Dairy Products, Except Dried or Canned

SIC 5143

Companies in this industry

Industry report:

This classification covers establishments primarily engaged in the wholesale distribution of dairy products such as butter, cheese, ice cream and ices, and fluid milk and cream. This industry does not include establishments primarily engaged in pasteurizing and bottling milk. Establishments primarily engaged in the wholesale distribution of dried or canned dairy products are classified in SIC 5149: Groceries and Related Products, Not Elsewhere Classified.

Industry Snapshot

In 2010 there were 3,459 firms engaged in the wholesale of dairy products, according to Dun & Bradstreet's Industry Reports. The industry employed about 42,454 people and generated total sales of $10.8 billion. The 2000s were marked by brisk consolidation, with the bulk of the dairy industry's distribution and wholesaling activities closely associated with the major dairy cooperatives.

Organization and Structure

The structure of the wholesale milk industry is somewhat different from that of other wholesale food product operations. In most metropolitan areas, local milk producers make it unnecessary for wholesalers, either chain store or affiliate, to operate their own fluid milk facilities. Instead, distributors arrange with one of the local milk companies for their fluid milk sales. These local producers are responsible for supply and delivery to stores. They also are in charge of producing private-label milk and milk products, which they distribute directly to the retailer.

In rural areas, when local sources are not available, wholesalers usually handle fluid milk through their own distribution centers. These wholesalers may be full-service wholesalers, providing dairy products and complete lines of grocery and nongrocery products. Besides the food products themselves, full-service wholesalers provide assistance to the retailer in advertising, merchandising, and procuring products they may not warehouse.

The retailer-owned wholesaler may also provide fluid milk to a number of outlets. This type of wholesaler represents the efforts of a number of retailers to join forces (sometimes under a common name) to operate their own warehouses and shipping lines. The cooperative effort makes it possible for retailers to obtain merchandise at the lowest possible cost. In addition to providing lines of food products, the retailer-owned wholesaler supplies group advertising, merchandising, and other services.

Ice cream, butter, and cheese may be handled by retailer-wholesalers, full-service wholesalers, or, in the case of some premium products, specialty wholesalers. This type of wholesaler provides a limited range of products and a variety of services, including point-of-sale merchandising material, display suggestions, and product servicing such as stock rotation and monitoring.

Background and Development

The industry developed in tandem with the country's changing social demographics and organization. Through the twentieth century, the importance of distribution skyrocketed in the dairy industry. In 1909, according to Amber Waves, over half of all milk consumption took place on the very farms where the milk was produced. By 1960 that figure had plummeted to only 10 percent, and by 2001 it was only 0.3 percent. With the average U.S. consumer growing more and more remote from the farm, distribution became a significant issue.

Fluid milk consumption stood at 34 gallons per person in 1945; by 2001, the average person in the U.S. drank only 23 gallons per person. Consumption continued to decline throughout the 2000s. Part of the decrease was associated with health concerns as a cholesterol- and calorie-conscious public became aware of whole milk's high fat content. Many consumers tended to cut milk from their diet completely, believing, erroneously, that lower fat milks were also lower in nutrients. Further research proved otherwise, and consumption of lower fat milks increased. In the period between 1970 and 1974, about 78 percent of all beverage milk consumption was of whole milk. By the mid-1990s, reduced-fat milk accounted for 50 percent of all beverage milk consumed. Skim milk consumption increased from 5 percent in the early 1970s to 13 percent in 1994. In addition, promoting the health benefits of low-fat milk, the industry embarked on a $52 million ad campaign in the mid-1990s featuring popular celebrities.

Cheese consumption, on the other hand, made up the difference for the decline in milk consumption. Per capita cheese consumption reached 30 pounds in 2001, more than twice as much as in 1975. By 2009, that figure had risen to 33 pounds, according to the U.S. Department of Agriculture. Much of the cheese was consumed on pizzas and in convenience foods. Ice cream consumption held steady from the end of World War II until the late 1980s, when fitness-consciousness forced ice cream consumption down slightly but steadily, often replaced by yogurt. Consumption of fluid cream products such as half-and-half, light cream, heavy cream, and sour cream increased in the 20 years from 1974 to 1994 with per capita consumption rising from 10 half-pints in 1974 to 15 half-pints in 1994.

Farm milk prices began plummeting in November 1996, causing many dairy farmers to lose up to a third of their income. The industry was quick to react: Within six months, four of the industry-leading cooperatives entered merger discussions, and within a year the cooperatives had inked an agreement pending approval by the Department of Justice antitrust division. Even as the justice department approved it, industry insiders questioned whether it sacrificed competition for the sake of increased efficiencies. Merger proponents pointed out that dairy co-ops had been consolidating since long before economic techno-globalization ushered in the late 1990s consolidation craze.

While farmers were getting the lowest prices for their milk and dairy products in a quarter century, there was no appreciable corresponding decline in retail prices, translating to healthy profits for wholesalers and retailers alike and leading to calls for industry regulations stipulating that cost savings be passed along to the consumer. The main factor behind the discrepancy between farm and retail prices was increased consolidation, which afforded wholesalers and retailers greater leverage in pricing decisions.

The fastest-growing dairy product in the United States in the early 2000s was yogurt, which continued its rise to reach approximately $2.8 billion in sales in 2002, according to ACNielsen, an increase of 13.6 percent over the previous year. Much of this increase was owed to the booming popularity of new drinkable yogurt products, which exploded in 2002 to $136.2 million, up 36.6 percent over 2001. Consumers tended to view yogurt as a healthy alternative to ice cream, and yogurts were frequently marketed as diet food to an increasingly health-conscious public.

In addition to concerns over evolving attitudes and understanding regarding the health of dairy products, the 2000s witnessed a surge in concern and protest over the use of hormone injections designed to stimulate milk production in cows. Part of the broader controversy involving genetically modified (GM) foods, the injection of recombinant bovine somatotropin (rBST) led to calls for labeling of dairy products so produced.

In what some industry observers viewed as a sign of things to come, Maine introduced an official quality seal, awarded only to milk from rBST-free cows, which spurred reaction from wholesalers and retailers throughout New England, many of whom marketed such dairy products as healthier and safer than hormone-injected products. Agrochemical behemoth Monsanto Corporation challenged the program, contesting that, since research was thus far inconclusive regarding the health risks associated with rBST, such marketing claims amounted to false advertising and potentially slandered hormone-injected products.

Proponents of rBST argued that it made for cheaper products, given that cows injected with the hormone produce up to 15 percent more milk. Activists working against GM foods, however, contended that the safety of such products had yet to be scientifically established and pointed to Canada and Europe, where rBST had been banned entirely, as an indication that policy should veer on the side of caution. The issue had profound implications for dairy wholesalers, as about one-third of U.S. dairy herds used rBST in 2003.

In tandem with evolving health concerns and the rBST controversy, the organic dairy segment was among the fastest-growing sectors of the dairy industry. With more shelf space at groceries being devoted specifically to organic dairy products, wholesalers quickly capitalized on this emerging niche. Dairy products were the largest segment of the organic foods movement in the mid- to late 2000s, with organic milk leading the way.

Current Conditions

As the nation entered the 2010s, the rBST issue continued to plague the dairy industry. Consumer groups fought for the use of rBST-free labels on milk from "rBST-free cows," and their efforts were supported by organizations like the American Nurses Association, which in 2008 made an official statement against the use of rBST in dairy cows, as did the American Public Health Association (APHA) in 2010. According to Food Traceability Report, "APHA says that suppliers and retailers offering products produced without rBST or other hormones should retain the right to label such products in an easily readable and understandable fashion so that consumers can make an informed choice about which brands to buy." On the other hand, dairy farmers who used the hormone lobbied for a ban on such labels, pointing out that there was still no scientific evidence that the use of the hormone impacted animal or human health. States' efforts to restrict the labeling of rBST-free dairy products prompted controversy and lawsuits throughout the country. For example, in 2010, after two years of ongoing litigation initiated by a lawsuit filed by the IDFA, the U.S. Court of Appeals reversed a district court decision that allowed the state of Ohio to ban the use of rBST-free labels on dairy products produced by cows not treated with the hormone, citing the ban as unconstitutional. Similar battles regarding the labeling issue were ongoing in other states as well, including Kansas, Pennsylvania, Indiana, Missouri, and Montana.

In the meantime, the organic segment of the industry continued to gain ground. In 2009, organic dairy products accounted for 14 percent of the $24.8 billion market for organic foods in 2009, according to the Organic Trade Association (OTA). In addition, more than 5 percent of all U.S. dairy sales that year were from organic products. Other figures from the U.S. Department of Agriculture showed that the number of certified organic milk cows on U.S. farms had increased from 38,000 in 2000 to almost 250,000 by 2009. The OTA expected the organic trend to continue, along with increased innovations in organic products, such as the addition of health-promoting omega-3 fatty acids.

Industry Leaders

In 2010, Dairy Farmers of America (DFA) was the world's largest dairy cooperative, bringing together 17,000 members across the country. Based in Kansas City, Missouri, the super-cooperative was born in 1997 with the merger of some of the country's largest dairy cooperatives, including Mid-America Dairymen of Springfield, Missouri; Milk Marketing of Strongville, Ohio; and Western Dairymen Cooperative of Thornton, Colorado. In 2009 DFA garnered sales of $11.7 billion with 4,000 employees.

Associated Milk Producers Inc. (AMPI) of New Ulm, Minnesota, chose to forego the merger talks that produced DFA and remained one of the industry's leaders even after its Southern Region unit was absorbed into DFA in 1997. Sales held steady at $1 billion in 2003, while the company employed 1,800 and brought together 3,600 farms throughout the north central Midwest. AMPI was the result of the merger of about 100 dairy cooperatives throughout the South and Midwest in 1969, which banded together in order to stabilize prices and to take advantage of government deregulation, which left the industry to regulate itself.

With 4,600 members, Land O' Lakes Inc. of Arden Hills, Minnesota, was the source of the nation's number-one butter brand and also offered more than 300 other dairy-based food products. The firm recorded sales of $10.4 billion in 2009 with 9,000 employees.

Another industry leader, Minneapolis-based Michael Foods Inc., generated 2009 sales of $1.8 billion and employed about 3,790. Two-thirds of the company's revenues came from egg products, whereas the firm's Crystal Farms subsidiary, which packaged and distributed butter, cheese, and other dairy products, accounted for about a quarter of sales. In 2010 Michael Foods was purchased by GS Capital Partners.

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