More Choices, But Tough Battles

Excerpted from Dairy Field’s December 1995 State of the Industry report.
Despite changing eating trends, consumers continue to spend more than 10 percent of their food budget on dairy products, a number that has varied only slightly in the past 20 years. Milk, cheese, ice cream and cultured products remain staples in most American diets. In fact, USDA and the Milk Industry Foundation (MIF) estimate that consumers spent a record $67.5 billion on dairy products in 1994.
To its credit, the industry has done a good job of adjusting its products to consumer demands. Today, there is a broad range of reduced-fat and nonfat dairy product choices, with more package size and flavor choices than ever.
Staying attuned to the consumer will be increasingly important as the federal government considers dismantling the elaborate regulatory pricing system that has supported the U.S. dairy industry for decades.
At the same time, consolidation continues at a steady pace; every year there are fewer dairy companies and fewer plant operations, replaced by larger companies and plants serving larger regional territories.
Some categories in the dairy portfolio have fared better than others in recent years. Consumers continue to drink less milk, a phenomenon the milk industry blames on its own lethargy in marketing over the past two decades. In response, the industry has united and launched powerful new marketing programs, the results of which are still being measured.
Frozen desserts and cheese continue to be strong, steady dairy categories. Innovation in lower-fat ice creams and frozen yogurts has been a boost to frozen dessert marketers. Cheesemakers have pizzas, prepared foods, pasta and other American favorites to thank for record-breaking production levels.
Meanwhile, on the farm, milk production continues to grow. More than 153 billion pounds of milk was produced in 1994, a 2 percent increase over 1993. 1995 milk production is estimated to near 156 billion pounds, MIF reports. According to USDA, the 10 largest milk-producing states, in order, are California, Wisconsin, New York, Pennsylvania, Minnesota, Texas, Michigan, Washington, Idaho and New Mexico.
Looking at milk-consumption figures for 1994 and the first three quarters of 1995, one might conclude that nothing new is happening in this enormous sector of the dairy business. The slowly declining line that reflects a 20-year drop in per capital milk consumption continues to sag, though rising skim milk sales improve the picture somewhat.
What the numbers don’t show is the flurry of processor- and producer-funded milk marketing that has occurred nationwide in 1995 and will continue in ’96. Processors are banking on their $53 million “Milk. What a Surprise!” milk mustache print ads and other MilkPEP (Processor Education Program) campaign activities to begin to stem the drop in milk consumption. Another effort, “got milk?,” initiated by California processors in 1994, has been picked up nationally by producers to further promote milk sales, mostly through television advertising.
Nonetheless, by most accounts, it may be another year before processors can hope to see a jump in the sales needle. That’s because some coordinated efforts are just now moving into full swing; and the makers of MilkPEP say the campaign is still geared toward removing barriers to milk sales — namely, changing negative perceptions and misconceptions that consumers have about milk.  m
70 Years Not a Lifetime, but Time to Reflect and Evaluate the Future
When one turns 70, it is time to reflect upon past and possible future contributions to friends, neighbors, loved ones, the community and society in general. It is a time to evaluate whether past and current activities are appropriate for the future.
After 70 years of existence, the Social Security program is receiving the focus and attention it needs and deserves. The Social Security program, started under President Roosevelt in 1935, has served several generations of senior citizens, but is now in clear need of change to reflect current realities.
Federal milk marketing orders and their predecessor programs were authorized in 1933, two years before the Social Security program. This program also deserves reflection, evaluation and analysis. It is time to take a hard look at where dairy-based foods and beverages fit in the world of new products that may look like beverages in that they are drinkable, but are formulated with many non-dairy ingredients and are regarded by consumers as foods, snacks, meal replacements or nutritional supplements.
The need for an introspective look at the USDA’s price classification policies was painfully apparent at its mid-June hearing to consider changing the current Class I definition. Witnesses raised recurring questions about whether the program was really enhancing dairy farmer revenues, whether it hindered the use of dairy ingredients by providing an incentive to use non-dairy ingredients and whether it negatively impacted incentives to create new products and develop innovative marketing programs.
The primary justification for price classification is to obtain greater revenues for dairy farmers than they would otherwise obtain without classified pricing. During the hearing there were substantial doubts raised about whether classified pricing — and especially extending Class I pricing to non-dairy beverage products containing small amounts of dairy-derived ingredients — would enhance producer revenues or decrease them. Cornell University presented extensive analysis showing the effect on dairy farmer revenues from the reclassification of new products from Class II to Class I is likely to be small (plus or minus less than one cent/cwt).
However, if the reclassification results in the substitution of non-dairy ingredients for dairy ingredients, then the negative impact on producer revenues is much greater (minus 23 cents/cwt). The Cornell professor concluded, “There is little upside potential from reclassification, but significant downside potential.”
Other witnesses, including yours truly, presented other studies that clearly cast doubt on whether classified pricing is or can, in fact, enhance producer revenues in view of the burgeoning number of alternative drinkable products in the market. New price elasticity studies report that many types of milks are more price responsive now than they were historically.
Another major issue was whether the present rule that excludes Class I beverage products containing less than 6.5 percent nonfat milk solids should be changed. Dairy farmer cooperatives urged that the exclusion be changed to apply to beverage products containing dairy-derived ingredients, but only if they contain less than 2.25 percent milk protein.
It was quickly pointed out by many that such a move would effectively cap the amount of dairy protein used in such products to avoid Class I classification. Other protein sources, such as soy, could be added if a higher protein level was desired. This is similar to the scenario modeled by Cornell and was strongly opposed by a major producer of sophisticated whey proteins because they thought it would greatly limit the market for whey proteins. In fact, virtually all witnesses, except those representing cooperatives, opposed the protein cap.
I suggest the time has come for the USDA to initiate a non-rule-making, fact-finding process to reflect on past and future contributions of this septuagenarian program. There are legitimate questions as to whether it is still enhancing producer revenues. The answer should be aggressively sought by all interested parties — producers, processors, consumers and, yes, the government. It would be a terrible shame if dairy farmer revenues are being unnecessarily reduced in order to perpetuate this antiquated program.
Let us know how you feel: 

Tip Tipton, chairman and chief executive officer of the Washington, D.C.-based Tipton Group, is the former CEO of the International Dairy Foods Association.
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