Special edition: Food prices

Dairy groups look to organic in commodities panic

By Neil Merrett

- Last updated on GMT

Related tags: Organic milk, Milk

While conventional dairy processors continue to fret over
increasing prices for milk powder and other ingredients, a leading
US organic group believes that current conditions in the
commodities market will continue to boost industry profitability.

Dano Strong, vice president for marketing at Naturally Iowa, told DairyReporter.com that as prices for conventional milk products continue to rise, the cost disparity between organic dairy goods will be much less of an issue for consumers. With dairy goods in particular priced to demand, he added that increased production of organic milk in the US has helped to stabilise prices. The industry could therefore have a significant role in ensuring that the dairy supply could keep up with demand, according to Strong. This was backed by market research group Organic Monitor, which suggested that a growing number of US dairy farmers were taking up organic production, ahead of a change in the rules regarding acceptable practices. Under the Harvey ruling, from June this year, producers in the industry have had to use 100 per cent organic feeds in their herds. Organic Monitor said that the resulting "flood"​ of organic milk entering the market was helping to ease previous shortcomings in the global supply of organic milk and dairy products. The news will be welcomed by some in the dairy industry, as increasing demand and declining supply have combined to drive record hikes in prices for conventional dairy commodities. Total global milk production for 2008 is projected to rise to 188.6bn pounds (lbs) from 184.3bn lbs expected this year, according to findings by the US Department of Agriculture (USDA). Despite this expected growth, sustained high demand for dairy, both on a domestic and international basis, is expected to ensure milk prices remain high. The USDA attributed these price projections by a two per cent rise in sales of fluid milk from 2006, creating a turnaround from previous declines in dairy consumption. This was driven predominantly by rising demand for low fat and skimmed milk, which has now outgrown whole milk use. Though starting at a smaller consumption base, organic milk sales also posted double-digit gains, according to the findings. Despite the industry's potential to offset increased prices, Strong accepted that organic dairy groups have to meet a number of challenges like innovation and distribution, if they are to meet increasing demand from conventional processors. However, with the organic market in the US still relatively in a developing state, he claimed that Naturally Iowa lies in a strong position to lead these developments. "While European markets like theUKhave been embracing organic dairy for a while, theUShas only just begun, though the industry is emerging quickly,"​ he said. "Certainly a benefit for our operations has been that we were one of the first in theUSmarket." ​ Naturally Iowa has therefore begun implementing a number of changes to both how it produces and then gets its products to market, which it claims will help drive future growth in the organic dairy sector. "Logistics is one hurdle that needs to be addressed,"​ strong stated, pointing to the company's announcement in September that it had entered into a partnership with US group Organic Logistics. Through the deal, Naturally Iowa, which currently focuses on markets in the mid-west US, expects to extend its presence on a more national basis, by using Organic Logistics' network of 1170 farms, the company said. Strong suggested that combining this focus with more innovative and nutritious products was another vital ingredient to the success of boosting organic trade. Besides milk, the company has also attempted to branch out into yoghurt products and ice cream to expand its portfolio to higher-value products, especially in terms of added nutritional benefits. "Lifestyles are changing and consumers are having to take more responsible steps in what they are eating,"​ Strong added. The claims come at a time of increasing optimism for the organic food and beverage industry, which Strong suggested was undergoing huge growth due to increasing concerns among consumers of what is going into their products. US sales of organic food and beverages have grown from $1bn (€744m) in 1990 to nearly $17bn (€12.6bn) by 2006, according to figures from the Agricultural Marketing Service (AMS) and the USDA. By 2010, these same figures project sales to reach $23.8bn (€17bn). The organic industry is viewed as the fastest growing sector of agriculture, currently representing nearly 3 per cent of overall food and beverage sales, according to US government statistics. Since 1990, organic retail sales have historically demonstrated a growth rate between 20 to 24 per cent each year including a 22 per cent increase in 2006. However, not everyone in the dairy industry is sharing this optimism over the benefits of organic milk on global commodity supply. Dean Foods, a leading US food manufacturer, said just last week that it was to cut between 600 and 700 jobs as increasing prices passed on from the supply chain had hit sales volumes in its dairy segment hard. Though the company said that it had seen growth in sales volumes through its Horizon Organic branded goods, an oversupply of the milk had negatively hit its results. Organic Monitor, despites it optimism for the US market, was also wary of the affects of increased organic milk production. "Whilst North American dairies find new uses for organic milk, European dairies continue to struggle to find adequate supply,"​ the group said in a report. The UK and Germany were key examples of markets in the region struggling to meet supply. The issue was highlighted as a particular problem in the German market, where increased focus by food discounters on organic dairy production has lead to a massive surge in demand. Similarly in the UK, Organic monitor said that some retailers had been forced to sell what it called "Transitional organic milk"​. The "Transitional"​ milk is sourced from dairy herds that have not fully competed switching to wholly organic means for its production. In these markets, the analyst added that importing milk could help in the short term. "Some North American dairies have been using organic milk fromNew Zealandto make organic dairy products,"​ the report said. "With the American market no longer requiring imports,New Zealandand Australian producers could start meeting the shortfall in European production." ​ The report added that Asia had already begun to import its organic products from these two countries. However, Organic Monitor stressed that the strategy of stepping up imports of milk to meet growing European demand for organically sourced goods would not be a suitable solution for long-term prosperity. Instead, it suggests that processors should be encouraged to develop greater regional production, claiming consumers are just as concerned with domestic food sourcing and food miles along with organic production. "The organic food industry may have become global, however consumers are increasingly thinking local,"​ concluded the analyst.

Related topics: Commodities, Pricing Pressures

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