and communications, discussed the ownership transition with DairyBusiness Communications.

By Dave Natzke

In many ways, the increasing cost for food, increasing need for protein and the weakening U.S. and global economy is changing the discussion regarding technology and food production, as affordability and availability of a safe food supply move up the list of concerns, and economics gain a stronger voice in the discussion surrounding “sustainability.” The impact is being felt throughout the dairy food chain, according to Dennis Erpelding, manager of Elanco’s government relations, public affairs and communications.

 

Dennis Erpelding, manager of Elanco’s government relations, public affairs and communications

Dennis Erpelding, manager of Elanco’s government relations, public affairs and communications

Elanco, the animal health division of Ely Lilly, has a vested interest in the discussion. The company manufactures and markets a variety of products designed to enhance and improve efficiencies in livestock production, affecting farmer profitability, as well as both yield and costs of meat and milk which ultimately impact consumers. 

Some food production technologies, including Elanco’s recombinant bovine somatotropin (rbST, brand named Posilac), have faced restrictions in the marketplace, as dairy product retailers have asked for milk produced by cows not supplemented with rbST. As retailers and dairy product processors seek to differentiate themselves in the marketplace, skirmishes over milk labels and other marketing practices have resulted, playing out in state legislatures, courthouses and the media.

For that reason, Elanco has made public affairs a priority since finalizing the purchase of Posilac from Monsanto in early October 2008, Erpelding said.

Dairy producer perspective

From a dairy producer perspective, the Posilac ownership transition has gone well, and producers using the product probably have not seen a lot of change, said Erpelding, noting that Elanco purchased not only the product, but also the manufacturing facilities, related workforce and sales team. “We have integrated sales teams from the two organizations, and producers probably haven’t seen a lot of change,” he said. “Continuity has been our hope. Producers see the value of the product at the farm level; that’s why they’ve used it for years.”

Beyond the farm

But with marketing restrictions placed on dairy producers by retailers and processors, not all are able to use rbST technology. That’s prompted Elanco to spend more time off the farm, talking with other segments of the dairy food chain. 

“The key thing – among producers and further down the chain – is their ability to sell their milk,” Erpelding said. “That’s why we go in and talk to the retail side to see where their demand is, then work back through the chain. There have been parts of the fluid market that have asked for milk from cows not receiving supplemental rbST. We recognize and respect that.”

“As we finalized the acquisition of this product, we talked about our commitment to the broader dairy industry and working with the entire dairy food chain,” Erpelding said. “We start by understanding the perspectives and needs of the retailer, working back to the middle – processors on the fluid, cheese and other dairy product side – back to cooperatives and producers.

“We were aware there was sensitivity about the use (of Posilac) in various segments of the chain,” he continued. “For example, there are some groups that are against meat or dairy product consumption, and you’re never going to appease them. However, we are seeking to engage the 98% of people who are interested in safe and nutritious food and food choices.”

The downturn in U.S. and international economies is making some segments of the food marketing chain take notice.

“In the broader dairy sector, with what’s happening on Wall Street, affordability has become the key driver, especially on the retail side,” Erpelding said. “Additionally, the whole discussion of ‘sustainability’ has gone beyond environmental issues to include economic, social and ethical aspects.”

From the farmer facing higher feed and production costs, to retailers staring at higher milk procurement costs, technologies such as Posilac have  beneficial aspects throughout the dairy food chain, Erpelding explained. “It’s important to communicate how the affordability/cost of production in one segment of the chain has beneficial components to address affordability/cost of procurement to the rest of the chain.”

“The United States and Europe are affluent enough to have the ability to pay for various food choices,” Erpelding said. “But in some developing countries, people spend up to 70% of their income for buying food on a daily basis. We have the luxury to debate some of the things about how food is produced. But most people – even in the United States – primarily want an affordable safe, nutritious food supply. Affordability and availability are the primary drivers. Then they can look at convenience and taste.”

In conversations with retailers, Erpelding said Elanco first seeks to determine and understand consumer concerns related to rbST.

For many retailers, concern is often limited to a few consumer inquiries per month, he said. Many of those questions evolve around media coverage or are driven by a special interest organization with an agenda.

“When we talk to retailers, we visit with them to understand the real level of concern,” he said. “We also found it’s important for them to know what rbST is, providing some basic facts about the product.” 

Another point of emphasis is “consumer choice,” Erpelding said. “Some consumers want milk produced in a certain way. We support such choice, and then discuss ways to match supply with the true demand side – not the perceived demand.”

While  “rbST-free” marketing has largely been limited to the fluid milk aisle, there’s been a growing discussion on whether the trend will move into cheese and other products.

“There are many perceptions about what people really want and what retailers are really doing,” Erpelding said. “But we’re finding there isn’t a strong desire to go across the dairy case. By understanding  that true demand, then we can accurately assess the economic and sustainability aspects and show the value of the product. Ultimately understanding demand and market segmentation options, allows more producer choice to use the technology.

Finally, Erpelding said, Elanco seeks to establish and be a reliable information resources.

“Day-to-day consumers aren’t always interested in food production details, but when they have a question, they want it answered,” he said. “We have to draw distinctions on where people get their information. To this point we address consumer influentials. It’s more important that the people who consumers turn to for answers have the right information. Thus information need is driven by consumer inquiry. So, when questions are asked at the retailer level, they have the right information. We stress our goal is to be an available and reliable information source for retailers for consumer inquiries.”

Dairy farmers can be valuable information resources, Erpelding said.

“We encourage dairy producers to be part of the process,” he explained. “As advocates, producers have to put themselves in the retailers’ shoes, asking how you can support them. As a whole, retailers want dairy producers to be successful and be able use technology. It’s important for people to connect – from the producer to the retailer – so they can all be the best advocates for the dairy industry.”

Erpelding’s advice to pro-technology advocates is to understand who consumers turn to for information.

“Then, look at how you can work with those people to be resources to them, he said. “We try to understand what questions consumers might have, and who they might turn to to get the answers. Dairy farmers are the best spokespeople for our products. It’s important to connect dairy farmers to consumer influencers and retailers to address those questions. It’s an evolving process. We have a great opportunity to work together.”

Label wars

One area Erpelding wishes there would be less talk regards so-called absence labels and marketing practices.

“Our goal is to take a lot of the discussion out of the legislation/regulatory court arenas,” he said. “Our primary thinking is that by sitting down at the table, we can come to a collaborative approach and come to a common consensus. We have a broader responsibility in the dairy industry than just selling our products. Everything we can do to build a positive image for dairy products and their attributes is to our advantage. 

“When label battles are played out in the media, consumers get misinformation,” Erpelding continued. “We need to redirect such energy to arenas that help build up the image of the dairy industry. Our goal is a positive message, advocating for the dairy industry and promoting nutritional, dietary health, sustainability and affordability attributes.”

The discussion includes retailers and processors using absence labels.

“We are proactively sitting down with all companies and seeking to understand their perspective,” he explained. “What do consumers really desire?  What are they willing to pay for?  Does this help us sell more total dairy product?  Can we come to a consensus approach on labeling for all segments of the dairy food chain?

“We have to ask what is best long term for the total dairy industry, and understand how these labels play into that,” Erpelding continued. “Based on experience have we increased overall fluid milk consumption?  Have we provided more choices to consumers?  Have we provided more opportunity to capture value in the dairy chain?

“In the ideal world, we’d take a recess on legislative/court activity regarding labels,” he said. “We’re best when we’re working together, putting our resources into increasing total dairy sales and promoting the nutritional aspects of dairy products. We have a common interest, whether it’s selling organic milk, rbST-free or conventional milk. It is time to pause and consider the value that all production practices and technologies bring to our industry. Let’s collaborate, assess and act to support our collective interests that maximize our total economic opportunity while providing choice, providing consumers the most affordable dairy products and while being great stewards of our precious natural resources.”

Global demand

The current global economy is lowering demand for U.S. dairy products. With profit margins shrinking throughout the food chain, production and procurement efficiencies will feel even more pressure to deliver the bottom line. The U.S. dairy industry must prepare for an eventual turnaround.

“Global dairy demand will definitely grow long term,” Erpelding said. “With the weakening economy and currency exchange rate, the United States may not be in as strong of a position today as it was six months ago. But when you look at global trends, population will continue to grow, and economic development will continue to grow outside of the United States. In the next 50 years, we’re going to have to double food production, and about 70% of that will need to come from new innovation and technology. As a U.S. dairy industry, we have to ask how we best position ourselves for that opportunity. 

“We may have some tough times in the short term,” he continued. “But there will be tremendous growth in global demand for U.S. dairy products. When you look at rbST and other production enhancing technology, they will affect producer cost of production and thus dairy food affordability. As economies get tighter, the more the producer can produce efficiently and at lower cost, the better they can compete in the global marketplace. The current economy reinforces the need for production enhancing tools that create an economic advantage.”

“We see being engaged in the entire global dairy food chain as critical, from retailers, back to processors, cooperatives and producers,” Erpelding said. “We see high value in networking, helping other assess, or in some cases reassess, where they are when it comes to production technology. Technology, such as rbST, fits into today’s need for affordability, sustainability and nutrition aspects of domestic and global demand.”

DFA, former executives reach $12 million settlement with CFTC

The U.S. Commodity Futures Trading Commission (CFTC) announced that Dairy Farmers of America, Inc. (DFA), its former chief executive officer Gary Hanman, and former chief financial officer Gerald Bos will pay a $12 million civil monetary penalty for attempting to manipulate the Class III milk futures contract and exceeding speculative position limits in that contract. How the payment will be divided was not disclosed.

Additionally, Frank Otis, Ambler, Pa., former president and CEO of a DFA subsidiary, and Glenn Millar, Las Vegas, Nev., former executive vice president of the subsidiary, will pay $150,000 for aiding and abetting DFA’s speculative position limit violation.

According to CFTC acting director of enforcement, Stephen J. Obie: “Today’s enforcement action punishes those responsible for DFA’s manipulative scheme with a $12 million civil penalty and a trading ban, and ensures future compliance with federal commodities laws through the imposition of a monitor. Given the severity of the past misconduct, we are pleased that DFA has committed to reform its trading practices.”

The Commission’s order found that, from May 21-June 23, 2004, DFA, Hanman and Bos  attempted to manipulate the price of the Chicago Mercantile Exchange’s (CME) June, July and August 2004 Class III milk futures contracts through purchases of block cheddar cheese on the CME cheese spot call market. The order found the pricing relationship between the CME block cheese market and the Class III milk futures market is well known throughout the industry, and the CME block cheese market price plays a significant part in establishing Class III milk futures prices.

According to CME Daily Dairy Reports archived by Dairy Profit Weekly, CME cheddar blocks sold in a range of $2.00-$2.20/lb. for most of the spring of 2004, but fell 20¢/lb. on May 21, 2004. During the period cited in the CFTC order, CME cheddar blocks held steady at $1.80/lb. every trading day until June 23, 2004, when prices fell another 19.5¢/lb.

Additionally, the order found that on several days in 2004, DFA’s speculative Class III milk futures contracts exceeded the CME’s speculative position limit, in violation of the Commodity Exchange Act.

A separate order against Otis and Millar found they aided and abetted DFA’s speculative position violation by directing trading of Class III milk futures in an internal sub-account designated for a DFA subsidiary.

According to an Internet search, Otis and Millar were the former management team of Sodiaal North America Corp., which formed a joint venture with DFA in 2000 to create Keller’s Creamery LP. DFA later purchased all the ownership interest in Keller’s Creamery, in 2005.

In addition to imposing civil penalties, the order bars Hanman, now of Platte City, Mo.,  and Bos, now of Weatherby Lake, Mo., from trading futures for five years. It also bars DFA from engaging in speculative trading for two years, and orders DFA to comply with certain undertakings, including: 1) retaining a monitor to ensure that DFA does not engage in speculative trading, and that DFA’s cheese spot call market cheese purchases are made for legitimate business purposes; 2) implementing a compliance and ethics program; and 3) providing future cooperation to the CFTC.

Without admitting or denying the CFTC’s findings in the administrative order, current DFA president and CEO Rick Smith said that agreeing to the settlement was in the best interests of the cooperative and its 18,000 members.

“Settling this matter will allow us to focus wholly on serving our members and moving the cooperative forward,” said Smith, who took the helm of the cooperative in 2006, years after the trading activity in question. “The transactions addressed by the settlement took place over a one-month period more than four years ago. We have fully cooperated with the CFTC’s investigation and wanted to put this matter behind us.”

Prior to reaching the settlement agreement, DFA management voluntarily developed and implemented new policies and procedures designed to ensure that all trading complies with both the spirit and the letter of the law.

 “We are focused on operating in the best interest of our 18,000 dairy farmer owners. We are looking beyond past problems and forward to our bright future,” said Smith.

Unrelated to the CFTC investigation, former DFA CEO Hanman was implicated in two unauthorized payments to DFA leaders: $185,500 to Bucky Jones, a Mississippi dairy farmer and former DFA Southeast Council Board member; and $1 million, to Herman Brubaker, Ohio dairy producer and former DFA board chair.

MATRIC publishes book on feeding distillers grains

The Midwest Agribusiness Trade Research and Information Center (MATRIC) at Iowa State University has published a book on using distillers grains, a co-product of biofuels production, as a feedstuff for livestock and poultry. The book is only available online at www.matric.iastate.edu/DGbook and is free for downloading.

The book, “Using Distillers Grains in the U.S. and International Livestock and Poultry Industries,” was edited by Bruce Babcock, Dermot Hayes and John Lawrence, all professors of economics at Iowa State University. The editors invited internationally renowned experts in animal science, economics, trade, and transportation and logistics from Iowa State and six other universities to share their knowledge and the latest research about distillers grains.

Chapters cover nutrition and live animal performance of beef cattle, dairy cattle, swine and poultry when fed various distillers grain products. Storage, shelf life and transportation issues are included, as are new technologies on the horizon and challenges remaining in the use of distillers grains. Two chapters discuss the trade value of U.S. distiller grains in small and large international markets.

A chapter on ingredient value and cost includes an online calculator program. Livestock and poultry producers can use the calculator to determine their best-cost diet in the context of current market supply and demand and balanced nutrient content for a specific animal species. Feed distributors can use the calculator to determine appropriate pricing of a feed ingredient.

“This book is a comprehensive, solid resource on all aspects of distillers grains feeding, handling and marketing,” said Lucy Norton, managing director of the Iowa Renewable Fuels Association. “Distillers grains are a valuable source of protein and energy that can be an economical addition to feed rations. Providing Iowa’s livestock producers with these guidelines and tools will enhance the feeding of ethanol co-products.”

MATRIC is an affiliate of the Center for Agricultural and Rural Development at Iowa State University. MATRIC funds interdisciplinary research projects in agribusiness and trade.

background_banner