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.
Continue Reading Below
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.
Continue Reading Below
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 firstname.lastname@example.org and Benjamin Parkin at Benjamin.Parkin@wsj.com
(END) Dow Jones Newswires
October 13, 2017 05:44 ET (09:44 GMT)