Dairies Are Awash With Organic Milk -- WSJ

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 (January 3, 2018).

Organic milk sales have cooled as the very shoppers who drove demand for the specialty product not long ago move on to newer alternatives, leaving dairy sellers and producers grappling with oversupply.

A yearslong surge in demand prompted food companies and dairy farmers to invest in organic production, which requires eschewing pesticides and antibiotics and allowing cows to graze freely. Now, organic-milk supplies have ballooned just as demand has stalled. Many shoppers have moved on to substitutes such as almond "milk," which contain no dairy.

Packaged-food companies that invested in producing organic milk are cutting capacity or looking to turn it into cheese or other products. Grocery stores that rushed to stock organic milk have eased purchases and allotted more dairy-case space to plant-based alternatives. Dairy cooperatives are slashing prices paid to farmers, setting quotas and even selling organic milk as conventional dairy.

"It's reached a market saturation," said Evan Rainwater, senior vice president for manufacturing at supermarket chain Albertsons Cos. Wal-Mart Stores Inc. and other big chains made the product available so widely so quickly, that organic milk became less of a specialty item, Mr. Rainwater said.

Kroger Co. is shifting more shelf space from organic milk to nondairy and plant-based alternatives, a spokeswoman said. Wal-Mart officials said they have seen demand for plant-based beverages grow, while organic milk isn't on the same upswing that it once was.

Dairy-industry executives say their forecasts were off for organic-milk demand continuing at the initial pace, but also blamed almond, coconut and other plant-based milks for grabbing market share to an unexpected degree. Lactose has also emerged as one of the leading allergens shoppers are looking to avoid, according to Nielsen.

Companies with heavy organic dairy product portfolios are responding to the shift.

Danone S.A., the French food company that acquired a stable of organic dairy products with its purchase of WhiteWave Foods Co. in 2016, is turning some of its organic milk into organic cheese, yogurt or creamer.

"The premium dairy business continues to be pressured by the industry's oversupply of organic milk," Danone CFO Cécile Cabanis said this fall. "We continue to take steps to reduce our organic-milk supplies."

Organic Valley, the largest U.S. farmers' organic cooperative, has lowered the prices it pays to its nearly 2,000 members twice since 2016. The cooperative formed a joint venture with dairy processor Dean Foods Co. in 2016 to place organic milk in more stores.

Organic Valley also opened a $16 million plant in Oregon in August to help diversify its offerings, including turning organic milk into butter and skim-milk powder.

"The market slowed way down," said George Siemon, Organic Valley's chief executive. "There are a lot of signals I may have missed in hindsight."

Dairy industry executives project that the supply and demand imbalance will eventually even out. Mr. Siemon said he expects prices to stabilize this year and improve in 2019.

Organic milk had been a bright spot for the beleaguered dairy industry. Fluid milk consumption has been declining for decades and stood a fifth lower in 2016 than two decades earlier, according to the U.S. Department of Agriculture. Sales of organic milk, meanwhile, climbed for more than three years consecutively through 2016 thanks to younger consumers and new parents who viewed it as healthier than conventional dairy.

A spike in global demand for U.S. dairy pushed milk prices to record highs in 2014, prompting both conventional and organic dairies to expand. The national herd of cows raised to produce organic milk rose to more than 267,500 in 2016, more than a third higher than in 2011, according to the USDA.

The honeymoon ended in 2017. Organic milk sales fell in volume and dollar terms for the first time since at least 2013, Nielsen data shows. Organic milk sales at select grocery and convenience stores peaked at more than $1.42 billion in 2016, falling to $1.37 billion in 2017, according to Nielsen sales figures.

Demand sagged just as the added capacity came on line, farmers and retailers said.

One big reason: competition from new alternatives to conventional dairy, including milk from grass-fed cows and nondairy options like almond and cashew "milk," which consumers increasingly perceive as being healthier. They also tend to be cheaper than organic milk, said Jordan Rost, Nielsen's vice price of consumer insights.

Kay Santiago, a retired IT assistant, said she prefers organic but buys soymilk instead because it is less expensive. Organic milk "tastes so much better," the 55-year-old said as she shopped recently at a Whole Foods Market in Chicago.

The dairy industry has pushed back at the intrusion of plant-based alternatives, lobbying the federal government and Congress to limit food labels using terms like milk and yogurt to products with animal milk. Plant-based foods have formed their own lobbying efforts in response.

Regardless, dairy farmers who invested to produce more expensive organic milk have been hit particularly hard. A dairy farmer who received nearly $40 per 100 pounds of organic milk at the start of 2016 -- more than double the price of conventional milk -- received about $27 per 100 pounds in late 2017, according to government and dairy-cooperative data collected by Rabobank.

Liz Bawden, who milks around 60 cows in St. Lawrence County, N.Y., said the price she earns for organic milk has fallen by around a quarter over the past year. "It's a big hit," Ms. Bawden said.

Some farmers are taking drastic measures to survive. Sean Mallett, owner of Harmony Organic Dairy in Twin Falls, Idaho, is sending some of the cows he added to his herd in recent years to slaughter before the end of their milking life.

"I'm having to basically cull good, productive animals," Mr. Mallett said.

Write to Heather Haddon at heather.haddon@wsj.com and Benjamin Parkin at Benjamin.Parkin@wsj.com

(END) Dow Jones Newswires

January 03, 2018 02:47 ET (07:47 GMT)