Retailers Are Bottling Their Own Milk, Raising Pressure on Dairy Companies
October 13 2017 - 5:59AM
Dow Jones News
By Heather Haddon and Benjamin Parkin
Big food retailers are becoming large players in the milk
processing and bottling business, a development that threatens to
squeeze a longstanding network of farmer-owned cooperatives and
dairy processors.
Milk is a low-margin commodity, susceptible to price swings.
Americans are drinking less of it, even as demand rises for cheese,
butter and other dairy products. But grocery executives say milk
remains one the most frequently purchased items in their stores.
Ensuring a steady supply at the best price is worth spending
millions of dollars on manufacturing facilities, they say.
"Virtually every basket that goes through has milk," said Erin
Sharp, vice president for manufacturing at Kroger Co., the largest
U.S. supermarket chain by revenue and stores.
Kroger, which built a fully automated dairy processing plant
three years ago in Colorado, is now processing 100% of the fresh
milk it sells. Competitor Albertsons Cos. opened a 55,000
square-foot plant in Pennsylvania this summer that will be able to
produce orange juice, ice tea and other drinks when milk demand is
low or prices dip.
"We are lot more agile," than traditional dairy processors, said
Evan Rainwater, Albertsons's senior vice president for
manufacturing. "You can do a lot more in a dairy plant than make
dairy."
Wal-Mart Stores Inc. said it plans to open what would be one of
the country's biggest dairy plants in Indiana by next year.
Chris Galen, spokesman for the National Milk Producers
Federation, said food retailers' growing bottling operations have
raised questions among farmers and executives at dairy production
companies and cooperatives about how grocers will make money in the
low-margin business.
Wal-Mart's plant will supply milk to more than 600 stores across
five Midwest states that are now supplied by Dean Foods Co., one of
the world's largest milk producers. Dean will still supply Wal-Mart
stores elsewhere, but the new plant will cost Dean roughly 100
million gallons of annual milk sales out of 2.5 billion total
beginning next year, according to Dean. The lost business from its
biggest customer could affect earnings next year, Dean executives
said.
"We're going to bear with our partners at Wal-Mart and we're
going to do the best we can to ensure a smooth transition," Dean
chief executive Ralph Scozzafava told investors recently.
Dean's stock has lost more than half its value as its faced
competition and other customer volume losses. A company spokesman
declined to comment ahead of its next earnings.
New dairy plants operated by food retailers could give
hard-pressed farmers dealing with a dairy glut more places to sell
their excess milk, some cooperatives say. Grain prices have dropped
in recent years, encouraging some farmers to expand their herds
even as milk consumption has dropped.
With milk prices falling a third from 2014 to 2016, traditional
processors have had little incentive to invest in new plants that
could turn the excess into increasingly popular cheese and butter,
said Mike McCully, a dairy-industry consultant in New Buffalo,
Mich. Cheese and butter prices have also shrunk despite rising
demand. As a result, some farmers are dumping excess milk on their
fields. Others have gone out of business.
"It's been extremely hard on the small independent farmers that
have lost their market in the last year or two," said Michael
Barnes, a dairy farmer in central New York and board member at
Agri-Mark, Inc. dairy cooperative in Massachusetts. Mr. Barnes
expanded his herd sevenfold from 2010 only to see his profits dry
up as prices fell.
Some dairy farmers are building or expanding their own plants to
keep up with expanding milk supplies. Dairy Farmers of America, a
national cooperative, has invested more than $750 million in plants
in the Northeast and Midwest in the last five years to increase
capacity there. A group of producers in New York invested over $100
million to open a facility, Cayuga Milk Ingredients, in 2014.
Cooperatives tend to focus on processing products like butter
and milk powder rather than fluid milk. But some farmers worry the
huge new retailer-owned plants will speed the gradual consolidation
of the dairy industry, squeezing their cooperative-owned facilities
out of business. The U.S. pork and poultry industries are already
organized around large meatpacking companies that control of every
segment of production, from raising chicks and piglets to selling
chicken breasts and cold cuts.
"Everybody is getting closer to the producer and everybody wants
that control," said Brad Rach, dairy director at the National
Farmers Organization.
Write to Heather Haddon at heather.haddon@wsj.com and Benjamin
Parkin at Benjamin.Parkin@wsj.com
(END) Dow Jones Newswires
October 13, 2017 05:44 ET (09:44 GMT)
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