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November 2010 Archive for Dairy Talk

RSS By: Jim Dickrell, Dairy Today

Jim Dickrell is the editor of Dairy Today and is based in Monticello, Minn.

Dairy’s Love/Hate Relationship with Retailers

Nov 22, 2010

Dairy producers argue that stores should bring down their dairy prices to sell more. Retailers are going to make money where they can. But there is some hope for both sides to boost dairy profits.

We all know the story. The dairy producer’s share of the retail fluid milk price is just 30% (or less). And each time milk prices spike, retailers pass those prices on to consumers, demand falls and even less milk is consumed.
Worse, it’s happening again. According to USDA’s Nov. 12 Dairy Market News, total fluid milk sales are down 1.5% year-to-date through September. The one bright spot is that organic fluid sales have rebounded, up 9% so far this year. But because they comprise just 3.6% of total sales, their resurgence doesn’t help all that much.
Producers often blame retailers for quickly pushing through price increases from the farm gate but are slow to ratchet prices back when farm prices decline. Those are easy criticisms to make (and not without some foundation), but the picture is a whole lot more complicated than that.
Cheese at retail  web
Paul Weitzel, a managing partner of Willard Bishop, laid out some of the nuances of an incredibly complicated U.S. grocery marketing system that is still evolving.  He spoke at Dairy Today’s Elite Producer Business Conference in Las Vegas two weeks ago.
Note: Willard Bishop provides cost and profit management consulting services to grocery, convenience, mass, drug and food-service channels in the U.S, Asia, Europe and South America. Weitzel’s expertise lies in the nitty-gritty of retail food sales.
Last year, traditional grocery stores’ dollar share of sales was less than 50% of total groceries sold. Non-traditional food retailers, such as wholesale clubs, supercenters, drug stores and others account for 37%, and convenience stores command another 15% of sales. By 2014, traditional grocery stores will sell an even smaller percentage, perhaps dipping below 45%, says Weitzel.
Who sells your milk, and how they sell it, is a mixed bag. They all want to make money, but they all approach customers differently. Superstores might sell on volume, but convenience stores and drug stores offer it as more of a high-margin, impulse buy than to move huge volumes. Weitzel adds that consumers in urban areas often shop five or more food retailers to buy groceries. They might buy the bulk of their staples from a traditional store, but they might buy their produce from a higher-end store that specializes in fresh vegetables. And they might pick up a gallon of milk when they buy gas at a convenience store or pick up a prescription at the drug store.
There’s also good/bad news in retailer profit margins. Dairy, in fact, is the second most profitable category in grocery sales. Dairy generates $15.71 in annual true profit per dollar of inventory tied up on the shelf. Only produce is higher, at $19.17. Liquor generates just $1.55, and bakery (-$3.97), seafood (-2.80) and health/beauty/cosmetics (-33¢) actually lose money.
On another measure, true dollars per base foot, dairy is a leader by far. For every $100 of profit dairy generates, produce brings in $38, groceries, $16, and health/beauty/cosmetics loses $2/ft.
Dairy producers will argue that stores should bring down their dairy prices to sell more. From the retailer’s perspective, that might generate more gross dollars but less profit. And when they’re making just a few percent on general groceries and actually losing money on items such bear claws, lobster and eye liner, they’re going to make money where they can.
But there is some hope, and this is where work done by Weitzel, Willard Bishop and the Innovation Center for U.S. Dairy comes in. This analysis shows that by adding 24’ of dairy case space, one store can increase its net profit $821 per week or nearly $43,000 per year. If a division of a chain of groceries has 125 stores, that’s a net of $5.3 million.
This won’t happen automatically, of course. In addition to adding more space, retailers will have to retool their dairy aisles, making them brighter, more inviting, more colorful. But there is a world of potential there for milk and cheese and yogurt sales. Working with retailers so they can have more profitable stores will translate into more dairy sales—for everyone. That’s a good thing.

Dairy Policy Consensus Building

Nov 08, 2010

There is growing agreement that U.S. dairy producers must go to Congress united and actively support a single plan if they have any hope of passage. Will it be Foundation for the Future or same old, same old?

While there are still a lot of questions surrounding the National Milk Producers Federation’s “Foundation for the Future” plan, there is growing consensus that this is the horse dairy producers will ride into Congress—and perhaps the future.
Time and again, as I spoke to dairy producers at National Milk’s annual meeting in Reno two weeks ago, there was excitement (or resignation) that Foundation for the Future was really the only option moving forward.
Virtually everyone I talked to doesn’t like some aspect of the plan:
• The plan contains a supply management component, or in contrast, the supply management component isn’t strong enough.
• The plan does away with Milk Income Loss Contract (MILC) payments, which is a massive, $800 million shift of revenue, much of it out of the Midwest and Northeast.
• The Federal Order reform components, particularly Class IV, are still sketchily defined, or not defined at all.
• Ditto for new price discovery mechanisms for Class III and IV, though there does seem to be universal agreement among producers that moving away from the thinly traded Chicago Mercantile Exchange is needed.
Despite all those reservations, there is growing agreement that U.S. dairy producers must go to Congress united and actively support a single plan if they have any hope of passage. That’s particularly true after last week’s election, with all the Rand Paul look-alikes who can’t find a federal spending program they’ll support.
Most telling is an Oct. 29 column by Rob Vandenheuval, general manager of California’s Milk Producers Council (MPC). (MPC is the driver behind the Costa/Sanders bill, which embodies much of the Holstein Association supply management scheme.)
In the column, Vandenheuval wrote: “…at the end of the day, the only chance we have for successfully making positive change for our industry is if the producer side of the industry is unified behind a single legislative proposal. We’ve documented the predictable, yet disappointing, opposition by the nation’s processors (the International Dairy Foods Association) toward any effort to implement a production management strategy as part of our solution. Given this inevitable opposition, the producer sector doesn’t have the luxury of bickering amongst ourselves once we are ready to go to Congress with a proposal for reform. And we are rapidly approaching that point; hence the need for unity in the ranks.”
For its part, National Milk must clean up the details on price discovery and Federal Order reforms. It also must honestly and forthrightly address producer and co-op angst.
During the NMPF Town Hall Meeting, Paul Toft, producer chairman of Associated Milk Producers, Inc., raised the concern that loss of MILC payments would be a shift of federal dairy support from small producers to large. Toft said that a 100-cow producer would receive $59,000 less in payments under the Foundation plan. But a 1,000-cow producer would receive $159,000 more.
Jerry Kozak, NMPF President and CEO, almost dismissed the concern. “This is not an entitlement program, and your numbers misconstrue the concept. [Our margin insurance program is] intended to kick in when needed. To contrast it between small and large does not help promote the cause.”
Kozak is right: It doesn’t help the cause. But his response didn’t, either. A more forthright response would have been this: ‘We understand your concern. But the political reality is that giving up MILC is the price smaller producers will have to pay to achieve fundamental dairy policy reform that makes us competitive both here at home and in global markets. Large herd states--Arizona, California, Florida and Texas--simply have too much congressional clout and will stymie our efforts if MILC remains part of the package.’
So back to Vandenheuvel. He says NMPF must now develop the legislative language to implement the Foundation for the Future plan. “When those details are in place, every dairy association, cooperative and other interested producers across the country will need to make a decision about whether or not the policy proposal improves our position from the status quo.”
He is right. It’s either Foundation for the Future or same old, same old.
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