Fair Oaks, fairlife co-founder paints picture of dairy’s future as seen by partner DMI

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By Sherry Bunting, Farmshine, February 14, 2020

STATE COLLEGE, Pa. — The big question Sue McCloskey gets about fairlife is “How did you think of it?”

As co-founder with her husband Mike of Select Milk Producers, Fair Oaks Farms and the fairlife brand, McCloskey spoke about “the spark of innovation” to a crowd of over 500 at the 2020 Pennsylvania Dairy Summit in State College last Thursday, Feb. 6. She was among the featured speakers that were sponsored by ADA Northeast.

“We are all innovators in agriculture,” said McCloskey, telling how they learned of reverse osmosis when a well on their New Mexico dairy backed up 25 years ago, and RO membranes were used to separate solids to restore water quality. That experience introduced them to the concept of filtering solids by molecular size, but her larger message was about the concept of innovation in allowing companies to differentiate in a generic category like milk.

For example, she said, who would think, years ago, that water would become the multi-billion-dollar industry that it is today? And coffee? She cited Starbucks as a catalyst for the rise of coffee houses and coffee drinks and blends today.

As in these examples, someone was the first innovator to bring value to those generic categories. She said for milk, the parallel is fairlife.

“Innovation – thinking outside the box — that’s what grabs people,” she said.

McCloskey maintains that as consumers, “We are all waiting for the next new thing. We want more. We want new. That’s where we have seen success with fairlife.”

The journey

McCloskey talked about her husband’s journey from being a dairy veterinarian to a dairy producer and innovator. They started with 300 cows in California and a partner they still have today in Tim DenDulk. One by one they bought dairies, fixed them up and rolled them over.

Once they got to New Mexico with a 3000-cow dairy, that was the real beginning of it, she said. That’s where they founded Select Milk Producers 25 years ago, which is today the sixth largest cooperative on a milk volume basis with 99 members.

They formed to focus on high quality milk with low somatic cell counts and to sell that concept direct to retailers instead of being part of a co-op that commingled their milk to blend-down the somatic cell counts. That’s where they were introduced, she says, to the concept of what has become fairlife through the use of RO membranes to ultrafilter the milk. She explained that the milk going in must be very low in somatic cell counts because the process of ultrafiltration concentrates the solids – including somatic cells.

She pointed to the “incredible success” of building different plants and beginning to build the fairlife brand, which led them to their next opportunity in the Midwest – Fair Oaks Farms.

When the McCloskeys came to Indiana, DenDulk, their original partner in California, was already in Michigan.

McCloskey said the housing technology had developed by that time to where they felt they could do larger dairies in the Midwest climate. They built the first of the original four 2800-cow dairies in 1999. Today, there are 13 separate dairies totaling over 36,000 cows that are owned and managed by a few families on the roughly 30,000 acres, including the new 800-cow robotic dairy that opened at the end of 2019.

In fact, she spent part of her time talking about the innovations coming out of Fair Oaks to recycle and recover nutrients and to address greenhouse gas emissions to improve the “sustainability” and carbon footprint of dairy.

“There are cool things happening and things we are doing that we really need to embrace,” she said.

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(Sue’s husband Mike, who spoke in March at the PDPW virtual business conference on U.S. Dairy’s goals for GHG emissions, was the first chairman of the Sustainability Initiative when it was launched under DMI’s Innovation Center for U.S. Dairy in 2009-10, and the checkoff’s research and development and marketing assistance for fairlife and Fair Oaks came from DMI through the Innovation Center where such partnerships are born.)

The process

Establishing fluid milk supply relationships with large retailers like H-E-B and Kroger, McCloskey said they have worked over two decades to move closer to consumers as they began using RO and ultrafiltration as early as 1995 to reduce the water moving loads of milk to cheese plants, while at the same time beginning the high protein, low sugar milk proposition partnering with H-E-B in Mootopia in 1996, before what is fairlife today.

They saw other protein drinks in the market they could compete with – by concentrating the protein in milk.

So began the process of building the brand from coast to coast as new products have been added continually. While most people are familiar with fairlife ultrafiltered milk, the CorePower fitness recovery drink was among the first that was created as a competitor for Muscle Milk.

Today, there are flavored Yup drinks, snack drinks that pair ultrafiltered milk with oats and honey, new coffee creamers, and a full line of weight management and healthy lifestyle products that are just emerging under the fairlife brand.

While Select Milk Producers sold its remaining half-interest in fairlife to its early partner Coca-Cola a few weeks ago, McCloskey remains a spokesperson for the brand. Also, the research and development teams remain intact and are still located in Chicago.

The spotlight

What Coca-Cola did for fairlife, said McCloskey, is to provide a nationwide distribution network that the Select co-op could not have achieved on its own.

“The hardest thing in consumer goods is to get a product in front of the people who want to buy it,” said McCloskey. “Our challenge was distribution. So, we formed a partnership with Coca-Cola. With Coca-Cola as 100% owner of fairlife, what happens now is that they are just going to run with it.”

This means that, “Milk is in the spotlight. While we hear the bad news from Dean’s and Borden, the good news is that the Coca-Cola, a top-five company, is involved in milk,” said McCloskey.

With an ultrafiltration plant producing fairlife in Michigan, she explained that the east coast and midwestern markets could be served and that the new Select plant in Arizona will serve the west coast market. A plant is also being built in Canada.

Answering a question about whether fairlife, or this direction of milk innovation, would ever “play ball” with the smaller average size farms in Pennsylvania, she replied that any milk supply for fairlife must be very low in somatic cell counts and will have to meet with flying colors all of the new levels of audits and animal welfare requirements that Select Milk Producers and Coca-Cola have implemented since the undercover animal abuse video at McCloskey’s original farm at Fair Oaks this past summer.

When asked how producers are compensated for these additional measures, she did not disclose proprietary information about how producers are paid.

The proposition

She said the fairlife story shows “there is still room for investment and innovation in milk, innovation that makes milk relevant to consumers.”

McCloskey explained how the ultrafiltration process raises the protein and calcium levels, removes the lactose and reduces the natural sugars in milk without adding anything.

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“And it is still real milk… but better,” she says, explaining that fairlife is finding “amazing growth in differentiation,” that fairlife’s entire proposition to consumers is the concept of  “believe in better.”

“Our core tenets of the master brand are better taste, better nutrition, and better values,” she said.

“The brand is created around values, and these values are not new, but they are done in a way that is a little more creative to today’s consumers.”

She explained that Select Milk Producers sends milk that goes into a jug at Krogers and sends milk to fairlife, “but it’s the innovation and sharing the values that leads to growth.”

Sharing consumer surveys showing 90% of fairlife consumers are satisfied and 69% are repeat customers, McCloskey said this growth and innovation “mean bigger things for dairy than just fairlife.”

She said that 45% of the fairlife market share is coming from within the milk category and 55% of their consumers are coming over from outside of the milk category.

While fairlife’s ultrafiltration process is patented, McCloskey said a dozen new products have come on the market since fairlife that use similar technology or other means of delivering high protein, low sugar outcomes.

This allows these products to differentiate themselves next to the gallon of milk as a generic staple, she explained.

“If someone is on food stamps and can’t afford these new products, that’s okay,” McCloskey said. “They can buy milk. People will still buy milk.”

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The next phase

McCloskey stressed the “tremendous value checkoff organizations bring to dairy farmers to promote how to innovate dairy and make it better.”

She explained the next phase, how DMI is sitting down with young urban-suburban consumers to “learn how they make food choices, to learn what they look for. This is leading us into sustainability and carbon footprint,” said McCloskey.

“We also sit down with the different NGO’s (like World Wildlife Fund for example). We all sit at the table and talk about the challenges that face dairy farmers,” said McCloskey. “The Net Zero Initiative coming out of that is one of the coolest things, and we are a collaborator on what is needed for dairy to get to net zero. It’s a big stake in the ground, but it’s got to be the place where we need to go.”

She explained the Net Zero Initiative under DMI’s Innovation Center for U.S. Dairy has a catalog of technologies to help producers deal with environmental issues.

“What if 37,000 dairy farmers could have net zero greenhouse gas emissions? This is what we have to chase,” she said. “The innovation can’t stop. The whole genome of the dairy cow has been mapped. Manure can be fractionated. There is innovation that is so exciting for us to think about what dairy can look like in the future.”

The forward-looking picture McCloskey painted for Summit attendees includes even more fractionization and extraction of milk’s elements, more use of specialized GMO crops and more consolidation of farms and processors with fewer cows producing more milk to meet new sustainability benchmarks.

McCloskey said the innovation from fluid milk to cheese to fractionating protein into “all kinds of other products” — while reducing the overall dairy carbon footprint — is the road to 2050.

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The ‘perfect laboratory’

“We have only begun to know milk’s power and the different vitamins and elements we are just discovering how to use and extract,” she said.

“And it all happens in nature’s perfect laboratory – the dairy cow.”

On the flip side, McCloskey acknowledged that DMI has also learned consumer choices come back to this bottom line:

“It’s got to taste good and it’s got to do something for me,” she noted. “This is why dairy is not going away. Dairy is real and it tastes great and it makes you feel good.”

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In light of trade news, Canadian dairy quota, Cl. 7, tariff situation explained

Should Canada make major concessions on the high tariffs on dairy imports that are part of its supply-managed dairy system? In a word: No. There is room to negotiate thresholds, but what right does the U.S. have to demand that they end a system that works for them? What right, especially as Canada has taken steps to manage how it determines quota as fat demand and protein demand are not moving together? Here’s what you won’t read elsewhere about the new Class 7 pricing and why it was implemented in Canada so that Canadian processors can use competitively-priced Canadian-produced protein solids that ride along with the now high-demand butterfat (on which their quota is based). Canada and the U.S. import and export dairy products and milk back and forth across the border with low tariffs up to a certain threshold. Perhaps, in the case of Canada, the U.S. should just reciprocate with high over-quota tariffs and tighter quota thresholds on Canadian fluid milk exports we know head south of the border. Canadian farmers have taken a step to show a willingness to be responsible in this discussion. They have moved to control their exports by reducing quota up to 3% this year after seeing 25% growth related almost exclusively to butterfat demand over the past 4 years. 

By Sherry Bunting, Farmshine, August 24, 2018

Canada8854w.jpgALBANY, N.Y. — “Cycles don’t exist in a supply-managed system,” said Canadian dairy farmer Nick Thurler. He sits on the Dairy Farmers of Ontario (DFO) board and operates a dairy farm of 500 registered Holsteins with his brother and their sons.

Thurler9413wThurler was a presenter at the Dairy Summit organized by Agri-Mark in Albany, New York on August 13. The summit gathered 350 people, half of them dairy farmers, and many of the producers in attendance being on various U.S. milk cooperative boards.

Thurler explained how the Canadian milk quota system works and some of the changes they have seen over the past three years in response to increased demand for butterfat.

He noted that the entire system is completely run by dairy farmers via provincial boards and that there are 450 processors in Canada with 80 to 85% of the country’s milk marketed to Parmalat, Saputo, Agropur, and Arla.

Thurler explained how the Canadian quota is based on kilograms of butterfat production per day.  All milk is sold to the provincial boards and they look after all the pickup and delivery of milk to the plants.

Canada9386web.jpgA government entity audits the processor stocks, which weighs into the market needs.

Quota value was capped some years ago at $24,000 per cow and new quota is distributed by dividing half equally over all producers and then the second half is prorated up to 10% of an individual producer’s current quota.

Meetings are held with processors and government once a year to “discuss the issues.”

The Canadian milk prices are determined with a formula that is 50% based on the change in cost of production at the farm level and 50% on the consumer price index.

Thurler said the current price to farmers stands at around $25 in U.S. dollars.

“It’s actually a little lower now because we have a little too much milk in the system,” he said, explaining that quota this year is being cut by up to 3% to balance that.

As noted around the world, demand for butterfat has increased, and since this is how Canadian quota is determined, increases in quotas continued higher over the past three to four years.

In addition, as demand for butter and cream increased, farmers became acutely aware of how their imports were increasing.

Thurler noted that when he got on the DFO board in 2014, “It drove me nuts the amount of butter we were importing.”

Canada allows imports to a certain threshold and after that, imposes high tariffs to protect its farmers. But as demand for butter increased — and Canadian farmers were just beginning to fill quota expansion to address that — U.S. processors (some of them Canadian-owned) saw the concentrated proteins product from the technology of ultrafiltered milk did not “fit” any category in the harmonized tariff schedule. Thus, the U.S. butter processors and cooperatives could, and did, export ultrafiltered milk (wet concentrated protein solids) to Canadian cheese and yogurt processors — free of tariffs.

Over the last three to four years, as Canadian dairy quota increased, producers had some difficulty keeping up with that progressive expansion of 4% per year in butterfat production, and could recoup their own previously-unfilled quota within a time frame.

These dynamics led to a combined surge in milk production in Canada coming into this year, up nearly 25% compared with four years ago.

As they were supplying more of the increased butterfat needs, they needed a market for the residual skim that was costing producers a lot in drying costs. This is why and when the Class 7 pricing was implemented to allow Canadian producers to offer skim solids associated with the butterfat demand growth their expanded quota supplies.

Under Class 7 pricing, these wet protein solids — remaining after the cream is separated — can be sold to their own processors at globally competitive prices, thereby avoiding the drying costs, and consequently at the same time, reducing the incentive for Canadian processors to import these protein solids (ultrafiltered milk) from the U.S. and other sources.

Thurler said in an interview after his presentation that it was never the intention to implement this Class 7 pricing as a tool for creating Canadian exports to compete with the U.S., but rather to align Canada’s milk production growth opportunities between producers and processors in a way that uses both the rapidly increasing demand for fat, on which their quota system is based, and the slower demand increase for skim. That pricing still uses an 83% to 17% split between domestic quota pricing and global pricing so that it still reasonably fits their supply-managed system.

Thurler had also indicated that Class 7 was put in place after a review by WTO lawyers to make sure it was compliant. Canada is allowed to export “some” dairy under its current trade agreements.

After this report was published, public statistics on global dairy trade were revealed, showing that Canada accounts for less than half of one percent of total global dairy exports.

Additional data for first 6 months 2018 from EU reporting (Milk Market Observatory)  These exporter rankings: Canada ranked 7th in SMP exports at 35,344 tons, up 14% over first half 2017, but just 2.8% of top 10 total (1.3 mil ton); U.S. was 2nd at 386,766 ton, +25%. In Casein exports, Canada ranked 9th at a paltry 210 ton, up 64% but just 0.02% (2/10ths of one percent) of top 10 total (90,000 ton); US ranked 4th at 1822 ton, up 3%. In Whey powder exports, Canada ranked 4th at 34,133 tons, up 8%, but 4.8% of top 10 total (711,931 ton); U.S. ranked 2nd at 282,893 tons, up 16%.

In the first 6 months of 2018, Canada imported 19% less butterfat and butteroil than year ago, but was still 10th in top 10 IMPORTER of butterfat at over 10,000 ton.

Interestingly, the U.S. was the 3rd highest butterfat and butteroil IMPORTER after China (1) and Russia (2). The U.S. imported 12% more butterfat and butteroil than year ago in the first 6 months of 2018, and more than twice as much as Canada, at over 22,000 tons. The U.S. also ranked 4th in condensed milk imports, up 11% at 18,117 tons during the first 6 months of 2018 — particularly in the so-called ‘spring flush’ months of April, May and June.

Stay tuned.