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Fat Content and Composition of Animal Products: Proceedings of a Symposium (1976)

Chapter: Market Implications of Changing Fat Content of Milk and Dairy Products

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Suggested Citation:"Market Implications of Changing Fat Content of Milk and Dairy Products." National Research Council. 1976. Fat Content and Composition of Animal Products: Proceedings of a Symposium. Washington, DC: The National Academies Press. doi: 10.17226/22.
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Suggested Citation:"Market Implications of Changing Fat Content of Milk and Dairy Products." National Research Council. 1976. Fat Content and Composition of Animal Products: Proceedings of a Symposium. Washington, DC: The National Academies Press. doi: 10.17226/22.
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Suggested Citation:"Market Implications of Changing Fat Content of Milk and Dairy Products." National Research Council. 1976. Fat Content and Composition of Animal Products: Proceedings of a Symposium. Washington, DC: The National Academies Press. doi: 10.17226/22.
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Page 191
Suggested Citation:"Market Implications of Changing Fat Content of Milk and Dairy Products." National Research Council. 1976. Fat Content and Composition of Animal Products: Proceedings of a Symposium. Washington, DC: The National Academies Press. doi: 10.17226/22.
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Page 192
Suggested Citation:"Market Implications of Changing Fat Content of Milk and Dairy Products." National Research Council. 1976. Fat Content and Composition of Animal Products: Proceedings of a Symposium. Washington, DC: The National Academies Press. doi: 10.17226/22.
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Page 193
Suggested Citation:"Market Implications of Changing Fat Content of Milk and Dairy Products." National Research Council. 1976. Fat Content and Composition of Animal Products: Proceedings of a Symposium. Washington, DC: The National Academies Press. doi: 10.17226/22.
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Page 194
Suggested Citation:"Market Implications of Changing Fat Content of Milk and Dairy Products." National Research Council. 1976. Fat Content and Composition of Animal Products: Proceedings of a Symposium. Washington, DC: The National Academies Press. doi: 10.17226/22.
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Page 195
Suggested Citation:"Market Implications of Changing Fat Content of Milk and Dairy Products." National Research Council. 1976. Fat Content and Composition of Animal Products: Proceedings of a Symposium. Washington, DC: The National Academies Press. doi: 10.17226/22.
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Page 196
Suggested Citation:"Market Implications of Changing Fat Content of Milk and Dairy Products." National Research Council. 1976. Fat Content and Composition of Animal Products: Proceedings of a Symposium. Washington, DC: The National Academies Press. doi: 10.17226/22.
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Page 197
Suggested Citation:"Market Implications of Changing Fat Content of Milk and Dairy Products." National Research Council. 1976. Fat Content and Composition of Animal Products: Proceedings of a Symposium. Washington, DC: The National Academies Press. doi: 10.17226/22.
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Page 198
Suggested Citation:"Market Implications of Changing Fat Content of Milk and Dairy Products." National Research Council. 1976. Fat Content and Composition of Animal Products: Proceedings of a Symposium. Washington, DC: The National Academies Press. doi: 10.17226/22.
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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

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

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.

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

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

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~:

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

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.

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

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

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.

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