U.S. dairy industry of the future

As we look toward a new year, the U.S. dairy industry is at a pivotal point. We have rapidly growing global demand for our dairy products and ingredients, but we are stuck in a morass of regulations that hamper domestic markets for milk and stifle innovation. Consumption of fluid milk is falling and other fresh products are reeling from unaffordable costs, while other products are in growing demand in emerging markets. Federal Milk Marketing Orders no longer make sense, and product innovation is stymied by the straightjacket of inflexible product standards of identity.

Despite the fact that I’ve been a broken record for many years about the need to address these issues, I believe 2015 is finally the time to move forward with a serious dialogue about how to bring changes that will increase the efficiencies and maximize the potential of our U.S. dairy industry.

We don’t need the FMMO

Let’s start with the Federal Milk Marketing Order system. Its original purpose was two-fold: to encourage Grade A milk production, which now represents over 99% of all farm milk; and to balance the market power of dairy producers and manufacturers by requiring manufacturers to pay producers no less than minimum Federal Order monthly milk prices. However, the structure of our dairy markets has changed dramatically since Federal Orders were established in 1937. There simply is no comparison to today’s sophisticated infrastructure or market demand.

We now have a vast highway system, refrigerated trucks and train cars, and the infrastructure to ship broadly in interstate and international commerce. Emerging nations around the world are demanding more protein and dairy in their diets. And today, U.S. dairy co-ops are a potent force in the marketplace, controlling the distribution of more than 80% of the milk produced on our nation’s dairy farms. The dominance of dairy farmer co-ops and their ability to forward contract outside the minimum Federal Order price regulations have more than leveled the playing field between milk buyers and sellers. All of the facts in the marketplace have changed, yet the Federal Order system remains.

The same logic holds true for standards of identity, which are essentially recipes for how to make specific products like milk, ice cream, yogurt and various varieties of cheeses. Dairy products have one of the largest shares of all product standards of identity on the books at the federal Food and Drug Administration, and they can only be altered by a formal rulemaking process that welcomes all interested parties to participate. The process has always been cumbersome, but navigating through it in today’s world of social media and people who are anti-everything is virtually impossible.

Restrictive standards of identity

Yet innovation in processing techniques and ingredients still finds a way to blossom, offering new ways to make better products at nearly every turn. As consumers seek healthier product choices and dairy manufacturers respond, we find ourselves with terms like “dairy beverage,” “frozen dessert” or “pizza cheese” rather than the names defined in the standards that are understood and trusted by consumers. This same restraint isn’t applied to most of our competitors who also are vying for share of stomach.

These two issues – Federal Order regulations and outdated or restrictive standards of identity – are creating major impediments to growth and innovation in the U.S. dairy industry. Until now, consensus on making changes has been impossible to achieve. IDFA members would like to see changes and hope the dialogue can begin across the industry to ramp up greater understanding of the opportunities that lie ahead in a market environment where growing demand is the ruling class.

Deregulation of domestic, government-controlled pricing and greater flexibility in the use of new technologies and ingredients to create more healthful products could spawn increased competition, innovation and consumer choice in product categories where sales are lagging.

Instead of being largely in the business of redistributing dollars from a tightly regulated system, cooperatives would have real market power on behalf of their farmer-members. And milk buyers could better manage the risks of price volatility for their milk inputs just as they do with other ingredients and packaging.

Each company is painfully aware of the effects of the current dairy regulations on its business. But it’s time to come together to improve the business environment across the industry. This will take individual and collective efforts to find a way toward working with markets rather than regulations, but the payoff can be real in growing U.S. dairy into a much more efficient and effective industry.

 So let’s start 2015 with a serious dialogue among all U.S. dairy industry participants that will pave the way for a more successful industry of the future. That would truly make each new year a cause for celebration.