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CoBank: Evolving consumer demands reshaping dairy supply chains

TAGS: Business
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Transparency and sense of connection emerge as leading drivers for dairy consumer decisions.

Consumer demand for more transparency and a sense of connection to where food is grown or produced continues to have a significant impact on food supply chains, according to CoBank’s Knowledge Exchange Division. For the dairy industry, these evolving demand drivers will affect supply chains in different ways.

According to a new report from the bank, meeting these increasingly important consumer demands provides an 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.”

According to CoBank, the average American consumer is further removed from the farm than ever before, with less than 1% of the population 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,” the report noted. “Consumers are increasingly forming opinions about farm management practices, ranging from the use of GMO [genetically modified organism] 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, CoBank explained. In fact, 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, sales of products with transparency claims are growing, the bank noted.

However, dairy producers taking advantage of the opportunity to serve this diversifying market face challenges. With the expansion of product offerings, CoBank said 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 (NMPF) developed the National Dairy Farmers Assuring Responsible Management (FARM) 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, CoBank said.

Supply chain challenges

According to the report, 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,” Laine said. “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 whereby 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, according to CoBank. 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%, and the product is available in about 9,000 stores.

CoBank explained that 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,” Laine said. “Instead, there are a number of brands and manufacturers that 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, CoBank said.

Some cooperatives may also 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

The report explained that 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.

CoBank said although the definition of “local” varies by consumer, it generates a sense of being part of a regional ecosystem 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, the bank noted.

One of those opportunities for producers or artisan cheese-makers is farmers markets. While often commanding a premium price, CoBank said 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,” Laine added. “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."

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