Leading Dairy Forward

Michael Dykes, D.V.M., President and CEO International Dairy Foods Association

This is Part I, excerpted from his remarks as prepared for Dairy Forum 2019
Jan.21, 2019 – Orlando, Fla. Part II will follow in our Feb. 18 edition of
DairyBusiness Digital

Michael Dykes, International Dairy Foods Association

Over the past several weeks, while preparing this talk, I have been trading emails with colleagues and friends whenever we saw stories about changing trends, changing tastes and changing technologies in the food industry. The stories are remarkable in number…there is a lot going on. They are remarkable in speed…things are changing really fast. They are remarkable in breadth…no corner of commerce is exempt. We are experiencing DISRUPTION all around our industry!

They are also remarkable because they directly or indirectly shine light on the challenges we face as an industry. One clear takeaway message for me: There is evidence all around us that what worked yesterday does not work today or may not work tomorrow.

Now let’s take a little deeper look at DISRUPTION. Can you name the world’s largest hotel chain or the world’s largest taxi company? Let me give you a hint: They own no hotels or taxis!

Think about this… In 1927, J. Willard Marriott opened his first hotel. Ninety-two years later, Marriott is the biggest hotel chain in the world, with 1.25 million rooms Yet it’s taken just over a decade for Airbnb to get to 5,000,000 listings – more rooms than the top five hotel chains combined. Talk about speed of disruption!

Or…what about the folks who paid $1.3 million for one of 13,500 taxi medallions in New York City in 2013 only to find themselves competing with 65,000 Uber drivers today. And just think about how the iPhone technology made this possible!

Closer to home, consider breakfast cereal. I ate cereal as a kid. I bet a lot of you did, too. I favored Sugar Smacks and never heard any concern about added sugar! We don’t see the word sugar on the label today! A great way to fuel up for the day. No matter your favorite cereal — from Shredded Wheat to magical Lucky Charms — milk always came along for the ride. Now, cereal has fallen on hard times and it has dragged down its best friend. We talk a lot about fluid milk sales declining every year since 2009.

Well, the same — the same! — is true for cereal sales. Milk volume is down about 18% over that 10-year period. Ready-to-eat cereal sales are down 21%. That situation has little to do with milk’s characteristics…or with cereal’s merits. It has everything to do with changing consumer habits. We are simply too busy to take the time to sit down with a bowl of cereal. A story in The New York Times a few years ago noted that 40% of millennials think cereal is an inconvenient breakfast choice because it requires too much clean up. Really.

No one necessarily screwed up, no one did something wrong in any of these examples. Technology changed. Habits changed. Everything just…changed.

That’s yesterday and today. What about tomorrow?

We see Amazon — the disruptor-in-chief — creating cashier-less stores, studying drone deliveries and who knows what else. Jeff Bezos famously says that he still feels it is day one at Amazon. It’s been a heck of a day!

We see Kraft Heinz, Danone, Mondelez, Dean Foods, General Mills, Unilever and many others, all facing artisanal insurgents promising greater authenticity to the consumer. Anheuser Busch waved off craft brewers only to cede market share to them. We have seen P&G razor blades challenged by subscription-based Dollar Shave Club, which Unilever bought for $1.6 billion in 2016! All are recent vivid examples of disruption and how competitors are reacting to it – and consumer demand – to survive! We see retailers spending billions to figure out e-commerce and click-and-collect.

Consumers are also demanding more protein – the most significant nutrient delivered by animal agriculture – but some want the protein without the connection to animals and animal agriculture.

That’s why we see major food companies — companies like Tyson and ADM — making investments in companies working on “lab grown” meat and dairy. New genetic engineering technology now makes it possible to make the same proteins that cows produce in their milk in a laboratory! Technology will now give you the same casein, either from a cow or from the cow’s same gene inserted into a yeast. Just like Uber, new technology is enabling disruption in other industries, such as dairy! Many questions will come forward as companies bring this technology to the marketplace, and our industry will have to participate in this disruption! We will have to disrupt or be disrupted.

Let’s be clear about one thing: Consumers are in charge. They have lots of choices and they want even more choices. And, in many ways, they are less predictable than ever. We need to be in tune with their needs and, as importantly, their wants.

In an interview with the Harvard Business Review, Walmart CEO Doug McMillan offered an honest reflection on his company’s sustainability efforts: “We started listening to our critics rather than being defensive. We started learning about social and environmental sustainability, and we began to see an overlap between doing good and succeeding financially. We set some big goals: to be powered by 100% renewable energy, create zero waste and sell products that sustain people and the environment.”

Elsewhere in the interview, he added, “Customers want to buy products they feel good about. In embarking on our sustainability journey, we quickly came to realize that people want to feel good about the products they purchase.”

Folks, this is not a nice to have. It is a must have. It is table stakes going forward.

Against that backdrop, sitting still is not an option. Hoping this will all pass is not an option. Doing the same old same old is not an option.

Adapt or perish. Innovate or fail. Disrupt or become disrupted.

* * *

From an industry perspective, we accomplished a lot in 2018. I am confident that everyone in this room contributed to drive this industry forward. Let’s talk about five significant accomplishments.

First, the historic collaboration between IDFA and the National Milk Producers Federation on the farm bill garnered an extraordinary – and much-needed – change to the Class 1 price mover. Three years ago, when I arrived at IDFA, people said this would never happen. Well, here we are.

The “higher of” mover will soon be gone, and a new Class 1 pricing formula will make it much easier to hedge fluid milk – a long overdue development, and both producers and processors worked together to make it happen! Based on what have heard from members, it seems reasonable to believe that the ability to lock in forward prices could encourage innovation and promotion.

Second, we’re very pleased with the historic decision of Agriculture Under Secretary Greg Ibach to authorize USDA purchases, for the first time ever, of up to $135 million of pasteurized fresh fluid milk (along with cheese) for food banks across America. IDFA collaborated with the Milk Processor Education Program and Feeding America, a national hunger relief organization, to involve processors and help USDA to make the program a success.

This effort is a win all around for milk processors, dairy farmers and families in need. We saw 18 million half gallons of fresh fluid milk delivered to food banks starting last October, and deliveries will continue through April 2019. We also expect USDA to announce plans to purchase additional fluid milk for donation in 2019. That effort will be a part of the mitigation package USDA is implementing to lessen the impact of trade disruptions.

The positive news for fluid milk doesn’t end there. We also worked closely with USDA and Secretary Sonny Perdue and Congressman GT Thompson, R-Pa., to change regulations to allow schools to again serve low-fat flavored milk to their students. We strongly support this regulatory change because we know this action will help to increase milk consumption in schools and give us a chance to foster milk drinking in the next generation.

Fluid milk needs all the help it can get. Each of these actions has the potential to boost consumption and improve the health of our industry. If nothing else, we proved that, with laser-like focus and relentless advocacy on multiple fronts, we can make good things happen.

Fourth, we saw U.S. dairy exports grow, even as trade skirmishes saw tariffs levied on U.S. products moving into China and Mexico. We don’t have any data beyond October because of the government shutdown. But, through the first three quarters of 2018, the U.S. had exported nearly as much nonfat powder as it had in any full year previously. Cheese exports were still up by 3% year-over-year. We also exported more butter, more AMF, more dry whey, more whey protein concentrate, more lactose and more whole milk powder. In total, from January through October, exports of those products added up to 1.7 million metric tons, up 17% from the same period in 2017.

Fifth, cheese and butter demand continue to grow. We estimate that domestic cheese consumption reached 12.5 billion pounds last year. That’s up by more than 2% over 2017. And, that’s up by more than 16% over five years. We estimate that butter demand reached 1.9 billion pounds, up 3% over 2017 and up 7% over the past five years. Ice cream even had a decent year, with dollar and unit sales above year-prior levels.

* * *

Those accomplishments took some doing. They are real. You can be proud of the role you played in helping make it all happen.

But…can I be brutally honest with you? It’s not nearly enough. Not even close.

It’s not nearly enough for processors struggling mightily to grow sales and preserve profits.

It’s not nearly enough for dairy producers enduring an extended margin squeeze. Having grown up on a very small dairy and tobacco farm in Kentucky and having been a dairy veterinarian during the financial difficulties of the ‘80s, I have a special place in my heart for all those dairy farm families experiencing the current market conditions!

It’s not nearly enough for an industry that, collectively, has ambition for bigger toplines, bigger bottom lines and bigger influence in the world. And doing so at a time when, some days, it feels as though the entire industry is under assault.

It’s not nearly enough to just see the challenges ahead, to be aware. Now…. What are we going to do about it? We must do more if we believe that what worked yesterday is not really working today and won’t work tomorrow.

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