Highs and Lows
by James Dudlicek
Editor
Editor
Higher prices may threaten consumption, but product development continues — especially in the wellness arena.
We’ve seen the
headlines all year, most of them variations on a common theme: “Why
are milk prices high?”
The pundits can argue the matter to death, but the
reasons are basic: upswing in demand for dairy products in the first
quarter without an equal rise in production, high corn prices that have led
producers to cut back on production, and an increased global demand for
U.S. dairy products — oh, and also the rising energy costs that
trickle down into so many nooks and crannies of doing business in this $90
billion industry.
So here we sit, in the middle of the third quarter,
with a $21.70/cwt all-milk price, according to the latest USDA forecast
that predicts a slide to $21.15 by the fourth quarter. That’s up from
$15 at the beginning of the year.
Such dire straits for dairy led Irene Rosenfeld, chief
executive officer of No. 2 processor Kraft, to warn of a slowdown in milk
consumption, telling the Financial Times that this year’s record-high dairy prices will
drive more and more consumers away from the category. To be sure, Kraft and
others have boosted prices to offset production costs.
Will higher prices really drive folks away? The fluid
side has the most to worry about, as studies have shown consumers are more
likely to cut back on their commodity white gallons when prices climb.
But what about all the new specialty products —
the fancy cheeses, the functional yogurts, the dairy-based foods spiked
with the latest new wellness ingredients?
Data presented by a major ingredient supplier at this
year’s IDFA Cultured Products Conference indicates that consumers
will pay top dollar for dairy products that deliver added value, be it
omega-3s, cholesterol-reducing plant sterols or an oil emulsion that curbs
your appetite.
And if the folks we interviewed for our State of the
Industry report this year are to be believed (and we have no reason to
think otherwise), good things lay ahead for dairy.
Though market data doesn’t paint the rosiest of
pictures for the fluid segment, processors are optimistic that a renewed
recognition of milk’s role in wellness will bring the boost needed to
effectively push back against sugary sodas and juices.
American consumers continue to have an insatiable
appetite for cheese, especially convenience formats like slices and shreds.
Yogurt — the category with perhaps the greatest
healthy halo — continues to do well, and new products continue to hit
the market with cutting-edge fortifications. That halo appears to be
extending to frozen yogurt as well, a category that’s experiencing
its best growth in years.
However, the wellness wagon appears to wear out its
welcome when it comes to ice cream, as sales of low-fat and fat-free
varieties plummeted this year compared to last. Despite the success of the
various “churned” products, consumers apparently prefer to
invest their ice cream calories in the so-called “good
stuff.”
Organic continues to be a strong sector within dairy,
with higher prices for conventional milk putting organic products within
closer reach of many consumers’ pocketbooks. Organic prices have
stabilized — and in some cases dropped — due to a glut in
production caused by farmers taking advantage of one final year of the
80/20 feed requirement. Hundreds of new farms have been converting to
organic, creating a tidal wave of milk that has not only helped organic
processors meet their fluid demands, but allowed many to develop new
organic cheeses, butters and cultured products as well.
So where do we go from here? The USDA’s July
report predicts high milk and dairy product prices and lower-than-expected
feed prices will boost production enough this year to limit further price
increases. The agency further suggests that prices could ease slightly in
2008, projecting a first-quarter all-milk price of $19.50/cwt.
Milk production in 2008 is forecast at 188.4
billion pounds, up 2.2 percent from the 2007 expected total, according to
the USDA, indicating a return to growth that is closer to trend.
Activity among processors this year seems to indicate
that high prices are not going to stop shrewd dairy innovators and
marketers from figuring out new ways to get more milk into more households.
In all, more than 1,100 new dairy products have been
launched in North America this year between January and July, according to
Mintel’s Global New Products Database. That’s not an indication
that the industry expects its consumers to turn tail and run.
It means the industry has been busy developing new
products that it knows consumers will pay good money to buy, whether
it’s for taste, wellness or convenience.
As our friends in the juice business might say, when
life gives you lemons, make lemonade.