Yogurt phenomenon driving Northeast dairy industry
By Dave Natzke
The “yogurt phenomenon” is changing the dynamics of the Northeast dairy industry, according to Greg Wickham, CEO of Dairylea Cooperative Inc. Speaking during an agribusiness webinar, March 6, Wickham said continued growth in the yogurt market could lead to near-term raw milk shortages in the Northeast for fluid and soft dairy products.
“The Greek yogurt phenomenon has spurred all the growth,” said Wickham, who noted proximity to customer base has been a primary driver. “By our estimation in 2012, this market will use 6% of the total raw milk production in New York, New England, Pennsylvania, New Jersey, Delaware and Maryland.”
With milk production basically stagnant in Northeast federal order #1, the growth in milk utilization for yogurt has largely come at the expense of fluid milk. Wickham believes the increase in milk used for yogurt will continue, perhaps at a faster pace than the Class I milk use decline, creating a milk shortage of milk for fluid and soft products. While Class III (cheese milk) has seen some expansion, that's been offset by declines in Class IV utilization (butter/powder milk).
The Northeast lagged anticipated 2011 milk production growth, for a variety of reasons, Wickham said. That trend has changed, however, and milk production in the last quarter is more than anticipated. But, construction of new dairy processing plants, and growth of some old plants – particularly yogurt – will outpace farm milk production growth in the region.
“We could sell more milk,“ Wickham said, noting the co-op has tools to help individual producers who want to expand or grow production. “We're not forcing you or twisting your arm, and it might be a once-in-a-generation or 10-year phenomonen, and it might not be available in the future.”
“(Tightening milk supplies) will increase pressure for remaining processing plants to pay a little more – which will flow to farms – and could pressure some manufacturers of some ‘commodity’ products to reconsider whether they want to remain located in the Northeast,” Wickham said.
Wickham said retail consolidation remains a challenge to the industry.
“Large retailers have such a big market share, they apply huge pressure back to the processors, making it difficult to pass price increases for farmers,” he said.
Wickham said about 10% of raw milk is not compliant with new European Union somatic cell count requirements; about half of that is a chronically below standard, and about half is related to individual incidents on a rotating basis.
Ed Gallagher, president of Dairy Risk Management Services, said the milk price outlook is quite different than it was a year ago. However, while the near-term milk price outlook isn’t good for dairy farmers, he remains bullish for long-term U.S. and, specifically, Northeast prospects, especially due to global markets. He said expanding middle classes around the world, especially in India and China, are putting a greater emphasis on nutrition, increasing the demand for dairy products.
Supply and demand remain the key, with most major milk-producing regions of the world increasing production, he said. For the U.S., modest growth in domestic consumption has been offset by strong gains for exports, leading to record prices in 2011. However, near-term, economic challenges in the European Union and slowing economic growth in China will affect U.S. milk prices, Gallagher said. And, even if demand grows, it probably won't grow as fast as production.
”Feed inflation is still with us, and isn't going to go away anytime soon,” Gallagher said. “Things look ugly this spring, especially as you move West, where there’s less of a Class I price influence. There will be stress on farms, and it could influence milk production this summer and fall.”
If factors negatively impact milk production, producers could see better prices in the last half of 2012, he said.
He expects market volatility to remain, and perhaps even increase over the next 10 years. Profitability will ebb and flow, mandating a focus on risk management. Gallagher said a large number of producers he's worked with on risk management strategies were able to develop price protection through “min-max” programs, setting a Class III milk price range of $16-$19/cwt. for 2012.
Jay Waldvogel, senior vice president of strategy and international development for Dairy Farmers of America, Inc., said attention to global markets was no longer optional.
Globalization of the dairy industry has been driven by the free-flow of information and capital, he noted.
“We see more people, with more money, in more places,“ Waldvogel said. "Wherever you're at in the world, nutrition is becoming a necessity. It's not only the importance of nutrition, but the speed in which they’ve moved up the value chain. That driver is not likely to change.
“We aren't an island,” he continued. “You are part of the global market, even if not one pound of your milk or product doesn't go into the export market.”
Waldvogel said U.S. and EU domestic consumption has stagnated at a compound annual growth rate of less than one-half of 1% per year. At the same time, milk production has grown by 1.5% per year, and that growth has been driven by the export market. Demand has coming knocking on the U.S. door, while imports have declined, he added.
In terms of milk production, the U.S. is currently at 8%-10% over domestic consumption requirements, he explained. For those who don't want to participate in the global market, they'll have to determine what they want to do with 1 million extra cows in the U.S., he warned.
The dairy value picture is changing, Waldvogel said. Powder, once the low-value product – has become the driver of price on the export market over the past few years. The price powder brings on global markets has been the driver of U.S. milk prices, and that trend will continue over at least the next 5-10 years.
“Exporting 13% of our production is no longer an opportunity, but an obligation,” Waldvogel said. “The global market is real. It's really important to the U.S., literally setting the price foundation for all the milk in the U.S., whether you export or not. And, the global market is really, really complicated. The future depends on the choices the U.S. dairy industry makes.”