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OCR for page 189
TRUMAN F. GRAF
Market Implications of
Changing Fat Content of
Milk and Dairy Products
INT RODU CTION
Consider the following questions: Does changing fat content of milk
and dairy products have market implications? or Are market implica-
tions causing the changing fat content of milk and dairy products?
The distinction is important if the former is true, the drop in fat
content of milk and dairy products will stop when the dairy industry
collectively decides it should. However, if the latter is true, the dairy
industry will have little voice in the decision on fat content of milk and
dairy products, but instead will have to react, and quickly' to the col-
lective voice of some 200 million consumers, if it is to prosper.
So what's the answer? Probably the latter. If the dairy industry hopes
to maximize per capita sales of dairy products in the future, it must
recognize and react to the marketing situation it's facing-consumers
are demanding, and will get, lower-fat milk and dairy products. Con-
sumers are putting more emphasis on the solids of milk and less on the
fat portion.
This chapter will discuss four aspects of market implications of
changing fat content of milk and dairy products- (a) minimum stan-
dards, (b) consumption trends, (c) substitute and imitation products,
and (d) component pricing.
MINIMUM STANDARDS
The U.S. Public Health Service (USPHS) Milk Ordinance and Code,
recommending a minimum of 3.25% butterfat in farm milk, was re
189
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190
TRUMAN F. GRAF
Gently adopted as the official national standard. Prior to its adoption,
states with higher than a 3.25% butterfat minimum could make it
difficult for farm milk with less than their minimum to be marketed in
the particular state. Now farm milk can move if it meets the USPHS
butterfat minimum of 3.25%, even though a particular state has a
higher minimum.
Fifteen states have butterfat minimums on farm milk of higher than
3.25%, so strong pressure is being applied in these states to decrease
the butterfat content to the USPHS recommended level. Six states have
lower minimums than the USPHS recommended level of 3.25%, further
discouraging higher fat content in farm milk. The effect of the USPHS
minimums on farm milk will be to encourage a further drop in the
average U.S. butterfat test of farm milk, which has already dropped from
3.96% butterfat in 1950 to 3.65% in 1973.
Food and Drug Administration (FDA) federal minimum standards
effective December 31, 1974, require less than 0.5% milk fat for skim
milk, 0.5% to 2% for low-fat milk, and not less than 3.25% for fluid
whole milk in its final form for sale, if shipped in interstate commerce.
These minimums will likely result in a reduction in state minimum milk
fat standards for fluid whole milk. For example, Wisconsin recently
dropped its minimum from 3.3% to the federal minimum of 3.25%.
Reductions in state milk-fat minimums in fluid whole milk will en-
courage further reduction in fat consumption.
Tied in with these varying fat minimums on various milks, is the
fact that low-fat milk sales are increasing and fluid whole milk sales are
decreasing (see Table 1). This shift in consumer demand decreases the
volume of butterfat consumed. For example, low-fat and skim milk
now comprise 28% of total fluid sales on Federal Milk Order markets,
compared to only 10% in 1962. As a result, the average milk-fat test of
all fluid products excluding cream is now about 2.8%, compared to
3.3% just a decade ago-a decline of 0.5%.
FDA standards requiring a minimum of solids-not-fat content of
8.25% in whole, low-fat, and skim milk, in its final form for sale,
shipped in interstate commerce, and requiring fluid milk products con-
taining 10% solid-not-fat to be labeled "protein fortified," went into
effect December 31, 1974. In the past there were no federal standards
for minimum solids-not-fat content of fluid mink or solids-not-fat
content required in fluid milk to use the term "protein fortified." These
new standards will likely increase the quantity of solids-not-fat mar-
keted in fluid form and also the importance of the solids-not-fat portion
of milk compared to the milk-fat portion.
Dairy industry leaders are working to increase minimum solids
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Market Implications of Changing Fat Content
TABLE 1 U.S. Per Capita Commercial Sales a
191
Change Change
1953-1973 1953-1973
Product 1953 (lb) 1973 (lb) (lb) (%)
Fluid whole milk 298 213 -85.0 -28.5
Cream 11.8 5.6 - 6.2 - 52.5
Butter 8.5 4.0 -4.5 -52.9
Ice cream 18.0 17.7 -0.3 -1.7
Dry whole milk 0.2 O.1 - 0.1 -50.0
Evaporated and condensed
whole milk 17.4 5.7 - 11.7 - 67.2
Low-fat milk 29.4 74.3 +44.9 + 152.7
Nonfat dry milk 4.1 5.0 +0.9 +21.9
Cottage cheese 3.6 5.2 + 1.6 +44.4
American cheese 5.1 7.9 +2.8 +54.9
Other cheese 2.4 5.7 +3.3 + 137.5
Ice milk 2.0 7.6 +5.6 +280.0
Sherbet 1.3 1.6 +0.3 +23.1
a Prom USDA (1961, 1974)
not-fat content even higher-to at least 8.5% in whole milk, 9% in skim
milk, and 10% in 2% butterfat milk. If achieved, this higher solids-
not-fat content would further accentuate the importance of the solids-
not-fat portion of milk.
Nutritionists tell us protein and calcium are two nutrients very often
deficient in diets. The federal government is putting more and more
emphasis on improving the nutritional levels of young and old alike.
Protein is therefore being stressed, and milk is one of the best sources
of protein a solid-not-fat constituent in milk. New federal nutritional
standards require listing on food and milk packages the percent of
minimum daily protein requirements provided by a unit of that food.
For example, they now permit nutritional labeling, indicating that one
serving of fluid milk with 10% solids-not-fat will provide 25% of the
U.S. recommended daily allowance of protein. This should enhance the
value of protein and solids-not-fat in milk. At present about 22% of
the protein in our diets comes from milk.
One more example low-fat cottage cheese constituted only 3% of
total sales of cottage cheese in 1965, but will likely be over 12% in
1974. New FDA standards of identity for cottage cheese provide for a
low-fat standard. These will likely facilitate interstate sales of low-fat
cottage cheese, thereby increasing total sales of the product and further
accentuating the movement toward lower-fat dairy products.
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192
TRUMAN F. GRAF
Adjusting to this declining demand for butterfat, as exemplified by
new federal standards, is one of the major challenges facing the dairy
industry.
CONSUMPTION TRENDS
U.S. per capita civilian disappearance of dairy products combined on a
milk-equivalent basis declined one fifth in the past two decades to
556 pounds in 1973. A further drop of almost 3% occurred in 1974
(USDA, 1961, 1968, 1974~. However, the entire decline is because of
reduced milk-fat consumption. It has been a long, steady drop in dairy
consumption because butterfat consumption is down, but per capita
sales of low-fat and high solids-not-fat products are increasing.
For example, 1973 per capita sales were approximately one fourth
lower for fluid whole milk; one half lower for butter, cream, and dry
whole milk; and two thirds lower for evaporated and condensed whole
milk than they were 20 years ago. Meanwhile, per capita sales were
approximately one fourth higher for nonfat dry milk and sherbet, one
half higher for American and cottage cheese, one and a half higher for
other cheese and low-fat milk, and three times higher for ice milk in
1973 than they were in 1953 (Table 11. All low-fat products are doing
very well, and all high-fat products are hurting consumption-wise.
Per capita sales of low-fat milk in particular are increasing sensa-
tionally-up one and a half times since 1953, while fluid whole milk
sales are down one fourth. Consumers are demanding more and more
skim and modified skim milk and less and less fluid whole milk, result-
ing in a reduction in the average fat content of milk sold and a decrease
in the quantity of fat sold.
Cheese, although not low in fat, has a high solids-not-fat content,
especially protein, and per capita sales of it are also increasing sub-
stantially one half for American cheese and one and one third for
other cheese in the past two decades. All cheese varieties shared in
the phenomenal increase in per capita consumption. Since l9SO, the
increase in per capita consumption for cheeses was American, 45% (to
8 lb); Swiss, 54% ( 1.08 lb); Italian, 427% (to 2.86 lb); cream
and Neufchatel, 46% (to 0.67 lb); Brick and Munster, 65% (to
0.33 lb); Edam, Gouda, and Limberger, 63% (to 0.13 lb); and Blue
mold, 1 13 % (to 0.17 lb) (USDA, 1974) .
Cheese has approximately 30% solids-not-fat and 25% protein on a
volume basis far above the solids-not-fat content of high-fat items
such as butter (1%), cream (5%), and fluid whole milk (8.25%~.
Consumers are demonstrating in the marketplace they want high solids
OCR for page 193
Market Implications of Changing Fat Content
193
not-fat and protein products in preference to high-fat, lower solids-not-
fat products. Hence, the phenomenal increase in cheese sales and the
drop in fluid whole milk, butter, and cream sales.
The increase in per capita sales of low fat and high solids-not-fat
dairy items and decrease in per capita sales of high-fat items is likely to
continue. In light of past and projected future consumption trends, the
dairy industry will need to place greater emphasis on low-fat and higher
solids-not-fat dairy products. Consumer demand for butterfat will
continue to drop.
SUBSTITUTE AND IMITATION PRODUCTS
At the same time a decrease in per capita sales of high-fat items has
been occurring, dairy products have also been facing stiff competition
from vegetable fat products. Consumers have been replacing milk fat
with vegetable fat, primarily because vegetable fat is cheaper. For ex-
ample, per capita sales of butter dropped over half (53%) between
1953 and 1973-to 4 lb, compared to a 38% increase for margarine-
to 11.3 lb. Thus, per capita sales of margarine are almost three times
butter sales. Butter has recovered slightly in 1974 because of higher
soybean and hence margarine-prices, but the long-term trend for
butter sales is not encouraging.
Consumers are eating as much fat as ever, but they're shifting from
butterfat to vegetable fat-and high-fat dairy products are suffering.
This doesn't mean high-fat products such as butter should be ignored
by the dairy industry. However, it does mean the sales potentials for
lower butterfat products should be explored more closely than they
have been in the past.
Following a big "stir" in the late 1960's, filled dairy products (vege-
table fat, milk solids-not-fat combinations) dropped off in the early
1970's. However, they again pose a threat to the dairy industry. Why?
Because retail dairy product prices have increased substantially 24%
in the current year alone. This has made consumers very price con-
scious with respect to dairy products. Consumers notice milk and dairy
product prices more than other foods, because they're basic household
items hence the opportunity for cheaper synthetic products.
Changes in FDA standards of identity will also increase the competi-
tiveness of vegetable-fat products. For example, last year vegetable-fat
ice cream was authorized for sale in only about 20 states and when sold
interstate had to be labeled "imitation ice cream." New federal standards
of identity for vegetable-fat ice cream effective July 1, 1975, will permit
the name "mellorine" on interstate sales. More of the product will un
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194
TRUMAN F. GRAF
doubtedly be purchased by consumers as "mellorine" than was pur-
chased as "imitation ice cream," cutting into the sales of ice cream-
and milk fat. A federal standard of identity has also been established
for filled evaporated milk, increasing the competitiveness of this product.
A recent federal court ruling legalized the interstate shipment of
filled cheese. FDA is also considering proposing a standard of identity
for the product. These developments will increase competitiveness of this
substitute dairy product.
Filled dairy products substitute vegetable fat for milk fat, but use
about the same quantity of solids-not-fat that regular dairy products
do. Thus they further accentuate the "fat" problem facing the dairy
industry.
COMPONENT PRICING
Milk fat and protein are the two major variable constituents in milk.
Lactose remains fairly constant at about 5% and minerals at about
0.7~o, but proteins and fat vary considerably seasonally and between
breeds and herds. On the average, a 1-point (0.1%) change in milk
fat test is associated with 0.4-point change in solids-not-fat and in
protein, since protein is the major variable constituent within the solids-
not-fat portion. However, this 1-point-0.4 point relationship is an
average, and considerable variation exists around the mean (Figure 1~.
Nevertheless "differentials" to price milk of varying tests are almost
always calculated on the basis of the value of the variation in milk fat
when manufactured into butter, with little or no consideration for the
value of the variation in solids-not-fat protein, even though fat and
solids-not-fat do not go up and down together. Component pricing,
taking into consideration both the value of variations in solids-not-fat as
well as fat, is being advocated by some to correct this inequity to dairy
farmers and also to encourage more solids-not-fat and less fat produc-
tion, to more accurately reflect consumer demand preferences. Their
contention is that milk has been priced on the basis of its other major
variable constituent fat for 75 years, so why not also solids-not-fat
protein. Major issues these advocates see with respect to component
pricing are as follows:
1. Without protein pricing, farmers with a high level of protein rela-
tive to fat are not getting paid for the extra protein, even though it's
valuable nutritionally and moneywise. Thus they are not being treated
equitably in milk pricing. The relationship of protein to fat varies con-
siderably among cows and herds. For example, Ontario, Canada, which
has been continuously testing the milk from 19,000 dairy herds twice
weekly from 1971 to 1974 found (Irvine, 1974~:
OCR for page 195
Market Implications of Changing Fat Content
3.6
Us
A, 3.4
Z 3.2
Id
o
3.0
2.S
l
it"
195
_~45~- FAT
TV
PROTEIN `91
2.6
JAN FED MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
FIGURE 1 Butterfat and protein of Ontario milk. (From Irvine, 1974)
(a) Even though on the average milk has more fat than protein,
averaging about 3.6~o fat and 3.2% protein, nevertheless 600 of the
19,000 herds in every test period had a higher protein than fat content.
Over 50 herds had more protein than fat in all test periods to date. So
paying on a straight fat basis is inequitable.
(b) Even though on the average protein content follows fat content,
nevertheless there are major seasonal discrepancies and deviations
around the average. For example, average fat test on all 19,000 Ontario,
Canada, herds held constant at 3.5% butterfat between May and June
1972, but protein content increased from JO to 3.2~o. Fat and protein
do not always go up and down together (Figure 21.
(c) Protein started at a high level in January, increased until March,
dropped rapidly until May, increased in June, dropped in July and
August, and strongly rose again until the end of the year. Protein content
averaged 3.3% in January, went down gradually to 3.0% in May, up
~ ' A
to 3.2% in June, down to 3.0% in July, gradually up to 3.4% in
November, and down again to 3.3% in December. Cows had their
lowest protein content in May-about 75 days after freshening, and
protein content increased when cows went out on grass (Figure 2~.
_
Therefore, protein content and hence product yields are lowest in
May, when manufactured product production is highest. Ignoring com-
ponent pricing has resulted in an upside-down situation lowest pro
OCR for page 196
196
7e
2 4 _._.~
12.2
12.1
12.0
11 .9
9 ·01~
8.01
4.8)
4.7 L
4.61
4.51
3.~- .
3.7
3.6
3.5
3.4
3.3 ~ .
3.2
3.1
3.0, _ _
7 9 11 13 15 17 19 2] 23 TEST PERIODS
FED APR JUN AUG OCT
FIGURE 2 The composition of all Ontario milk, 1972. (From Irvine, 1974)
_._`
,0
TRUMAN F. GRAF
__.-- TOTAL SOLIDS %
EST. MINERAL: 0.730
-_- ~-- ·SOLIDS-NOT-FAT %
in:
.
...- LACTOSE 96
,.'' ~ BUTTERFAT 96
PROTEIN %
tein content and hence cheese yield when manufactured product produc-
tion is highest (Figure 3 ~ . Protein content varies widely within the year,
yet without protein pricing, no reflection of this is made in farmers' milk
checks, and so there's no incentive for them to increase protein content
when manufactured product production is highest.
2. The market value of nonfat solids and, therefore, protein has
gone up sensationally in recent years. For example, the value of nonfat
solids in Chicago federal order Class I milk was $1.13 per hundred in
June 1964 but had increased to $6.44 (570% ~ in a decade.
Meanwhile, the value of milk fat in Class I milk changed slightly
during the same 10-year period, going up only 11 cents, from $2.45 to
$2.56 per hundred. The Chicago Class I situation is typical of Class I
and Class II situations in markets throughout the country.
Thus, 98~o of the Chicago Class I price increase in the last decade
was allocated to an increase in skim values and only 2% to an increase
in fat values. This situation makes nonfat solids and, therefore, milk
protein that much snore valuable.
But the price differential per "point" to dairymen stayed practically
the same, only going up from 7 cents to 7.3 cents during the 10 years.
This increase reflected only the change in the value of fat, but not the
great increase in the value of nonfat solids and protein.
OCR for page 197
Market Implications of Changing Fat Content
10.0
9.8
8 9.6
9.4
J 9.2
-
~ 9.0
In 8.8
uJ 8.6
8.4
8.2
8.0
197
-
~ CH EESE Y I ELD ,|
""""'
\ / FAT & PROTEIN
\/
1
7.3
7.2
7.1
7.0 ,i,
6.9 o
6.8
6.7
6.6 ~
6.5 A:
6.4
6.3
6.2
. 6.1
6.0
JAN FED MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
FIGURE 3 Correlation of cheese to fat and protein content of milk, eastern
Ontario, 1972. (From Irvine, 1974)
June 1974 farm milk "differentials" based on the market value of
solids-not-fat and fat in the various products would have been 9.3 cents
for milk going into butter-skim milk powder, 13 cents for American
cheese from standardized milk, and 15.3 cents for American cheese from
unstandardized milk some 2-8 cents above actual differentials.
Thus the 570% increase in the value of nonfat solids and protein in
the past decade was not reflected in price differentials to dairymen.
Those who ship milk with higher nonfat solids and protein did not get
credit for the added value of nonfat constituents in the higher test milk.
This they feel was highly inequitable.
3. Additional protein results in higher yields of skim milk powder,
cheese, and other dairy products. These added yields, plus the higher
price plants can get for higher protein fluid milk and not having to add
as much or any solids-not-fat to bottled milk, provide money for com-
ponent pricing a "protein premium."
Component pricing reflects higher yields in higher milk prices to
farmers as protein content of milk increases. Present pricing procedures
do not and are therefore felt to be inequitable to farmers, as well as not
accurately reflecting nonfat values in milk.
4. Minimum price support of 75~o of parity is no longer required
for butterfat as a result of provisions of the 1970 Agricultural Act.
Therefore, it is felt the shift to more emphasis on the skim portion and
less on the fat portion is likely to continue. For example, the new price
support levels for the 1974-1975 marketing year increased skim milk
OCR for page 198
198
TRUMAN F. GRAF
powder prices 37%, but kept butter prices constant. This combination
of actions further increases the actual and relative skim and hence pro-
tein value in milk-and, therefore, increases the justification for, and
need for, protein pricing of milk.
World demand for beef is growing rapidly, as international demand
for skim milk powder for animal feed is also growing. This, plus in-
creases in consumer demand, is resulting in upward price pressure on
skim milk powder, which also increases the justification and need for
component pricing.
5. Consumers are becoming more and more protein-conscious. In
addition to encouraging increased protein content in milk, which can
be used in promotional campaigns, protein pricing plans for milk can
also attract considerable attention to milk itself, which can aid in ad-
vertising campaigns. By stressing protein pricing to farmers, dairies
could communicate better with consumers in promotional and mer-
chandising campaigns. Protein has a "glamorous" ring to consumers
and should be exploited more than it has. Pricing milk on the basis
of its solids-not-fat protein content, in addition to its fat content as at
present, is an important way to accomplish this and can help capitalize
on increased consumer preference for the solids-not-fat portion of milk.
SUMMARY
Consumers are demanding and will get lower-fat milk and dairy
products and are putting more emphasis on the solids-not-fat portion
of milk and less on the fat portion. If the dairy industry hopes to maxi-
mize per capita sales of dairy products, it must recognize and react to
the reduced consumer demand for butterfat.
U.S. per capita civilian disappearance of dairy products combined on
a milk-equivalent basis declined one fifth in the past two decades to
566 lb in 1973. A further drop of almost 3% is occurring in 1974. It
has been a long, steady drop in dairy consumption, because butterfat
consumption is down. Per capita sales of low-fat and high solids-not-fat
products are increasing, while per capita sales of high-fat items are
decreasing.
Per capita sales were approximately one fourth lower for fluid whole
milk; one half lower for butter, cream, and dry whole milk; and two
thirds lower for evaporated and condensed whole milk in 1973 than they
were 20 years ago. Meanwhile, per capita sales were approximately
one fourth higher for nonfat dry milk and sherbet, one and one half
higher for low-fat dry milk, and three times higher for ice milk in
OCR for page 199
Market Implications of Changing Fat Content
199
1973 than they were in 1953. All low-fat products are doing very well,
and all high-fat products are in trouble consumption-wise.
Cheese, although not low in fat, has a high solids-not-fat content,
especially protein, and per capita sales of it are also increasing sub-
stantially-one half for American and cottage cheese, and one and one
third for other cheese in the past two decades.
Cheese has approximately 30% solids-not-fat and 25% protein on a
volume basis-far above the solids-not-fat content of high-fat items
such as butter with about 1 %; cream, 5 %, and fluid whole milk, 8.25 % .
Consumers are demonstrating in the marketplace they want high solids-
not-fat, high-protein products in preference to high-fat, lower solids-
not-fat products. Hence, the phenomenal increase in cheese sales and
the drop in fluid whole milk, butter, and cream sales.
The increase in per capita sales of low-fat and high solids-not-fat
dairy items and decrease in per capita sales of high-fat items is likely to
continue. In light of past and projected future consumption trends, the
dairy industry will need to place greater emphasis on low-fat and higher
solids-not-fat dairy products. Consumer demand for butterfat will con-
tinue to drop.
Milk and dairy products are high in protein. Emphasizing this can off-
set the decline in milk-equivalent sales attributable to a decline in con-
sumer demand for butterfat. While there are many other valuable com-
ponents in dairy products, protein is the most readily recognizable to
consumers and the most marketable. It appears to have more "glamor"
as far as consumer motivation is concerned. An important step in more
fully exploiting protein in sales of dairy products is to take protein con-
tent into consideration in pricing milk to both producers and dairy
plants, rather than just fat as at present.
REFERENCES
Irvine, D. 1974. The composition of milk as it affects the yield of cheese. Marschall
Invitational Cheese Seminar, Madison, Wisc., May 7, 1974. (Unpublished)
USDA. 1961. Dairy Statistics through 1960. Stat. Bull. No. 303. Economic Research
Service, U.S. Department of Agriculture, Washington, D.C.
USDA. 1968. Dairy Statistics 1960-67. Stat. Bull. No. 480. Economic Research Ser
vice, U.S. Department of Agriculture, Washington, D.C.
USDA. 1974. Dairy Situation. Publ. No. DS 353, Economic Research Service, U.S.
Department of Agriculture, Washington, D.C.
Representative terms from entire chapter:
capita sales
