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Leading Dairy Forward

Jan 21, 2019
Michael Dykes, D.V.M., IDFA president and CEO, delivers opening remarks at Dairy Forum.

By Michael Dykes, D.V.M., President and CEO, IDFA

Remarks as prepared for Dairy Forum 2019
January 21, 2019


Welcome to Dairy Forum 2019!

It is great to see you here. Once again, we have a great turnout! I think this is a credit to the great people on my team at IDFA who spend a lot of time carefully putting this event together every year…for 34 years now. I think that it is obviously a credit to all of you who care deeply about our industry and relish the opportunity to learn, to network and maybe even enjoy a minute or two in the sunshine. It is powerful when the U.S. dairy industry comes together to discuss how we can work together to lead dairy forward! Thank you for joining us.

Last night, at the Chairman’s Lecture, we heard a fascinating talk about disruption and innovation and getting ahead of the curve. Michael Steep’s comments resonated with me because I have been thinking a lot about disruption lately.

Over the past several weeks, while preparing this talk, I have been trading emails with colleagues and friends whenever we saw stories about changing trends, changing tastes and changing technologies in the food industry. The stories are remarkable in number…there is a lot going on. They are remarkable in speed…things are changing really fast. They are remarkable in breadth…no corner of commerce is exempt. We are experiencing DISRUPTION all around our industry!

They are also remarkable because they directly or indirectly shine light on the challenges we face as an industry. One clear takeaway message for me: There is evidence all around us that what worked yesterday does not work today or may not work tomorrow.

Now let’s take a little deeper look at DISRUPTION. Can you name the world’s largest hotel chain or the world’s largest taxi company? Let me give you a hint: They own no hotels or taxis!

Think about this… In 1927, J. Willard Marriott opened his first hotel. Ninety-two years later, Marriott is the biggest hotel chain in the world, with 1.25 million rooms Yet it’s taken just over a decade for Airbnb to get to 5,000,000 listings – more rooms than the top five hotel chains combined. Talk about speed of disruption!

Or…what about the folks who paid $1.3 million for one of 13,500 taxi medallions in New York City in 2013 only to find themselves competing with 65,000 Uber drivers today. And just think about how the iPhone technology made this possible!

Closer to home, consider breakfast cereal. I ate cereal as a kid. I bet a lot of you did, too. I favored Sugar Smacks and never heard any concern about added sugar! We don’t see the word sugar on the label today! A great way to fuel up for the day. No matter your favorite cereal — from Shredded Wheat to magical Lucky Charms — milk always came along for the ride. Now, cereal has fallen on hard times and it has dragged down its best friend. We talk a lot about fluid milk sales declining every year since 2009.

Well, the same — the same! — is true for cereal sales. Milk volume is down about 18% over that 10-year period. Ready-to-eat cereal sales are down 21%. That situation has little to do with milk’s characteristics…or with cereal’s merits. It has everything to do with changing consumer habits. We are simply too busy to take the time to sit down with a bowl of cereal. A story in The New York Times a few years ago noted that 40% of millennials think cereal is an inconvenient breakfast choice because it requires too much clean up. Really.

No one necessarily screwed up, no one did something wrong in any of these examples. Technology changed. Habits changed. Everything just…changed.

That’s yesterday and today. What about tomorrow?

We see Amazon — the disruptor-in-chief — creating cashier-less stores, studying drone deliveries and who knows what else. Jeff Bezos famously says that he still feels it is day one at Amazon. It’s been a heck of a day!

We see Kraft Heinz, Danone, Mondelez, Dean Foods, General Mills, Unilever and many others, all facing artisanal insurgents promising greater authenticity to the consumer. Anheuser Busch waved off craft brewers only to cede market share to them. We have seen P&G razor blades challenged by subscription-based Dollar Shave Club, which Unilever bought for $1.6 billion in 2016! All are recent vivid examples of disruption and how competitors are reacting to it – and consumer demand – to survive! We see retailers spending billions to figure out e-commerce and click-and-collect.

Consumers are also demanding more protein – the most significant nutrient delivered by animal agriculture – but some want the protein without the connection to animals and animal agriculture.

That’s why we see major food companies — companies like Tyson and ADM — making investments in companies working on “lab grown” meat and dairy. New genetic engineering technology now makes it possible to make the same proteins that cows produce in their milk in a laboratory! Technology will now give you the same casein, either from a cow or from the cow’s same gene inserted into a yeast. Just like Uber, new technology is enabling disruption in other industries, such as dairy! Many questions will come forward as companies bring this technology to the marketplace, and our industry will have to participate in this disruption! We will have to disrupt or be disrupted.

Let’s be clear about one thing: Consumers are in charge. They have lots of choices and they want even more choices. And, in many ways, they are less predictable than ever. We need to be in tune with their needs and, as importantly, their wants.

In an interview with the Harvard Business Review, Walmart CEO Doug McMillan offered an honest reflection on his company’s sustainability efforts: “We started listening to our critics rather than being defensive. We started learning about social and environmental sustainability, and we began to see an overlap between doing good and succeeding financially. We set some big goals: to be powered by 100% renewable energy, create zero waste and sell products that sustain people and the environment.”

Elsewhere in the interview, he added, “Customers want to buy products they feel good about. In embarking on our sustainability journey, we quickly came to realize that people want to feel good about the products they purchase.”

Folks, this is not a nice to have. It is a must have. It is table stakes going forward.

Against that backdrop, sitting still is not an option. Hoping this will all pass is not an option. Doing the same old same old is not an option.

Adapt or perish. Innovate or fail. Disrupt or become disrupted.

* * *

So, what are we doing at IDFA? What are doing as an industry?

As an organization, we are laying a new foundation. Last fall, the IDFA boards and members voted to change our governance structure. They decided to merge the three organizations for milk, cheese and ice cream into one unified IDFA.

Under this new structure, IDFA will be more nimble. We will be more inclusive. We will be more effective in representing the interests of all segments of the dairy processing industry. This foundation will allow us to enhance our legislative, regulatory and communication efforts. It will increase the return on investment for our members.

Today, we have a new IDFA Executive Council seated. The council will focus on the business and operations of the association to carry out its fiduciary responsibilities. Later this spring, we will inaugurate five Industry Segment Boards to drive policy and strategy. These boards will represent fluid milk, ice cream, cheese, yogurt and cultured products, and dairy-derived ingredients.

Effective January 1, IDFA assumed the assets of the National Yogurt Association from the American Frozen Food Institute. The Live and Active Culture Seal Program will be incorporated into our newly formed Yogurt and Cultured Product Segment. We also will have the option to add other segment boards as our industry continues to evolve and new product categories emerge.

* * *

From an industry perspective, we accomplished a lot in 2018. I am confident that everyone in this room contributed to drive this industry forward. Let’s talk about five significant accomplishments.

First, the historic collaboration between IDFA and the National Milk Producers Federation on the farm bill garnered an extraordinary – and much-needed – change to the Class 1 price mover. Three years ago, when I arrived at IDFA, people said this would never happen. Well, here we are.

The “higher of” mover will soon be gone, and a new Class 1 pricing formula will make it much easier to hedge fluid milk – a long overdue development, and both producers and processors worked together to make it happen! Based on what have heard from members, it seems reasonable to believe that the ability to lock in forward prices could encourage innovation and promotion.

Second, we’re very pleased with the historic decision of Agriculture Under Secretary Greg Ibach to authorize USDA purchases, for the first time ever, of up to $135 million of pasteurized fresh fluid milk (along with cheese) for food banks across America. IDFA collaborated with the Milk Processor Education Program and Feeding America, a national hunger relief organization, to involve processors and help USDA to make the program a success.

This effort is a win all around for milk processors, dairy farmers and families in need. We saw 18 million half gallons of fresh fluid milk delivered to food banks starting last October, and deliveries will continue through April 2019. We also expect USDA to announce plans to purchase additional fluid milk for donation in 2019. That effort will be a part of the mitigation package USDA is implementing to lessen the impact of trade disruptions.

The positive news for fluid milk doesn’t end there. We also worked closely with USDA and Secretary Sonny Perdue and Congressman GT Thompson, R-Pa., to change regulations to allow schools to again serve low-fat flavored milk to their students. We strongly support this regulatory change because we know this action will help to increase milk consumption in schools and give us a chance to foster milk drinking in the next generation.

Fluid milk needs all the help it can get. Each of these actions has the potential to boost consumption and improve the health of our industry. If nothing else, we proved that, with laser-like focus and relentless advocacy on multiple fronts, we can make good things happen.

Fourth, we saw U.S. dairy exports grow, even as trade skirmishes saw tariffs levied on U.S. products moving into China and Mexico. We don’t have any data beyond October because of the government shutdown. But, through the first three quarters of 2018, the U.S. had exported nearly as much nonfat powder as it had in any full year previously. Cheese exports were still up by 3% year-over-year. We also exported more butter, more AMF, more dry whey, more whey protein concentrate, more lactose and more whole milk powder. In total, from January through October, exports of those products added up to 1.7 million metric tons, up 17% from the same period in 2017.

Fifth, cheese and butter demand continue to grow. We estimate that domestic cheese consumption reached 12.5 billion pounds last year. That’s up by more than 2% over 2017. And, that’s up by more than 16% over five years. We estimate that butter demand reached 1.9 billion pounds, up 3% over 2017 and up 7% over the past five years. Ice cream even had a decent year, with dollar and unit sales above year-prior levels.

* * *

Those accomplishments took some doing. They are real. You can be proud of the role you played in helping make it all happen.

But…can I be brutally honest with you? It’s not nearly enough. Not even close.

It’s not nearly enough for processors struggling mightily to grow sales and preserve profits.

It’s not nearly enough for dairy producers enduring an extended margin squeeze. Having grown up on a very small dairy and tobacco farm in Kentucky and having been a dairy veterinarian during the financial difficulties of the ‘80s, I have a special place in my heart for all those dairy farm families experiencing the current market conditions!

It’s not nearly enough for an industry that, collectively, has ambition for bigger toplines, bigger bottom lines and bigger influence in the world. And doing so at a time when, some days, it feels as though the entire industry is under assault.

It’s not nearly enough to just see the challenges ahead, to be aware. Now…. What are we going to do about it? We must do more if we believe that what worked yesterday is not really working today and won’t work tomorrow.

With that in mind, I hope you are planning to stay with us until Wednesday, when McKinsey and Company will present a full end-to-end study on how to position this industry for growth, both domestically and internationally. They did this study exclusively for IDFA. I got a sneak peek at the materials. I was surprised by some of the findings and I think you will be as well. During the session, the McKinsey team will provide valuable, actionable insights… For example, talking about where the dairy industry should be playing and sharing views on ensuring the industry’s growth.

As we think about our positioning for dairy’s path forward, three things are critically important: sustainability, innovation and trade.

Over the past few months, I have had several conversations with members about their mandates to retool operations with an eye on sustainability. Reducing waste. Shrinking carbon footprints. Sourcing responsibly. Contributing to communities.

Kroger, for example, launched a “Zero Hunger/Zero Waste” campaign that aims to end hunger in communities they serve and eliminate waste in the company by 2025.

Companies such as Danone and Unilever are seeking to be entirely carbon neutral or even carbon positive within the next 10 to 15 years. Nestle is committed to using more renewable energy. Walmart, an IDFA member and new milk processor, is taking out fluorescent light bulbs and installing LED lighting in all 5,000 of its stores. IDFA members are also among the 250 companies worldwide that have pledged to eliminate plastic waste by 2025, promising that 100% of plastic packaging will be 100% reused, recycled or composted.

Google any big food company and the word “sustainability.” The websites feature Environmental, Social and Governance, or ESG, reports with detailed statements and pledges to do more, to do better. By extension, suppliers to those companies – including many IDFA members – are going to have to do more and do better, if they plan to supply these companies.

This is not a passing fancy. More consumers demand that their food comes from companies that hold environmental stewardship and social responsibility as core values. I often say, “Consumers want food with a story!”

Animal protein is in the crosshairs. GlobalData says that its research shows 70% of the world population is reducing or eliminating meat consumption. A recent report from the EAT-Lancet Commission on Food, Planet and Health -- a group of 20 leading scientists from around the world -- called for severely curtailing consumption of animal protein products such as meat and milk to reduce greenhouse gas emission and protect the environment.

We just had a Bloomberg article. “Big Dairy is About to Flood America’s School Lunches with Milk”! Just one quote from this story will make the hair on the back of your neck stand up, “The killer is white milk: It just doesn’t have a reason for being,” says Jeff Manning, who commissioned the ads for California milk processors and is now an independent marketing consultant. “I don’t think a millennial will ever drink a cold glass of milk.”

I encourage you to read the story. The policy fight on USDA school lunch program is long from over. We will see a renewed focus in the political campaigns of 2020 to overturn Trump Administration policies and we are likely to see a return to previous policies such as the “Let’s Move Campaign” from the Obama Administration.

We are coming off eight years of nonfat flavored milk in schools. That hurt near-term consumption and, even more importantly, likely did lasting, long-term damage to milk consumption.

Plus, with 100 new members of Congress seated this month, the legislative agendas and actions will undoubtedly reflect the evolving views of more values-oriented food consumers. We have a huge educational challenge in the Congress!

These changes are all around us! They are a big deal. Are we listening and, most importantly, are we ACTING?

IDFA and its members must be vigilant, developing and – as importantly -- promoting the dairy industry’s efforts to be more sustainable. We must have people see us as being on top of the issue. On the forefront of positive developments with meaningful metrics. Positive. That’s important.

And as long as we are talking about defense and Congress, we have to keep spotlighting dairy’s positive role in well-balanced diets. We must intensify our efforts to make sure dairy gets into “good food” categories. That was why creating a new milk incentive pilot program within SNAP was one of our farm bill priorities. Put milk next to broccoli. Make sure we get some of the glow from vegetable health halos!

Look at what might happen in Canada. People who have seen Canada’s 2019 Food Guide say that it no longer recommends that Canadians consume four full servings of dairy each day. Draft reports show only one recommendation: a pint of milk. No cheese. No yogurt.

We also have a new Dietary Guidelines for Americans coming in the U.S. in 2020. How will dairy be addressed in the new Guidelines?

People on balance still have a positive view of animal protein. AC Nielsen reports the same, with 55% of US households saying that high protein is an important attribute. But we cannot be the only ones who understand that. We applaud ADPI for its new effort to say positive things about protein. The Dairy Protein Messaging Initiative is not only something we support, it is something we need more of.

We cannot take anything for granted. The new Congress could wittingly or unwittingly hurt our industry based on popular perceptions about the environment or nutrition. We are all in this one together. I promise that IDFA will be engaged. We will continue to build our legislative/advocacy efforts!

* * *

Innovation is part of the same story. It is about developing more products, better products, better packaging that meet consumer needs. That could be from a nutritional perspective. It could be from a taste perspective. It could be from a convenience perspective.

fairlife is still one of the best success stories in the dairy beverage category. It has become a billion-dollar brand for Select Milk Producers and Coca Cola. Coke’s website says that the company is “reimagining what is possible…” Now that’s the spirit!

As members take up that challenge for themselves, know that IDFA is paving the way. Our regulatory team is making great strides with the Food and Drug Administration to urge standards of identity be as flexible as possible to encourage new technology and to foster innovation.

How do we get to the next fa!rlife? Several companies are using incubators that help food industry entrepreneurs discover new products. Land O’Lakes has a Dairy Accelerator program that empowers dairy entrepreneurs and equips them to scale up their operations and achieve meaningful growth. The Chobani program offers similar assistance, helping small companies “with big heart and ideas to challenge the food industry, improve broken systems and make a difference." Others like General Mills and Nestle are buying small companies, infusing capital and marketing leverage while hoping to get smarter about innovation in return.

Can we do more at the industry level? I think we can.

* * *

Innovation also colors the trade story. During the next few days at Forum you will hear more and more about the need for more market access through trade agreements. McKinsey and Torsten Hemme will have interesting things to say about global opportunities, especially in dairy-deficit regions such as Africa, as well as Asia outside of China and India.

Most everyone in the dairy industry agrees that expanding trade is critical to growing the U.S. industry. USDA says that domestic milk production will grow by another 33 billion pounds between now and 2028. Where is that going to go? Can we consume it all home? USDA’s forecast says it doesn’t think so. And I don’t either.

Right here, to state the obvious, we need to keep reminding the administration and Congress that trade skirmishes are doing untold damage to U.S. dairy industry prospects. We need to fix the steel and aluminum tariff situation with Mexico. We need movement on China trade and resolution on China tariffs. We cannot ignore the market opportunities with 1.5 billion people in China and the growing populations across Asia.

We applauded the announcement by the U.S. Trade Representative that the United States would begin trade negotiations with Japan during 2019. Japan is our fourth-largest market abroad, representing sales of more than $290 million. However, U.S. dairy exports still face high tariffs, limited tariff-rate quotas and other barriers to trade in the Japanese market. We have provided input on the negotiating objectives.

In addition, we recently asked U.S. officials to address our widening import

disadvantage with New Zealand, Australia and now the European Union, which also is in conversations with Japan about trade.

But we must do a lot more than that. We need to up our game in a big way and not let our competitors get ahead of us

This summer, I had the privilege of joining my friend Jim Mulhern from National Milk on a unique opportunity to meet with USDA’s dairy team. Dana Coale extended the invitation, asking us to share our views on the Federal Milk Marketing Orders, the state of the industry and view for the future.

As part of my presentation, our friends at Blimling and Associates put together a graph, which shows that the EU not only exports more volume than the U.S., it also exports more value per unit of volume. I said at the beginning of my talk that we are doing a nice enough job growing cheese, powder and whey exports. We are in the game. But to win the game, we need to really figure out how to export higher value products.

Why was that conversation with USDA especially relevant? In my opinion, if we believe that growing exports is critical, we need to make sure our regulatory system and industry practices support progress toward that goal. The same is true for innovation.

I spoke of a “shared vision for growth” for processors and producers. A vision that unites the industry. A vision that gets past zero-sum game thinking. Here are some key points:

  • Embrace disruption and encourage innovation
    • Our Federal Milk Marketing system must have flexibility and generate the market signals to encourage investment and risk taking throughout the supply chain
  • Expand markets with higher value products
    • Producers make a high-quality milk, we must find ways to maximize the returns in domestic and international markets
  • Listen, learn and lead bold change
    • Value winning together and acknowledge the need to do even more with greater speed and deeper commitment

These are broad sketches. They are my views. We can use these principles as a guide. They will mean different things to each of you, and each of you will have different ideas about how we may accomplish them.

But I am confident about this much… We know that what worked yesterday is not really working today and definitely won’t work tomorrow. Same old same old approaches are going to generate same old same old results – if we are lucky!

I am also confident that this industry has the power, the leadership and the commitment to find a way to win. We must put a greater focus on winning together!

Now let’s go make it happen and lead dairy forward.

Thank you for being here...and enjoy the Dairy Forum.  

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