By Alison L. Krebs, CoBank

While yogurt, cheese and export sales have been a boon for the U.S. dairy industry, allowing milk production to expand nearly 18% in the past decade, fluid milk sales have continued along a troubled trail. From 1975 to 2010, annual per capita fluid milk consumption dropped from 28.6 to 20.9 gallons.And the trend hasn’t let up as overall per capita fluid sales declined another 1.6 and 1.8% in 2011 and 2012, respectively, and experienced their fourth consecutive month of year-on-year declines in February, 2013.2

Indeed, despite a 43% increase in U.S. population between 1975 and 2010, total milk consumption increased just 4 percent.3 In 2012, a mere 26.5% of milk production was marketed through fluid products versus 46% in 1975.

It’s been a painful time for fluid milk, but the industry is now moving beyond the gallon jug to address changing consumer needs more aggressively, primarily through the introduction of low volume, niche or branded products. While these products may not seem to be as appealing to producers who are keen to maximize volume, many have shown promise in their ability to compete against other beverages and some have the added benefit of providing processors with higher margins.

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ESL, products, which have a shelf life of 90 to 120 days, allow slow turn or niche dairy products to be more viable in the marketplace. 

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Improvements on the processing side have enabled product innovation through increased shelf life and shelf stability. According to Darigold CEO Jim Wegner, extended shelf life, or ESL, products, which have a shelf life of 90 to 120 days, allow slow turn or niche dairy products to be more viable in the marketplace. Calcium-enriched, lactose-reduced, creamy fat free and probiotic milk can all command shelf space to meet specific consumer needs with less chance of spoilage. Many ESL products are specializing even further, adding supplements such as additional calcium, omega-3s and plant sterols to cater to health-conscious consumers.

To compensate for slight changes in taste due to higher temperature pasteurization, many producers of aseptic (sterile) milk have turned their attention to flavored milk products. In fact, fluid milk sales in these categories are actually growing because of these and other specialty type products, even though they currently make up a small percentage of overall sales. As might be expected, chocolate has been at the core of this upturn. Aseptic products are also meeting consumer demands for convenient, single-serve products, which are of particular interest to club or mass retailers, such as Sam’s Club or Costco.

Creative processors are also exploiting milk’s high protein content to develop new meal replacement and post-workout refuel products. In the refuel category, Coca-Cola recently took on the distribution of Fair Oaks Farm Brand’s aseptic product Core Power, bringing the beverage giant into the dairy industry. PepsiCo also distributes ready-to-drink Muscle Milk, which contains dairy ingredients. In the meal replacement category, Kellogg’s recently rolled out its Breakfast to Go product — chocolate, strawberry and vanilla shakes that nutritionally equate to a bowl of cereal with milk.

The organic dairy market also has seen the value of innovation. White Wave Foods is increasingly known for its Horizon single-serve, aseptic flavored and white milk products. Horizon President Mike Ferry suggests one of the main benefits of these milk boxes is convenience. “They are easy to grab on the run and are shelf stable, so they are great for lunch boxes and make great snacks.”

A key takeaway is that innovative products with clear consumer benefits are finding success. While it appears that product innovation in the dairy industry may be finding a foothold, processors need to continue to push the innovation envelope as fluid milk continues its battle for share in the crowded beverage market.

Alison Krebs is director in the Knowledge Exchange Division at CoBank, a $95 billion cooperative bank serving vital industries across rural America. The bank provides loans, leases, export financing and other financial services to agribusinesses and rural power, water and communications providers in all 50 states. The bank also provides wholesale loans and other financial services to affiliated Farm Credit associations serving farmers, ranchers and other rural borrowers in 23 states around the country. Knowledge Exchange is an innovative knowledge-sharing practice providing strategic insights into the key industries served by CoBank.