Dairy Stakeholders Reflect On 2022 Challenges
As we look back on the past year, Cheese Market News invited a panel of executives across dairy markets, trade organizations, education, and processing to reflect on the key challenges the dairy industry faced in 2022, as well as what’s to come in the new year.
This year’s panelists are:
• Robert Chesler, CEO, United Dairymen of Arizona (UDA), Tempe, Arizona
• Sara Dorland, managing partner, Ceres Dairy Risk Management, Seattle
• MaryAnne Drake, William Neal Reynolds Distinguished Professor of Food Science and director of the Southeast Dairy Foods Research Center at North Carolina State University, Raleigh, North Carolina
• Matt McClelland, CEO, Prairie Farms Dairy Inc., Edwardsville, Illinois
• Becky Rasdall, vice president, trade policy and international affairs, International Dairy Foods Association (IDFA), Washington, D.C.
How do you believe U.S. dairy prices will track for key commodities in 2023? What will be the key factors affecting U.S. dairy prices over the course of 2023?
Chesler: Dairy prices will likely remain at historically high levels resulting from tight supplies from all non-U.S. exporting regions. This is now a demand-driven market and will likely remain one for the foreseeable future as the European Union and New Zealand move toward cow reductions to support carbon initiatives. China and its openness or lack thereof amidst its zero COVID (policy) will be the volatility factor. Regardless, the question for U.S. producers will be: Can they remain profitable alongside historically high input costs such as feed, energy, labor and interest rates? It takes an extremely high milk price to be profitable on the farm in this environment, and while $20 per hundredweight is historically a high milk price, it won’t be enough for on-farm profitability.
Dorland: It may be the tale of two markets in 2023 — lower during the first half and higher in the second half. A global recession is likely and probably more impactful overseas. But slower demand and more competition could pressure U.S. dairy product prices lower in early 2023.
McClelland: I believe we will continue to see higher milk checks at the farms in 2023. With the anticipation of continuing inflationary pressures on many inputs and the continued growth in certain product segments (including exports), I believe the demand for dairy will support stronger prices into 2023.
What priorities are you watching for the 2023 Farm Bill? Are there policy changes you wish to see implemented in this legislation?
Chesler: Currently there seems to be a lot of attention on make allowance increases and an initiative to change back to the “higher of” Class I pricing. Alongside those two hot topics there is a lot of ongoing chatter about the block versus barrel price spread, with some suggesting an elimination of the barrel spot market. All three of these would have wide-reaching impacts to the dairy industry and therefore warrant attention and data-driven discussions.
McClelland: Efforts related to federal milk marketing order (FMMO) modernization and its support of dairy farmers.
Rasdall: We’d really like to see the Healthy Fluid Milk Incentive Program expanded to additional regions across the country to ensure Supplemental Nutrition Assistance Program (SNAP) participants have incentives to purchase all varieties of fluid milk as well as other nutritious dairy products including cheese and yogurt. It’s a program that has been really helpful in connecting consumers to more dairy products, particularly in today’s inflationary environment for the food insecure. We also want USDA to receive authorization to conduct regular cost-of-processing studies to estimate the average costs of manufacturing the four dairy commodity products used in FMMO price formulas. We would also like to see the Dairy Forward Pricing Program made permanent.
As the industry continues to grapple with workforce shortages and hiring challenges, what are some strategies the industry can implement to entice potential employees to enter a career in dairy?
Dorland: People eating is a certainty and provides for consistent industry performance through a variety of economic conditions, unlike other sectors. For those starting out, dairy and agriculture provide ample opportunities for advancement and the ability to see a wide swath of the industry — an opportunity that may not be as available in other sectors.
Drake: Many young people entering the workforce are looking for a sense of community and a message or product that they believe in. Professional development opportunities are also appealing. A welcoming workplace and strategic messaging with an emphasis on personal growth opportunities may provide encouragement.
McClelland: Beyond the area of staying relevant in the wages/benefits discussion, I believe our industry has a great message for potential employees:
1. We are feeding America.
2. We are adding value to our local communities with local employment and local products.
3. We have a culture that is founded on being part of a “family,” while at the same time acting as an integral part of a larger community of agricultural industries that offer both individual and career advancement opportunities.
Rasdall: There is no magic answer for workforce challenges facing dairy and food manufacturing, but it does demonstrate a great urgency to put people at the center of everything we do. People must know they are welcome and included in our industry. We developed the IDFA People Strategy because we know our ability to remain globally competitive depends on how we develop the workforce of the future, cultivate the next generation of leaders, empower and support diversity in leadership roles, and solve our nation’s immigration crisis. We have the IDFA NextGen Leadership Program to support, guide and prepare mid- to senior-level dairy industry professionals who are ready to take the next step in their leadership journey.
We have developed several professional communities such as Women in Dairy, the Dairy Tech and Innovation Network, HR Leaders in Dairy and a Legal Network to create environments for sharing, learning and refining best practices among various constituency groups across the industry.
Still, our industry is dealing with chronic 10%-20% labor shortages in manufacturing facilities. Dairy’s unique labor needs require a federal solution to ensure a reliable workforce at the farm and processing plant alike. We will continue to push Congress on immigration reform to ease our workforce challenges, but that remains a steep uphill climb.
What is your outlook on potential supply chain issues and inflation in the coming months for dairies, processors and exporters?
Chesler: The cost of freight has come down rather significantly from its highs, and we’d expect, exclusive of a black swan type of event, for costs on freight to remain at or below historic averages. Inflation has ravaged every aspect of the supply chain in cost increases, and now the blight will be increasingly high interest rates. Time from port to destination will improve but remain longer than historic norms, and increases in the cost of money (interest) means longer time holding inventories and costs the manufacturers more to sell the same load than it had previously. Default rates are also likely to increase in a recessionary environment, and people will be focused on securing cash all around the supply chain.
Dorland: Supply chain issues appear to be abating — especially those related to transportation — and there is positive news on the horizon.
Parts and chips remain an issue, but as China begins to relax its zero-COVID policy, markets are hopeful production can start to approach pre-COVID levels by the second half of 2023.
The cost of money will be the challenge next year as that could stifle investment; unfortunately, investment is necessary to repair the supply chain. It is a challenge and one the Federal Reserve could struggle with to find an appropriate balance.
McClelland: Until we experience relief in the supply chain issues of the last three years, it is imperative that we continue our focus on managing the day-to-day barriers and anticipate future volatility. Since the beginning of the COVID-19 pandemic, the intensity and speed of change has been unprecedented, and our willingness and ability to adapt will be the difference in success or failure.
Rasdall: It is tempting to consider all that the U.S. dairy supply chain has overcome in the past year and breathe a sigh of relief, but I don’t think we can be complacent on supply chain outlooks just yet. We’re fortunate to have worked through major export backlogs at ports, enacted some of the most sweeping ocean shipping reform ever and averted a rail strike. But I do not think we can equate those positive changes with “normalcy” or “resilience.” The fact is, we need a sweeping rail reform as badly or worse as we did the ocean shipping reform, and we need a workforce to bolster our entire supply chain across every mode of transportation. On top of that, I don’t think we’ve seen the end of tightness and shortages of critical inputs (CO2, diesel and packaging, most recently) or inflation, among other lingering challenges. So, our supply chain may not be in crisis mode, but neither is our work done.
What types of dairy products do you see the most opportunity for in the coming year in terms of innovation and/or growth?
Chesler: The dairy industry is full of innovative opportunities. Clean labels remain popular amongst consumers, and dairy has that in its favor as the lab-based products have suffered with their dirty labels. Further fractionating of milk will lead toward new innovative products in years to come, and higher fat and protein products are likely to remain in vogue.
Dorland: Cheese is always a sure bet for an opportunity. Demand continues to expand domestically and internationally as more consumers look to cheese as a high-protein snack and TikTok creates more viral recipe trends.
McClelland: I am looking forward to the opportunities for growth of the “traditional” Prairie Farms products of milk, cultured and frozen products during 2023. As the footprint of our sales markets has expanded in the last year, so has our ability to bring Prairie Farms’ products to new customers. At the same time, and with a look towards future customer needs, we are excited about our potential growth in extended-shelf-life products.
Rasdall: We hear about consistent demand from our members for high milkfat products like butter and cheese, and I think that will continue as the consumer perception of the nutritional concerns with dairy fats continues to shift to a more moderate position based on scientific evidence indicating the uniqueness of milkfat versus other sources of fat.
What are some of the benefits and/or drawbacks of increasing M&A activity and consolidation across the dairy industry?
Chesler: Every industry experiences consolidation — dairy is no exception. An expected benefit should be more well-financed businesses yielding further investment in research and development to further growth in consumption.
Dorland: Larger companies tend to acquire innovation — it is more cost effective. But less competition tends to negatively impact service levels — that is always a concern.
Rasdall: Evolution is a part of business, and consolidation has been a part of food and agriculture for centuries, so as we manage workforce shortages and efforts to be more environmentally sustainable, more use of data, technology and automation will continue to be incorporated into the dairy supply chain. This is also more evident in sustainability, where scale can bring greater returns for the soil, air and water. Size allows business owners to get better data on greenhouse gas (GHG) emissions, track trends, institute scalable practices that reduce and mitigate emissions, and create streams of revenue throughout the supply chain, such as through renewable natural gas capture. However, we must ensure sustainability policies do not become a driver of consolidation as a race to the top prioritizes scale and resources. Pressures contributing to consolidation will continue to evolve, and consolidation itself is something our industry will need to continue to cautiously manage.
What advancements would you like to see in terms of sustainability measures within the dairy industry in the coming year? Does your company have plans or initiatives in place to advance this?
Chesler: “Sustainability” is a hot buzzword which means so many different things to so many people. Here in the Southwest the first thought it arouses is toward water, our most valuable and threatened resource. UDA has launched a slew of water-reduction and water-reuse programs within our plants and our farms. What we need is a regional multistate agreement on water usage to assure longevity to our constrained supply.
Nationally it seems energy is the second hottest thought associated with the term “sustainability.” Will EV (electric) trucks be able to haul milk? Will fast charges be available? Will renewable natural gas production be a viable long-term solution to California’s Low Carbon Fuel Standard program? These are areas I hear discussed often in which we hope to see serious progress this year.
On the farm, digesters and carbon credits are likely the most hotly associated concept with sustainability. Arizona dairies are flush with digesters both already built and under construction. We need to see further refinement in a fair and objective way at both defining and valuing carbon credits. This topic is still the Wild West, and we believe some taming is likely in the next year or two.
Dorland: Consumers are voting with their wallets and seeking industries/companies that put the environment first. U.S. dairy has a great track record of reducing methane emissions per pound of dairy product produced; however, there are perceptions that is not the case. It would be tremendous if the dairy industry could create the baseline to measure progress.
Drake: The dairy industry needs to be more proactive and strategic in communicating sustainability efforts. Young consumers are eager to know more about what our industry has done and is doing to reduce carbon emissions on farms and in processing facilities. Both plant/co-op/farm-specific and generic dairy messaging are needed. Further, animal welfare and clean label ingredient decks are critical pieces of sustainability to the consumer that we as an industry often overlook.
McClelland: In my opinion, the efforts of the dairy industry on sustainability measures have been that of a leader. Stewardship of its livestock and lands has been a priority, and efforts to continue those proud traditions and practices are only getting better. Unfortunately, dairy is sometimes portrayed as the problem when in fact dairy is part of the solution. I think it’s also important to emphasize the “sustainability” of family farms and the needs of their operations, communities and families.
Rasdall: Let’s look at packaging and recycling. The latest IDFA ice cream trends survey shows that more than half of all ice cream processors, for example, are using or in the process of moving toward sustainable packaging solutions. We need government investment focused on putting the infrastructure in place to support a circular economy, rather than overburdening companies to do more.
The USDA climate-smart agriculture grants demonstrate that government can collaborate with the private and academic sectors to create voluntary, incentive-based practices and marketing opportunities that drive sustainable food and agriculture. We’d like to see USDA and other federal agencies use this opportunity to bring greater credibility to the process of measuring, tracking and reporting sustainability data. Our sector needs common standards and practices to demonstrate to consumers that we are in fact making real progress.
The U.S. dairy industry has committed significant resources to achieve ambitious environmental stewardship goals related to sustainability, including GHG neutrality, optimized water use and improved water quality by 2050. In a recent IDFA-McKinsey survey, roughly 70% of IDFA members reported having a corporate sustainability and/or ESG strategy in place. Clearly, dairy is doing the work.
In addition to the topics already addressed, what key issues will impact the dairy industry in 2023?
Chesler: The U.S. dairy industry is in a once-in-a-multigeneration situation. With milk production compression from other major exporting regions ongoing, the U.S. can seize global export market share. We can unite as a nation and invest upstream together to capture premium market share on value-added products. We can invest in foreign customer relationships as partners and increase not only sales volumes but, more importantly, profit per unit. However, with a short-sighted approach, we would squabble over market share now and increase sales volumes primarily of commodities while foreign competitors invest upstream and make greater profits off less volume. The choices we make now will have a generational effect on American farmers. We don’t need to make milk, we need to make money; we owe it to the backbone of this industry, the American farmer.
Dorland: New policies are coming from Europe and are proposed in New Zealand. The European Green Deal’s sunrise in Jan. 1 — it could change how Europe engages in dairy. New Zealand has proposed methane and carbon taxes for dairies — again, it could restructure the industry in unexpected ways.
Rasdall: The most important issue facing our dairy industry is ensuring dairy is viewed as a major contributor to nutrition, health, and wellness. This will require more support for new research by credible institutions and individuals on dairy’s role in human health and nutrition to better inform the federal Dietary Guidelines for Americans (DGA). We know dairy is a nutritious product that consumers need, especially in food-insecure populations, but there have been so many years of erroneous publicity and outdated science associated with dairy that those needs often get overlooked.
With the pressures of heightened sustainability goals on top of supply chain friction, inflation, and workforce shortages, we need to make sure we are not losing sight of proactive efforts to ensure dairy maintains its status as an excellent source of nutrition with policymakers in 2023. As USDA undergoes rule-making to update the WIC Supplemental Foods package and school meals nutrition standards, we need to remind the department and Congress of fluid milk’s and dairy products’ nutritional value so they remain core components. Dairy products are recommended by the DGAs both as part of a healthy dietary pattern and specifically for increased consumption by 90% of Americans. Unfortunately, USDA’s recently released WIC proposed rule reduces the size of the milk and dairy redemption package for pregnant women, infants, and children, which is directly counter to DGAs recommendations to increase dairy consumption.
Keep Up To Date On Cheese Industry News
Find all of HART Design & Manufacturing’s current industry news here.
Source: Cheese Market News