Evolving Consumer Demands Will Continue to Reshape Dairy Supply Chains

DENVER (January 11, 2019) — Consumer demand for more transparency and a sense of connection to where their food is grown or produced continues to have a significant impact on food supply chains. For the dairy industry, these evolving demand drivers will affect supply chains in different ways.

According to a new report from CoBank’s Knowledge Exchange Division, meeting these increasingly important consumer demands provides opportunity for some dairy producers, cooperatives and processors, but will require reworking supply chains into greater segmentation and direct contracts with farms.

“Dairy supply chains are adapting in order to meet consumer demands for increased transparency about farm production practices,” said Ben Laine, senior economist for the dairy sector at CoBank. “However, the entire industry will be forced to walk a fine line to meet these demands in an environment in which cost reduction and efficiency are a constant focus.”

The average American consumer is farther removed from the farm than ever before and less than one percent of the population is engaged in farming. This disconnect between consumers and farmers has contributed to the desire for more transparency throughout the supply chain back to the farm. Consumers are increasingly forming opinions about farm management practices, ranging from the use of GMO feed to animal welfare and antibiotic use.

Product Labels and Assurances

At the retail level, customers are looking for labels that indicate farm management practices. Nearly a third of all food is now sold with at least one transparency claim on the label. In many categories where conventional product sales are declining, products with transparency claims are growing.

Dairy producers taking advantage of the opportunity to serve this diversifying market face challenges. With the expansion of product offerings, the risk rises that retailers will require differing and potentially conflicting farm management practices from their suppliers. To mitigate this, the National Milk Producers Federation developed the Farmers Assuring Responsible Management program as a proactive step to define and audit responsible farm management as an industry. This prevents individual farms from being susceptible to unique requirements based on the retailer they ultimately supply.

Supply Chain Challenges

Managing price and input volatility can be more challenging for producers that sell a niche product. One example is organic milk, which involves a costly three-year transition period for a conventional farm, followed by ongoing higher feed costs.

“This desire for transparency has also led to a restructuring of the way dairy processors develop milk supply contracts,” said Laine. “One notable example is Danone’s move to provide yogurt made from the milk of cows that have been fed non-GMO feed. This is a unique niche, tapping into a consumer who is not looking for organic, but does want their food GMO-free.”

Sourcing GMO-free milk without going to the organic market has necessitated “cost-plus” contracts where the dairy producers who supply the GMO-free milk are offered a fixed margin over their cost. One of the newest and fastest growing milk brands in the U.S. is A2 milk. A2 milk, which contains only the A2 beta-casein protein, is said to be easier to digest than normal milk for people who suffer mild discomfort from dairy. In the second half of 2018, U.S. distribution of A2 milk increased more than 50 percent and is available in about 9,000 stores.

Achieving A2-only production at the farm level is a matter of breeding and genetics. Some farms have already begun transitioning the genetics of their herds in anticipation of continued growth in this market.

“With any of these specific new products, the challenge to the supply chain is that there is no longer one commoditized pool of milk to be distributed efficiently into different products and brands,” said Laine. “Instead, there are a number of brands and manufacturers which now need to work back to the farm level to contract directly for a segregated milk supply.”

As a result, cooperatives may see members seeking out these direct contracts for a premium elsewhere. Many farms, however, will still prefer the stability of cooperative membership in the wake of highly publicized contract cancellations in the recent past between producers and milk processors. Some cooperatives may look for opportunities to segment portions of their member milk supply which can meet some of these new criteria and handle premiums internally adding a logistical benefit to customers.

Bridging the Connection Gap

Many consumers are seeking opportunities to feel more of a connection to the farmers who produce their food, which has contributed to the increased desire for locally produced foods.

Although, the definition of “local” varies by consumer, it generates a sense of being part of a regional eco-system rather than an anonymous global supply chain and carries with it a sense of reduced transportation and environmental impact. This has driven a growing range of direct marketing opportunities for dairy producers.

One of those opportunities for producers or artisan cheesemakers is farmers’ markets. While often commanding a premium price, farmers’ markets have grown in popularity as an opportunity for consumers to interact directly with farmers, ask questions, build trust and feel a connection.

“While directly marketing to consumers can add a premium value to dairy products, it requires the benefit of being located in proximity to a metro area and a willingness to alter the business model and become actively involved in marketing,” added Laine. “This carries additional risk and there is limited room for competition from multiple producers in any given market. It is far from an industry-wide solution but can provide opportunity to farms willing to devote the time and effort to developing a marketing plan.

To see a brief video synopsis of the report, “Consumers Calling the Shots: Desire for Transparency is Reshaping Dairy Supply Chains,” click here. To read the full report, visit cobank.com.

About CoBank

CoBank is a $128 billion cooperative bank serving vital industries across rural America. The bank provides loans, leases, export financing and other financial services to agribusinesses and rural power, water and communications providers in all 50 states. The bank also provides wholesale loans and other financial services to affiliated Farm Credit associations serving more than 70,000 farmers, ranchers and other rural borrowers in 23 states around the country.

CoBank is a member of the Farm Credit System, a nationwide network of banks and retail lending associations chartered to support the borrowing needs of U.S. agriculture, rural infrastructure and rural communities. Headquartered outside Denver, Colorado, CoBank serves customers from regional banking centers across the U.S. and also maintains an international representative office in Singapore.