Grocers Spoil Milk Processing for Dairy Industry -- WSJ
October 14 2017 - 3:02AM
Dow Jones News
By Heather Haddon and Benjamin Parkin
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (October 14, 2017).
Food retailers are becoming big players in the milk processing
and bottling business, a development that threatens to squeeze a
longstanding network of dairy processors and farmer-owned
plants.
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
ensuring for themselves a steady supply of what remains one the
most frequently purchased items in their stores is worth spending
millions of dollars on manufacturing facilities.
"Virtually every basket that goes through has milk," said Erin
Sharp, group vice president for manufacturing at Kroger Co., the
largest U.S. supermarket chain by revenue and stores.
Kroger, which built a fully automated dairy 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.
Some cooperatives say the new processing plants could give
hard-pressed farmers dealing with a dairy glut more places to sell
their excess milk. Grain prices have dropped in recent years,
encouraging some farmers to expand their herds even as milk
consumption has dropped.
Chris Galen, spokesman for the National Milk Producers
Federation, said food retailers' growing bottling operations have
farmers and executives at dairy production companies and
cooperatives asking 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 this year as the
company contends with competition and other customer volume losses.
A company spokesman declined to comment ahead of its next
earnings.
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 dropped 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
processing 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 14, 2017 02:47 ET (06:47 GMT)
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