Episode 38 - Strong Hope For Dairy’s Future: Key Findings From the latest State of the Industry Report

Barb O'Brien, CEO of DMI, discusses the State of the Industry report with its authors, Will Loux, analyst with NMPF and U.S. Dairy Export Council, and Mike McCully, DMI consultant. DMI commissioned the report in early 2024 and highlights the unprecedented $8-10 billion in new and expanded dairy infrastructure.

Key findings include the significant impact of new cheese plant capacity, consumer recovery from high inflation, and structural changes in the dairy industry in China. The report emphasizes the checkoff’s need to invest in strategies focused on new product innovations and research, new technologies, and a strong commitment to meeting global demand, as well as the ability to adapt to changing market dynamics.

Tune in to find out!

Host & Guest:

• Host: Barb O’Brien, CEO and President of Dairy Management Inc.
• Guest: Will Loux, Senior Vice President, Global Economics Affairs of U.S. Dairy Export Council
• Guest: Mike McCully, President of McCully Consulting

Transcript (AI-Generated, please ignore typos)

Your Dairy Checkoff Podcast 00:02

Welcome to your dairy check off podcast from dairy management Inc, where dairy check off leaders and farmers share real stories, strategies and insights that grow sales and build trust for us dairy, let's get started.

Barb O'Brien 00:18

I am Barb O'Brien, CEO of DMI excited to talk today about the state of the industry report, which, frankly, is a critical role that DMI plays, in partnership with us, deck and others, and in looking at where the industry is going. On behalf of dairy farmers, we commissioned the report in early 2024 to look at those changing dynamics in the marketplace, and worked very closely with the National Milk and US Dec economics team, as well as with Mike McCully. So I'm going to pause for a minute and let Mike and will both say, Hello,

Mike McCully 00:54

hi, Barb, thanks. It was a great project to work on with will and the team, as well as the folks are at DMI, and I'm happy to be on the podcast here today and share some of our thoughts on what we found. Thanks for

Will Loux 01:05

having us on BART. We're excited so will Alex, I lead the Econ team here for national Malkin us deck, and it's just been a fun project to work on, but also one that I think we're excited to see, kind of what we can do with it, and how it impacts check off and organizational strategies too, and

Barb O'Brien 01:21

you know, will that's really what this report was all about, because we all stepped back and looked at all of the changing dynamics. We wanted to ensure, first and foremost, our dairy farmers were ready for the change that was coming, but use it as a tool for planning, cross the check off, and frankly, across the industry, the report certainly confirms unprecedented developments at the farm and the plant level. I think we were originally estimating it was maybe $7 million in new and expanded infrastructure. That number is maybe eight or eight and a half billion dollars at this point, in my mind, we need to look at it in what, in fact, is a constantly changing global marketplace. The geopolitical dynamics and economic dynamics that we're dealing with right now are really a lens that we need to apply to the programming we're putting in market here and now, but also longer term. It was designed, really to provide an outlook of us dairy supply growth through 23rd to lay out scenarios, supply and demand changes that we see and the potential impacts in terms of us, dairies growth. You gentlemen, used forecasting to look at future supply, future demand, and what we can expect in terms of category growth across the various sectors, and importantly, as we all enter a new strategic planning phase, 2026 to 2028 we're going to use this report to help guide our strategies, and, you know, to look at how we're going to ensure growth over time. So with that, gentlemen, what was your role, and why do you believe this report at this point in time is so important?

Will Loux 03:00

Yeah, I can start off with this, certainly. So I think there are a few kind of pieces with this. Is one actually going back to March or February of 2024. Is when this really sort of kick started. Mike and I gave a joint presentation on some of the big changes that we saw happening within the industry to check off leaders, both at the national checkoff and state and regional level as well, and that's kind of where this got rolling. Mike and I have worked together informally for many years. My role as head economist for both the Export Council and National Milk kind of provided a good platform to dig plenty into what's happening internationally as well as what's happening on the farm sector. And then I'll praise Mike as being one of the foremost leaders in kind of what's happening in the product side and the processing side of things as well. And then it wasn't just us either. And Mike can talk a little bit more about his role and everything else here too, but Peter Vitaliano, longtime economist with National Milk, had a great perspective to add. We utilize Madeline daily a lot from BMI to provide that consumer landscape. We certainly used other members of my team here, especially Monica Ganley, Stephen Kane, Allison Wilton. This was really kind of a team effort behind the scenes. Certainly, folks probably see Mike and I the most, but I think certainly a lot of credit goes to kind of how we aggregated a lot of collective knowledge into a finished product, where this is also something that we're continuing to mess with and look at and see how things are evolving and how our forecasts hold up, especially right now, because folks are not stopping new capacity. Because you mentioned we basically when we started, we went to 678, and a half. The two Chobani announcements we saw in quick succession probably put us to 10. So let's see how this evolves. But maybe Mike, you want to touch on a little bit of your role and your background within all this?

Mike McCully 04:48

Sure. Yeah, thanks. Will I started working in a dairy industry in 1996 so been around for quite a few years, a lot of time in the food business, at craft and. For the last nearly 13 years, consulting with companies everywhere from the farm gate all the way out to to the in consumer and, you know, end users. So it's, you know, for me, it's been really rewarding to see dairy from the farm gate all the way out to the consumer, and seeing all parts of the this, you know, the value chain in between. And I think that was really, as will mentioned, kind of the genesis of the whole project was a year, over a year ago, looking at all of the new investments, which is exciting, but that also brings challenges and changes to to the industry, whether that's at the farm level, the processing level, what the outlook is for demand and so forth. So I think in will what I would both say that while we have our internal team, or as far as our own work on this on a regular basis, on a daily, weekly basis, we're talking to people not only here in the US, but around the world, end users, other manufacturers, suppliers, traders, to really bring in a very broad view in terms of what's going On, not just here in the US, but then globally, and as well as what the outlook is, I think it provided even added some additional richness to the report that way. Were

Barb O'Brien 06:08

there findings that were surprising to you, I think, and

Mike McCully 06:12

will, I'm sure we'll amplify on this too. But a year or more ago, we were looking at all this investment, and I think one of the big questions from a lot of people were, where's all the milk going to come from? Milk Production hadn't been growing. Still isn't growing that much. And in total, you know, all this capacity being added, whether it's cheese plants, milk plants, other product plants, was the equivalent of roughly eight to 10% of us milk production, which is huge. I've never seen anything like this before, and the, you know, the so that that was really the main question when one of the answers that I've given over time is, it's not necessarily that the, you know, where the plants, these new plants, will get the milk, it's what plants won't get the milk. And we've seen that dynamic playing out now. And it's really started middle of last year, and it's, it's gotten, probably even more pronounced in some regions this year, and I think that only increases going forward. So this is, again, it's depending on where you're at from a farmer standpoint, in some areas, this has actually improved, or has the ability to improve milk prices and premiums. And that's, again, probably one of the main positives that I see, at least from the farm level coming out

Will Loux 07:20

of this? Yeah, I think there were certainly kind of surprises as we went along and the markets continued to move on us a little bit. I'd say Mike and I were certainly back in 23 it would have been was when we were first started looking at all this new cheese capacity coming online. It was he had announced plants equivalent to half a million metric tons, basically the equivalent of our cheese exports in total of new capacity. But the other things that we talked about, especially at that early 24 meeting with check off leadership, was we had four big, kind of mega trends that we saw going on. Was one, the capacity investment was certainly the big piece that I think kind of sparked a lot of this conversation. But we also were looking at a US consumer that was still coming out of a high inflation environment, and in many ways, they're still trying to recover from a high inflation environment. We also were talking about the structural evolution within China, and I think that was a major one that we had picked up, and we're really watching to see how that really went out. And then we also had a number of other factors that we were sort of like, how does this all fit together, with milk supply being kind of that key, critical question of, are we going to have the milk for the plant? So I echo Mike certainly on the it became kind of, what do we do with all this cheese to are we going to have milk to fill these plants, or who gets it, or what are the implications for our product mix. I think that was the follow up question of, how do we move up the value chain? How do we add value to the milk that we're seeing? Well, also the fact of for right now, especially given the dynamics on replacement heifers and everything else, there wasn't going to be a massive increase in milk production, at least not right away, and so at the same time, I think the conversations that I know, I've mentioned quite a bit with you, Barb and everything else is in the short term. Right now, we probably don't have enough milk for the processing that's coming online, but that milk supply is going to come. Dairy farmers are very good at responding to financial incentives, and the market is saying we need more milk, especially with this new capacity. So I think the as I look out towards 27 and beyond, as milk production really does start to ramp back up, especially on a component basis, it's where our opportunities to drive demands, both here in the United States, especially as consumers hopefully recover and are in a better position. Current outlook notwithstanding in geopolitics, but really, as we look out towards this longer term, where US consumers have really been one of the key driving forces of cheese, butter, protein demand, and then we also see those same trends happening overseas. So that's the sort of two trains passing in the night of how do we. Incentivize more growth because we need it today, but also, how do we incentivize more demand because we're going to need it tomorrow? Yeah,

Barb O'Brien 10:06

you know, you both touched on the farm level implication of the report. Let's pull that thread a little bit and talk about the implications, and ultimately, how you see this trend or this movement over the next three, five years. What's the benefit, ultimately, to the farmer community?

Will Loux 10:23

But I'd say, right in the short term, I think this is an opportunity for dairy farmers. Mike has said it many times of the cheap pools of surplus milk are basically gone today. I mean, you are seeing capacity has gone where the market was saying, hey, there's an opportunity to add additional capacity here, and that creates, fundamentally, competition for milk, which benefits dairy farmers. And I think that is good, and I think benefits the industry as kind of a free marketer. Competition is helpful in that way. As we look ahead, over this next kind of era, I think you're seeing dairy farmers also diversify their income stream. This is not a new thing, but between digesters, between especially beef on dairy, becoming very relevant. But we also see dairy farmers who are choosing to invest over these next five to 10 years, and really at that longer term horizon, I think as we look at that picture, it's this round of new capacity that we've been talking about, this 8 billion, 9 billion, whatever it is now we're still going to actually need more capacity before the end of the decade here too, in large part because there is demand for US dairy products. And so I think that's sort of the optimism here for dairy farmers, is this is not a static picture. This is not a last gasp of the US building capacity. This is an evolution and an acceleration of the US. Is opportunity to really shine as you as a dairy industry, from farm to processing to export, and as we look at other countries, New Zealand, Europe, they're mostly just replacing old plants. We are investing new and expanding, and I think that gives us a critical opportunity, but it's not one that's going to come easy either.

Mike McCully 12:05

Yeah, those are all great points. When I've presented on this over the last six to nine months or so, I've started presentations by saying, Do not lose sight of this. The United States is growing, and the amount of investment is unprecedented. Our competitors are not doing this. Europe, New Zealand, other countries are not investing. They're not growing. The US is and that sends a strong signal to people and buyers and companies outside the US as well. So that's one of the main things I like to really highlight, is that there's all this investment. There's a lot of companies, a lot of people, that are bullish on the future of dairy and dairy demand, and they're putting a lot of money behind it. So don't lose sight of the fact that that's the case. Another point that then probably, you know, maybe saying it a little different way of as as will mentioned for years and years and years, there's always been parts of the country where milk is chasing plants and getting cheap to finally attract processing investment, or plant investment in those areas, to absorb the milk and then for allow for future growth. We're now in an environment where plants are chasing milk, and that's very, very different. And again, that's a good thing from a farmer standpoint, because it's going to raise the premiums and raise milk prices. But it also creates challenges. If those farmers own co ops or other plants and non Co Op plants, if their milk costs go up, it creates some, some additional challenges. And, and again, we've seen this over the years, and it's going to create opportunities. It's also creates challenges for different companies and, and that's going to be one of the, ones that are challenged, how do they adapt in this new environment, whether it's at the farm level or at the plant level, you

Barb O'Brien 13:46

spend a lot of time talking to dairy cooperatives, processing organizations, what are the impacts to the industry as a whole, and and what can they take away from this? It

Mike McCully 13:58

feels like a lot of things are clicking in dairy right now, last year, fluid milk sales were up for the first time, year over year since 2009 look at the growth and all of the you know, the specialty milks and things like that. Look at the growth in fat. Look at butter. Cheeses growing cottage cheese. Yogurt consumption is up a lot last year. So just a lot of really good news, protein, great trend, great story here from dairy. So we've got a lot of really good things happening, and again and again, companies are investing to take advantage of those opportunities here going forward. So I think again, that that really is a very, very positive story out there for dairy and and one that you know, for those of us been around here for a long time, have probably waited for some of these things. I always joke that, you know, I was one of the few people under the age of 75 that ate cottage cheese, and now we've got it's, it's such a sexy product you get all over social media and and look at the growth in Cottage cheese's example. So there's lots of really good stories out there around dairy. And I think from a processor standpoint, there's, you know, there's the large scale processors are really good at doing what they're doing. Creating, whether it's making milk powders or cheese, cheddar cheese or mozzarella cheese. But as will and I've been talking here, I think a lot of the focus is on these new cheese plants. But there's also a lot of new investment in extended shelf life beverages, dairy beverages. I myself am working on several projects on high protein milk drinks and dairy drinks. And look at the amount of investment that's going on across the country, CDI in California, all the way through to Cayuga in New York, and a number of points in between, of of dairy co ops, of plants that are investing in beverages, dairy beverages, protein beverages, packaging, extended shelf life, aseptics, there's lots of that. There's several ice cream investments, there's cottage cheese investments, there's sour cream investments, there's butter investments. So it's not just cheese, it's, there's a lot of investment out there on a lot of different products. And again, it's, it's for domestic as well as growth into exports. If

Barb O'Brien 16:01

I could just build on your comment too. I was just looking at the sales data, particularly at retail, and that momentum we felt coming out of 24 continues in 25 we're still seeing great double digit growth in in butter and cottage cheese. To your point, you know, stable growth across some of the other sectors. So you're right. I mean, this is an equal opportunity, or a full portfolio opportunity, for sure, as you look at where we are today, are there key takeaways that, again, you want to ensure farmers and the processing community understand from this report, What? What? What are the big what are the big calls to action here? And

Mike McCully 16:46

I've seen this over the last year or so, talking to farmers cooperatives, and it's a word I hadn't heard for a while, is optimism that there's there's optimism. Dairy farmers are optimistic. Maybe they're more cautious than than what? Maybe to start the year with a lot of noise here with tariffs and trades and things like that. But longer term, there's still a lot of optimism around dairy at the farm level, so that that's definitely a positive thing. That's, I think, from a farmer standpoint, that's one of the key takeaways. Is also what's happening with their milk. It's not just, you know, their milk going into a gallon of white jug milk anymore. Look at all the things that are happening in different extended shelf life beverages. And the protein story is really strong. It just came out of a conference the last couple of days talking with multiple people and multiple companies about protein, whether it's whey proteins, milk proteins, liquid UF milk going into different beverages. So this protein story is really strong, and farmers have been, you know, they've been responding to higher butter prices and protein prices, and looking will mentioned the growth and components, that seems to be a story going forward as well. So that, I think that's one of the, I would say, one of the good takeaways and positive messages at the farm level, at the processor level, we're still growing and, and that's, you know, unlike other companies, other countries, other segments that are flat to declining, where you're focused on cost savings and, you know, closing plants and those sort of things, we're we're in the opposite side of that. We're actually growing. We're investing and, and that's, again, that's a positive story for for dairy in general. It's not a straight line between here and there. There will be challenges. There'll be, you know, not everybody's going to end up winning on this, but it creates an opportunity, you know, opportunities for companies and people and farms that have the ability to invest whether it's a new technology, and it's not just necessarily getting bigger, it's getting better and adding more value to milk and milk components.

Will Loux 18:45

I certainly agree with Mike on that, and I agree with the optimism, but I'll maybe bring folks a little bit back here to Earth, because I think what you said, Mike is, it's not a straight line from here to there. And the other thing I think you talked about a bit that I want to touch on, is this is an opportunity. It is not a guarantee that we have this environment. This requires concerted investment. I think that is the role of checkoff, both in terms of what's happening at the DMI and state regional level, as well as the Export Council like this takes investment internationally. We are seeing competition continue from Europe New Zealand. Those are markets that are not going away. One of the key takeaways we had was, hey, China is in many ways, building their own domestic industry, which actually increases our competition in the rest of the world, from New Zealand as they diversify Europe, as they look elsewhere, competition is not going away, and that says nothing also about the competition we see from alternatives as well. Dairy needs to be on its a game. Continue to invest in science, continue to invest in innovation, and really growing demand, I would say, both at here and abroad. And that's from, you know, the bigger picture, market perspective, but also on the farm side. And you're already seeing this. Dairy farmers are really good at diversifying. I mentioned that already. That. But I think this is something that we are going to continue to see in this environment, especially a very uncertain one as it relates to the economy today here in the United States, as well as trade relationships abroad. This is one where we're going to need to be nimble on our toes and really be a forward looking industry that invests for the long term, but also has to be able to adapt as things change. And so that's a tough, tight rope to walk, but that is sort of this optimism couched with that's not just going to be given to dairy. We're going to have to make it happen. Hope

Barb O'Brien 20:32

which is so important is not a strategy. And so there has been such intention with which DMI and US deck have both responded to the learnings and the opportunity thinking about the work we've done to quantify the opportunity in the health and wellness best space, yes, it's about protein, but so much more in terms of the components of The macro and micronutrients and the opportunities we can play strength and performance in gut health, in heart and weight management, all really important trend areas. Mike, you talked about the beverage capacity right now, the diversification of that beverage capacity. We've also done a landscape report on the beverage opportunities, where DMI has developed concepts and prototypes that can help inspire others. And then the third piece of it is, you know, yes, retail is so important in the mix, but so is food service, both domestically and internationally. That's the other big report, landscape report we've done in this last year, looking at where those growth platforms are. And then there's all the work US debt, does you do that, going in country, identifying the specific needs of the population there, and do similar kind of quantification in terms of where the growth can be for us dairies, this report is a big milestone, but it's it can't act alone, right? That we need to put the strategic levers in place to make sure we and the broader industry are acting on the opportunity. We want to ensure that people can access the report. If you all look to the screen, you'll see a call out for the resource, any last comments that you want to share with with farmers and with the broader industry who may be listening? Yeah,

Mike McCully 22:28

this is it's not guaranteed. And, and I learned early in my career that if you're not growing, you're dying. So, you know, we got to continue to be in that growth mindset. And again, it's not just getting bigger. And I think that's people probably, you know, farmers, plants, whatever, probably misinterpret that. It's not getting bigger. It's getting better at what we do, and it's it's also creating new products, listening to consumers, doing the research, understanding what consumers need, not only today, but what's around the corner, what's next? Okay, we've got all this investment today, but I know, you know, been working with the DMI team about this, what's what's next? What, where's the consumer going to be in a couple of years? What are those investments we need to be making today to meet the consumer demand out for several years? I think that's really now. The challenge, as we finish this work and start talking to a lot of companies and farmers about it, is okay, how are you going to take this to implement some of these learnings at your farm, at the plant, at food companies, to really tap into what we see as opportunities. Yeah, and

Will Loux 23:26

I'll just add to that, that we're not done from our team looking into a lot of this and trying to future forecast. I mean, I think this is the benefit of having a group that is devoted between us, tech, National Milk, and the work with DMI to kind of running this analysis on the regular, because things will change. There will certainly be plenty of things that make Mike and I wrong three years down the line, but at the same time, you know, we want to be at least ahead of the curve, and, you know, able to react and adjust. And so I think the next phase is really going into more particulars, especially as it relates with my hat on the Export Council side is looking more into what are the actual products that we're going to have? How much fat, how much protein, how much others give solids. Where does that all mix happen? And where are opportunities to really grow exports, not just five years from now, not just, you know, but even longer term, where are these opportunities and markets of the future? And we, Mike and I already did a lot of that with this report, but this kind of goes that extra level down, and that's where I'm grateful that we've got a great team behind not just within econ, but across the Export Council, across national wealth, and across DMI, that this thing is not just going to go live on a shelf, but can help inform strategy moving forward. And glad to be a part of that and look forward to keep doing it with you

Barb O'Brien 24:39

all. It's an ongoing process, right in terms of our continued investment in science, which really is fundamental to inspiring some of these new areas of opportunity for our products. It's the investment you all make in going into new markets, both developed and emerging will, in terms of the potential us dairy around the world. World, the ongoing work we do hand in glove with our partners across the value chain to inspire and to do our part in terms of keeping that portfolio relevant, fresh and meeting consumers needs wherever they reside, right? Thank you so much for the time this afternoon, and you know, look forward to the ongoing effort, both domestically, as we know, there's still potential here and certainly around the world. Thank you, Mike and will appreciate it welcome.

25:27

Thanks for having us on.

Your Dairy Checkoff Podcast 25:32

Thanks for listening to your dairy check off podcast. Want to hear more about how your checkoff is making every drop count. Head over to Dairy checkoff.com or follow us wherever you get your podcasts, see you next time you.