Market Watch Diary: Fluid’s Last Hope

March 28, 2012 08:23 AM

Major changes in consumer behavior, a lack of creativity among dairy processors and marketers and an outdated pricing system have diminished beverage milk sales. Put simply: The world has changed; milk has not.

**Extended comments highlighted in blue
By Jerry Dryer
Editor’s Note: Jerry Dryer, longtime industry analyst, takes over the authorship of Market Watch Diary. Alan Levitt, author of the column since 2003, has joined the U.S. Dairy Export Council.
Milk has been losing ground to other beverages and foods for more than 35 years and, unfortunately, I don’t see anything on the horizon that will change this trend.
Why am I so pessimistic? Two major structural changes in consumer behavior, a lack of creativity on the part of dairy processors and marketers and an outdated pricing system have teamed up to raise havoc with beverage milk sales. Put simply: The world has changed; milk has not.
Thirty-five years ago, per capita milk consumption stood at 261 lb. annually. In other words, every man, woman and child in the U.S. used, on average, about 30 gal. of milk during 1975. During 2010, the latest data available, the average American consumed just 24 gal. of milk.
The first big structural change was when moms started joining the work force. This demographic change and other economic changes helped end home delivery of milk. Supermarkets and milk depots became the family source of milk.
In prior years, two or three times a week, home delivery automatically replenished the refrigerator shelf with plenty of cold milk. Once the task of keeping the fridge full of milk required a trip to the grocery store, the refrigerator wasn’t always fully stocked.
There wasn’t a convenience store on every street corner. Trips to the grocery store were a weekly event. Beverages with a longer shelf-life -- think carbonated soft drinks, Kool-Aid and Country Time Lemonade -- started to displace milk at home.
With moms busy contributing to household income, more dinners were being eaten away from home. Milk was (and still is) a pain in the neck for restaurant operators. It spoils; it costs too much; it sells for too little. Kids prefer Coca-Cola. Milk sales took (and continue to take) another hit.
More recently, another structural change trimmed milk sales. Historically, about one-third of the milk consumed at home was as a topping on cereal. But time-starved consumers, facing longer workweeks and longer commutes, started skipping the traditional sit-down breakfast at home: a bowl of cereal topped with milk.
The Starbucks next door to the office and the McDonald’s drive-through (dashboard dining) have become the breakfast spots of choice. Cereal sales have been ticking steadily lower for the past several years; consequently, so have milk sales.
For the past 35 years, meanwhile, the dairy business has been busy becoming its own worst enemy, with
  • packaging that contributes to the development of off-flavors;
  • packaging that can only be opened by a magician;
  • flavored milks sweetened with too much sugar;
  • flavored milks made with artificial flavors; and
  • flavored milks sweetened with artificial sweeteners.
Each of these actions was motivated by the undying urge of each processor to be the low-cost provider rather than the high-quality purveyor. Artificial flavors and sweeteners cost less, but many moms and dads frown on such. If we dissolve the lactose module in milk, the natural sweetness is released.
Chocolate milk with "no sugar added" is a possible new product; however, fracturing the lactose extends the processing and packaging time by an hour. This extra time was simply too "costly" for processors driven to be the low-cost source.
We’ve all read about the banishment of chocolate milk in school lunch programs over the past two years; it did not need to happen.

While talking about price and costs, we must not forget the byzantine system used to determine the price of beverage milk. The price of beverage milk (or, as some insist, fluid milk) is a function of the supply and demand for cheese, butter, nonfat dry milk and whey. What do these four products have to do with anyone’s desire to drink a glass of milk?
These product prices are very volatile and will remain so. You cannot repeal the law of supply and demand. Volatile product prices make for volatile beverage milk prices.
And volatile beverage milk prices are a very large problem as milk moves from the farm to the kitchen table or the fast-food counter. Everyone along the supply chain must constantly be monitoring and changing selling prices. How can processors or retailers or coffee shop owners put together a long-term, meaningful marketing plan when they have no way of knowing what the price of their most important component will be from one month to the next? Consumers who buy milk every week are keenly aware of the price whiplash, and they don’t like it.
The structural changes are here to stay. Home delivery is pretty much history as well as the sit-down breakfast at home. But the dairy business could solve and is solving some of the packaging issues. And the product issues, artificial this and that, are being addressed by natural alternatives in some beverages. A futures and options market for Class I milk would help everyone manage some of the price volatility.
I’m afraid the days of 30 gal. of annual consumption are gone. But we could and should preserve the 24 gal. now being used.

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