Iowa Dairy Processing Sector: Status and Opportunities Dr. Marin Bozic, University of Minnesota DairyIowa Committee Meet

1. Iowa Dairy Processing Sector: Statusand Opportunities Dr. Marin Bozic, University of Minnesota DairyIowa Committee Meeting Ames, September 4, 2013

2. Plan for Today • Maps of Iowa • Dairy Plants • Recent Dynamics • DairyIowa Survey: • Idea and Goals • Summary of Findings • Recommendations

3. Iowa Fluid Milk Plants - Commercial Dean Foods Le Mars Prairie Farms Dubuque Anderson Erickson Des Moines

4. Iowa Fluid Milk Plants – Farmstead/Niche

5. Iowa Fluid Milk Plants – Farmstead/Niche Hansen’s Farm Fresh Dairy (Hudson, IA) Kalona Supernatural (Kalona, IA) Picket Fence Creamery (Woodward, IA) Radiance Dairy (Fairfield, IA) Sheeder’sCloverleaf Dairy (Guthrie Center, IA) WW Homestead (Waukon, IA)

6. Iowa Ice Cream Plants Wells Blue Bunny Le Mars Anderson Erickson Des Moines

7. Iowa Cheese Plants – Large Commercial AMPI Sanborn Swiss Valley Farms Luana Agropur Hull Wapsie Valley Creamery Independence Twin County Dairy, Inc. Kalona

8. Iowa Cheese Plants – Farmstead/Niche • Frisian Farms (Oskaloosa, IA) • Maytag Dairy Farms (Newton, IA) • Milton Creamery (Milton, IA) • Goat: • Honey Creek Dairy (Honey Creek, IA) • Triple Creek Dairy (Long Grove, IA) • Yellow River Dairy (Monona, IA)

9. Iowa Dry Milk Plants AMPI Arlington

10. Recent Dynamics in Iowa Dairy Processing Sector 2008 Dean Foods purchases Le Mars fluid milk plant from Wells B.B. Swiss Valley Farms closes Cedar Rapids plant. Green Meadows Foods cheese plant opened in Hull. Swiss Valley Farms sells Dubuque plant to Prairie Farms. AMPI closes Sibley plant. AMPI closes Mason City plant. Foremost closes Waukon plant. Swiss Valley Farms expands Luana plant. Prairie Farms closes Roberts Dairy plant in Iowa City. Proliant Dairy buys majority stake in Twin County Dairy Agropur close to decision to expand Hull, IA plant. 2009 AMPI Arlington 2010 2011 2013

11. Emerging Patterns? Focus on Core Business Increase in Size of Plants Rebirth of differentiated farmstead processing I-29 Corridor AMPI Arlington

12. DairyIowa Processors Survey • Goal: • Establish status, prospects, needs and concerns of Iowa dairy processors • Method: • 21 telephone interview conducted, mostly in August 2013. • Participation rate: • Large processors: 87.5% • Farmstead/niche processors: 93.3%

13. DairyIowa Processors Survey: Topics Mission statement, market position & trends Byproducts, need for expert help, suggestions for basic research at the MDFRC. Future plans: capacity & investments Iowa dairy business environment: milk availability, regulatory environment, dairy industry outlook Collective actions: “Made in Iowa” logo; DairyIowa actions. Final thoughts and advice to new producers

14. 1. Mission statement, market position & trends To open this interview, how would you describe your business? Would you characterize your market as primarily local, regional, national or international? Would you describe the market your products participate in to be stable and mature, changing moderately, changing fast? In the forthcoming period of 3-5 years, do you expect your market share to stay stable, decline or grow?

15. 1. Mission statement, market position & trends • Wide variety of strategies: • Cost advantage (commodity business) • Differentiation (staying out of commodity world) • Flexibility through product mix • Market dynamics • Sluggish market demand may not necessarily mean stable markets – consolidation of buyers; “zero-sum” game. • Yogurts, organic & local changing fast • Market shares – widespread optimism • Almost all expect their market share to grow

16. 2. Byproducts, need for expert help, MDFRC 5) Dairy production often involves byproducts, such as lactose, buttermilk or whey. Could you please speak about your approach to byproducts of your principal production? 6) Are there any aspects of your business you would like expert help with? Examples may include improvements in production process, regulatory issues, estimating consumer sensory acceptability and demand (price-point) analysis for new products you are developing, etc. 7) As you may know, Iowa, South Dakota and Minnesota land-grant universities share efforts in fundamental dairy foods related research through Midwest Dairy Foods Research Center. Would you like to provide any advice on the research focus you would find of benefit or interest? Any particular dairy economic analysis that you would be interested in seeing done?

17. 2. Byproducts, need for expert help, MDFRC • Byproducts: • Milk  cream • Butter  buttermilk • Cheese  whey • Where volume allows it, utilization is optimized. Where volume is too small, actively seeking collaborative solutions within industry. Acid whey is a problem. • Expert help & MDFRC • Important research topics are (mostly) being worked on • Milk supply development • Business planning & regulatory issues (farmstead operations) • Cost of processing analysis • Processing troubleshooting, esp. whey

18. 3. Future plans: Capacity & Investments • 8) What is your current processing volume? In particular, what is your daily and annual milk intake and quantity of products shipped? Please feel free to provide us with approximate range, if you do not feel comfortable sharing a specific number. • 9) How does your current volume compare to your current processing capacity? • 11) Are you planning to change the size of your plant? I.e. are you considering an expansion or downsizing? • Most commodity plants trailing leading U.S. plants in terms of capacity. Fortunately, several plants are looking into feasibility of expanding to reduce average costs. • Underutilization is frequently reported (esp. for farmstead operations).

19. 4. Business environment: milk availability& outlook How satisfied are you with milk availability currently? For example, is it hard to source enough milk from an area close to your plant? How much of your milk do you procure outside Iowa? Do premiums you need to pay for milk jeopardize your competitiveness, etc? Number of Iowa dairy farms has been steadily declining. Does this influence your business strategy going forward? In other words, are you worried about availability of milk over the next 3-5 years? How about for a longer planning horizon? Could you please comment on the general situation of dairy industry in Iowa?

20. 4. Business environment: milk availability& outlook • Cooperatives are generally long on milk (procure more than they process), while private companies find milk to be tight. • Over-order premiums are found to be high, and impact adversely both feasibility of investments in cheese business and consumption of fluid milk. • Processors are not concerned about the decline in number of dairy farms, as long as the dairy herd size does not decline. • Concerns about long-term availability of milk varies across processors: some are very concerned, some are not concerned at all. • Many processors recognize external factors that reduce attractiveness of dairying relative to growing crops: ethanol and high crop prices; high land prices.

21. 4. Business environment: milk availability& outlook • 16) Can you talk about regulatory environment in Iowa and at your location? How does it impact your business? Do you have any particular suggestion what change would benefit dairy business in Iowa? • Wide diversity of answers. From “it’s ridiculous” to “business environment is friendly, inspectors are helpful”. • Several processors expressed concerns about changes in federal regulations – health care and food safety reforms in particular. • Some complaints about unnecessary duplications of inspections and product sampling. • Interestingly, nobody mentioned new farm bill (e.g. supply management, etc), though some processors are on record publicly opposing the Dairy Security Act.

22. 5. Collective actions: “Made in Iowa” logo; DairyIowa • If a “Made in Iowa”/ “Cheese From Iowa” / Midwest Cheese logo were available, would it add value to you in any markets and would you consider using the logo on your products? • “Made in Iowa” label is found to be of no value to most processors. Large processors tend to do business-to-business sales, while smaller operations that are well established focus on emphasizing their particular differentiating characteristics or town where located.

23. 5. Collective actions: “Made in Iowa” logo; DairyIowa • I understand that a lot of entrepreneurial success comes from efforts of a single individual or a company. But is there something important that we as an industry should try together to achieve? • Milk Supply Maintenance & Development: Farm transition, Creating friendly atmosphere for farmers considering relocating to Iowa or strongly expanding their herds. • Keep a pulse on regulatory issues • Be friendly to and supportive of all types of dairy businesses: large dairies; value-added dairies; all processors – coops and private.

24. 6. Final thoughts… • 17) What advice would you give to a young person considering dairy production in Iowa? Where to locate? Is value-added something to consider (i.e. organic, grass-fed, value added • production, agrotourism, etc.) • Locate near the dairy plant. • If commodity producer, be efficient, know your costs and choose an appropriate size of operation. Think in terms of profit margins, not gallons shipped. • If value-added: do your research before you try this – it’s hard. Plan carefully how to differentiate and find your niche. • In order to succeed in dairy business, you have to have a passion for it!

25. Summary & Recommendations • Write up survey results and distribute to processors, policy makers and make available online to producers. • Reduction in number of commercial dairy plants is likely over, though I have some long-run concerns regarding several facilities. Status quo is not an option long term. • Dairy infrastructure foundation has four pillars, and all of them should be strongly supported: • Midwest Dairy Foods Research Center • ISU Extension • Dairy check-off • Dairy trade associations • Variety should be respected and encouraged by all, as it contributes to dairy image and industry viability. • Artisian cheese producers should consider organizing into Iowa Cheesemakers Guild.

26. Iowa Dairy Processing Sector: Status and Opportunities presented at the DairyIowa Committee Meeting, September 4, 2013. Dr. Marin Bozic mbozic@umn.edu Department of Applied Economics University of Minnesota-Twin Cities 317c Ruttan Hall 1994 Buford Avenue St Paul, MN 55108 Thank you for your help: Chris Hoeger, Swiss Valley Farms Kevin Stiles, Midwest Dairy Assoc. Mark Truesdell, Iowa Dairy Foods Association DairyIowa Innovation Committee Members