consumer
January 11, 2019

Consumers Continue to Reshape the Dairy Supply Chain

Top Story  |   |  By: Mike Opperman

The average consumer is far removed from agriculture and disconnected from the activities that occur on a dairy. This disconnect creates a greater need for transparency in order to establish confidence in how food is produced. 

This 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. A new report from CoBank’s Knowledge Exchange Division suggests that, for the dairy industry, these evolving demand drivers will affect supply chains in different ways.
 
Meeting these increasingly important consumer demands provides opportunity for some dairy producers, cooperatives and processors, but the report suggests that meeting this opportunity 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, 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. 
Producers who employ practices that enhance transparency, such as the guidelines established in the Farmers Assuring Responsible Management (FARM) developed by the National Milk Producers Federation, should be less susceptible to unique requirements imposed by retailers.

“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. According to the CoBank report, in the second half of 2018, U.S. distribution of A2 milk increased more than 50% and is available in about 9,000 stores.

“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, CoBank says these 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 contract cancellations 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.

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. This has driven a growing range of direct marketing opportunities for dairy producers.
 
“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.
 

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