The Milk Check

The Ozempic and GLP-1 shockwave hitting U.S. dairy

GLP-1s like Ozempic and Wegovy are changing how Americans eat, and that has big implications for the dairy industry. In this episode of The Milk Check, host Ted Jacoby III welcomes Paul Ziemnisky, leader of nutrition and industry growth platforms at Dairy Management Inc., and Dr. Chris Cifelli, vice president of nutrition research for the National Dairy Council. Together with the Jacoby team, they unpack what GLP-1 appetite-suppressing drugs mean for dairy demand, and how our industry can win. We cover: How GLP-1s suppress hunger and how dairy’s fat + protein combo supports satiety How protein quality matters more than ever, and why dairy still leads the pack How R&D teams are turning classic dairy products into high-protein, low-sugar solutions From gut health to GLP-1 support, this episode dives deep into one of the most important trends shaping dairy today. Join us for The Milk Check episode 81: The Ozempic and GLP-1 shockwave hitting U.S. dairy. Intro with music: Welcome to the Milk Check, a podcast from T.C. Jacoby & Co, where we share market insights and analysis with dairy farmers in mind. Ted Jacoby III: Hello, everybody, and welcome to the Milk Check. Excited to be here today. In addition to our usual suspects, Josh White, Mike Brown, and my brother guest, Jacoby. We’ve got two special guests today. We have Paul Ziemnisky, leader for nutrition and product science, technology, innovation and industry growth platforms at Dairy Management Inc. Again, we have Dr. Chris Cifelli, vice president of nutrition research for the National Dairy Council. Guys, thank you so much for joining us today. Thank you for taking time out of your busy days to talk about GLP-1s and how it’s affecting the dairy industry. We really appreciate it. What are GLP-1s and why are they good for dairy? Dr. Chris Cifelli: I’ll start with what they are and then Paul can talk about the consumer point of view. One of the key things whenever we eat food is that feeling of satiety, the feeling of fullness we get during a meal and then the satiation that occurs between meals until we get those body cues again that we’re hungry and we want to eat. Unfortunately, in the environment we’re in with stress and different factors, our body is a lot off schedule, so we tend to eat a lot more than we may need to on a daily basis. What GLP’s are, glucagon like peptide is the official name, it’s an appetite suppressant. So, when you eat and especially when you eat fat and protein, the body will release GLP-1 naturally, and that’s what starts making you feel full. What these pharmaceuticals are, are ways to keep the levels of GLP-1 up in your body so you feel less hungry throughout the day more naturally. And what that’s going to do is you’re not going to snack quite as much. You’re not going to have those cravings maybe for sweet salty snacks during the day. But with that appetite suppressant, it means that every calorie really then matters when you’re eating throughout the day, and that’s really where dairy can win. Paul Ziemnisky: To build on that, what it means for dairy is, I think Chris used two magic words, fat and protein. I think fat’s been vilified since this early ’70s, late ’60s, and we’ve put a lot of effort in investment in proving the value of fat, especially dairy fats. I think you’re going to see in the next six months, the acceleration of an acceptance of fat into things like the dietary guidelines and other uses. And the protein side of the equation, we’ve got the highest quality protein by far. We’ve got science behind the highest quality proteins and the efficacy of that. And then by the way, consumers, when they purchase anything, taste is number one factor. So, when you look at taste, price, value, health and wellness, we deliver on all those three sweet spots for that consumer. And so, you see things like yogurt on fire because of that, because they can have yogurt and they enjoy the taste and it’s got all those signs behind it with gut health and immunity. You see things emerging like cottage cheese. Cottage cheese is fermented, cheese is fermented, and I think we under market and under leverage that. Chris and I have been on the road working with our cheese peers talking about let’s play up the protein and the fermentation, and some of the health benefits of that to drive new occasions. Then you see other things popping too in the space like creamers, which are adjacent to the GLP piece, but that fat in the keto and that satiety. And so, we’ve been working to dust off the decades of science to actually build a health and wellness playbook for the industry to use how to talk about these in a modern way with consumers. The great thing in the playbook is we actually tie the messaging and claims to science evidence, and so this is all the way approved through the USDA. So, we’re packaging out if you want to talk about weight management, you want to talk about performance, you want to talk about gut health, we’ve done quad studies with consumers at the different age cohorts. So, if you are a parent with a two-year-old, we’ve done studies with them. If you’re talking to a boomer, here’s how you talk about dairy at these different needs states and moments. And so, worth this fulcrum where it all adds up to where about 60 plus purchase decisions at the home, is a health and wellness decision. And just to dollarize that for our farmers, that’s $350 billion being spent in these high priority areas. And our share in those $350 billion are small today. But if we get three share points of these spaces, that’s the size of the yogurt category today. So, we can double the yogurt category. And the great example of that is look at the probiotic sodas. They launched. They don’t have any science like we do on yogurt. But they’re the $2 billion category in five years, yet kefir’s only $250 million. Yogurt’s sitting around $6.5 billion. So, there’s a lot of significant upside us playing in some of these spaces and GLP’s one of those spaces. There’s even a bigger macro in the health and wellness space opportunity. Ted Jacoby III: Is protein really the biggest driver behind some of those health and wellness spaces that we want dairy to become a bigger part of? And why protein? You mentioned, Paul, when you were talking, he goes, “We’ve got the best protein.” Why is dairy the best protein? Paul Ziemnisky: I’ll let Chris answer the why and I’ll talk to the spaces if that’s okay, Ted. These spaces, when you start to carve out that $350 billion, you’ve got physical, athletic performance, sustained energy, childhood growth and nutrition, then you start to keep going around these areas of weight management. Those are $50 billion segments right there, and protein is the key driver. When you look at muscle growth, performance, protein is essential to fueling the growth. Then you get into the gen Y and millennials are recognizing they need that protein for that sustained energy. So, that’s where you’re seeing the growth of creamers and all this. They’re pounding it. They’re not drinking coffee, they’re drinking dairy with coffee. And so, we’re seeing these other spaces of how do they stay satiety, energized, healthy. And then as you start to even age out, the boomers are recognizing they’ve got the most disposable income. You’ve got this big group of 80 million people, they’re trying to stay healthy. And so, you’ve got pre-aging occurring from the millennials and gen X, who don’t want to get to the point where they’re fracture risk and all that, so they’re consuming more protein because they’re seeing what’s happening to their parents. And then you’ve got the parents who are seeing what’s happening to their friends. And so, you look across all these age cohorts, proteins is this key driver for different needs states of each of these age cohorts. And Chris can talk through the science now. Dr. Chris Cifelli: From a nutrition point of view, I grew up building with Legos, so yeah, all these different pieces. For protein, there’s 20 amino acids, nine of which are essential, and dairy has all those. So, whey and casein are both complete proteins, so they have all the essential amino acids we need and they have them in the right proportions to support muscle growth and development, and all the other functions that protein do in the body. When it’s packaged, whether you’re talking milk, cheese, yogurt, cottage cheese or just isolates, it’s very bioavailable, so you’re not worried about any digestibility issues. You’re not worried about it being outcompeted by other nutrients. Our body takes it in. What makes dairy really unique is you have the whey and the casein. So, whey being very fast acting, it’s absorbed very quickly. It’s great for muscle recovery after exercise. Whereas casein, a little higher in tryptophan, a little slower digestion, so you’ll feel a little fuller, but then at the same time a great protein before bed because of the tryptophan may help you sleep and recover overnight. There’s all this unique layering to it that really sets it apart from other sources of protein, even ones like egg that also have a lot of amino acids in them as well. Ted Jacoby III: How many different proteins are in milk? Dr. Chris Cifelli: Just the two main classes of whey and casein, and then a lot of different peptides and other things in there. But generally speaking, those are the two main protein classes. Ted Jacoby III: With whey proteins being a lot smaller, more easily digestible, and the casein being a lot bigger and therefore a lot slower to be digested. Dr. Chris Cifelli: Generally speaking, yeah, that’s a good way of thinking about it. Laddering it back or taking it back to the GLP-1 discussion, when you lose weight, especially weight rapidly, your body doesn’t care if you’re losing fat or muscle, so you’ll start losing both. And that’s why protein’s so important. So, as you’re eating meals or you’re needing that snack, all these dairy foods, whether they’re casein, whether it’s a glass of chocolate milk, whether it’s a yogurt, it’s going to provide that high quality protein you need to maintain your muscle as the body’s shedding the fat to help yourself on your weight journey. That’s one of the key attributes where dairy can win in this space. Paul Ziemnisky: What we’re doing on the R&D front is really focusing on investment to the isolates and things like that for functionality and products. And so, you see this heavy growth in nutritional beverage. You start to see these things like the Nurri at Costco, well on its way to a $100 million in its first year, and you see all the different, the Fairlife nutrition plans, the Orgains, the Premiers, that’s where you see this investment in R&D to make it function because otherwise the old used to settle in the products. And now they’re even adding it to water and other types of beverage. Chris was over at IFT this week doing concepts in these protein-based mocktails. There’s investment on the nutrition science front, but there’s also heavy investment in the protein space for functionality, and bars and things like that. There’s a lot of things happening that is going to enable that protein of dairy to be placed in other growth sectors. I would expect you’re going to see the pizza crust. We’re looking at things to breads at Taco Bell. We’re looking to replace the shells with cheese as an examples of that, to meet some of these GLP consumers who are trying to cut back on those processed carbs and use dairy as the hero there. Josh White: What are the largest risks of GLP-1 consumption or GLP’s consumption for individuals? And is the demographic largely skewed to boomer or are you seeing equally as many millennials? Sorry to add multiple questions on here, but then the final question is I haven’t heard a whole lot about gen Z yet. From a healthy eating standpoint, as a parent of that demographic, I’m pretty blown away at how much they care about protein and what they eat. How does that demographic fit into this consumption profile for GLP? Paul Ziemnisky: The first thing we’re seeing is high sugar desserts, ice cream and things like that. So, we’re aggressively looking at high protein dairy. We actually took the IDFA forward this year. Cottage cheese, ice cream concepts is an example of ways to go in that low 22 grams, 25 grams of protein, 50% less sugar. So, you’re seeing a lot of players look at the ice cream space. How do they keep playing in that 7% of our sales in food service? So, how do we win there? I think that’s the biggest by far risk area. And the other one is just as we know, this $4 or $5 billion that’s being put out there in the cheese space, 750 million pounds of cheese coming online, cheese is going in some of these areas that’s carb driven. Whether it’s pizza, burger in that space. And so, working with the players, how do you bring thoughtful solutions to the food service players, a ways to use cheese and dairy. For us, we’re looking at ways to help them cut the carb side of that. Consumers love the food. If you were to look at food service today, what’s slowing anything in food service down? It hasn’t been a GLP. It’s been primarily the inflation and that’s affected people who are living paycheck to paycheck. Taco Bell will tell you at the end of the month, people are coming in with change. And that’s not GLP driven, that’s economics driven. There’s winners though. Taco Bell, they’ve played that out because they’ve invested in innovation, keeping the consumer engaged and giving them solutions. Where McDonald’s, their traffic’s down, they walked away from innovation for a couple of years. There’s winners taking place and there’s losers in the food service world. But I would just say in the food service world right now, 90% was hitting food services is that inflationary piece hurting the consumer. So, back to gen Z, you look at gen Z and the consumer segments. What’s interesting is really there is like five multiple segments who are going on GLP. There’s significantly overweight consumers. But there’s also people that are just looking to be fit to do it quickly to get back into shape faster. I think it’s like 25% to 35%. It’s an interesting fact. It is balanced across age groups, to your question. And there are a lot of younger people that hey, they’ve tried the diet. 80% of the US are always saying they’re on some sort of diet, but they’re finding this is a quick diet solution. When you look at the people who go on GLP drugs, the average is nine months, but you have some people that are going on for a month to two, that’s these younger generations who may need to lose 10 to 15 pounds. I’m like, hey, that’s an easy way for me to control it. Because Chris will tell you on the science front, these side effects, the number one side effect is nausea. You’re just not feeling good. You can handle that for a month, but that’s where dairy plays in. That yogurt and the high protein helps offset that nausea feeling. That by far, if you start to segment it out, it isn’t really an age thing. It’s across all age cohorts. The risk though to GLP also favors dairy because the people who are obese going on it, you do lose that rapid weight, but guess what? You’re losing muscle and bone mass. When you go to any of the doctors today, especially people that are 50 plus, they’re hammering. You got to take dairy. Chris and I were supposed to have a meeting tomorrow with two of the leaders of the industry on the GLP front and they actually postponed us. I was hoping we would’ve had some intel from them because the drug companies are going to feed in what they’re seeing and learning so far. So, maybe we have another regroup with you guys in three months. To answer your question, I think dairy across cohorts are going to have a significant solution, meeting these consumer needs. As you get older, it’s the bone mass. When you get younger, it’s the satiety and the nausea and maintaining fitness as well. Center commercial with music: Everybody, we will be right back after these messages. If you’re a dairy producer or a cooperative looking for a better market for your milk or you’re food manufacturer hoping to strengthen your dairy procurement or risk management strategy, please reach out to TC Jacoby & Company. We’ve been building worldwide relationships with all sides of the dairy supply chain for over 75 years. Tap into our expertise for unlimited free consultive support and we’ll develop a sales or procurement strategy that hits all of your targets. Please visit us online at www.chacoby.com to get started. Thanks for listening to the Milk Check. Back to the show. Dr. Chris Cifelli: We have to remind ourselves that these are still relatively new pharmaceuticals and these companies are working, as Paul’s mentioned, IFT, and there was a nice session on this. They’re all working to release now drugs that won’t have the same side effects. Maybe you won’t feel that same nausea and digestive issues. They suggest that one company’s working on a once a month injection so you’re not having to take it daily. So, it’s going to become even more prevalent. And I think they said in the session, it’s 5% or 6% of the populations on them right now, which doesn’t sound like a lot until you realize that’s about 20 million people who are currently on the drug with something like 10% to 15% who have at least taken it at some point. So, you’re talking significant numbers of people. When we think about dairy’s opportunity space, as Paul said, some people are going on it because they’re not happy where their weight is and they want to lose weight, but then they transition off. And this is where the protein fat combination of dairy can really then fit in. You want your appetite to remain that you’re not going back to snacking or overeating again. The satiety factor of the high quality protein and the fat that comes with four fat dairy products like cheese, can maybe help you keep the weight off that you maintain while maintaining muscle mass. There’s that opportunity to introduce dairy not just a nutrition solution while you’re on the pharmaceutical, but also that you be part of the management plan [inaudible 00:14:46]. Ted Jacoby III: But a lot more than just those people who are on Ozempic and Wegovy are hearing that message, and they’re realizing that for all of us we need to increase our protein intake. It’s getting beyond just that segment of the population that is hearing how important protein is, especially for the baby boomers in the aging population. Paul Ziemnisky: Especially when you start to look at youth. I think something around 87% of youth aren’t getting all the essential nutrients. And so, protein’s the first. All those other 13 essential nutrients that dairy provides, we know especially with people of color, they’re way underserved in that space. They’ve been following a lot of the regulation of, Hey, you have to stay away from fat, stay away from some of this. So, I’m hoping we see some improved messaging to help educate because we’ve been on it with our nutrition affairs, educating the doctors. Chris’s team is working with the Mayo Clinic doing science right now around whole fat. And Mayo Clinic’s already started to publish, given the look of the evidence we’ve given them to start to talk about not whole fats are the same. I think the understanding of what dairy’s fat is different, how it acts in this perfect combination will not just help us accelerate protein. We offer this broader nutrient density combination that no one has. Josh White: Where do most people get their nutritional advice from, particularly when they all of a sudden become medicated? Where are most people going for this advice? And who’s giving the people on the GLP drugs the advice as to what to eat? Dr. Chris Cifelli: That’s a great question. I think we all have to recognize their knowledge that medical doctors, general practitioners, family practitioners, insert doctor there, nutrition education is just not something that they get, and just like the rest of us, they’re getting it from sources that may or may not be reliable. In an ideal world, their practices would have a registered dietitian nutritionist partnered with them that after the doctor leaves the office, the nutritionist comes in. But we don’t live in the ideal world. As Paul mentioned, we have this collaboration with Mayo. One of the things we’ve been talking about with them is how do you over time, increase the nutrition knowledge of the primary care physician so that they are understanding of what are the current recommendations? What is the latest science? Acknowledging that NDC has done a great job. Katie Brown, our colleague, working with them to ensure that, at least at the Mayo Clinic, we’re providing them that information, because it is a frustration. There is a lot of education that has to go on. And unfortunately then you go to social media, which gets like only 2% of what’s on TikTok nutritionally is accurate. That is an opportunity space for all of us, the education especially around dairy foods of their health and wellness benefits and dispelling some of these myths that you only have to have low fat, or you got to cut it out or it’s not improving your health because it’s categorically false. Paul Ziemnisky: I think the way to think of it, medicine to date is reactive medicine. It’s shifting though, Josh, to preventative medicine and we win, because that’s where food is. Medicine comes in. That’s where we’re at the forefront. If you guys have the ability and the privilege to go through the Mayo Executive Program, anybody has $20,000 to play with, you go in there and they look at your blood, they look at all these other tests, they do to EKG. But the great thing is Mayo, they’re developing algorithms and they can say she’s predisposed of these three or four things. They can tell you that now based upon the executive program. But their goal is with telehealth and technology because they’re passionate about the rural consumer. They recognize whether it’s farmers or the inner cities. They don’t have the access like the Suburbans do to all the high-end doctors and stuff like that. So, Mayo is aggressively saying, how do we develop modern systems and technologies? The great thing is that will get to the youth fast. They’re telling you that three to five years you’re going to start to see these things roll out. And then when they recognize they’re going to put you on a food diet versus a pharma diet. Like Chris said, it’s always been pharma and the doctors because it’s reactive. When it comes to preventative medicine, food is going to be the solution. That’s where we’re really investing in that space. Mike Brown: Those of you who’ve known me a long time know I’m a lot smaller person than I used to be and GLP-1s played a big role. My house much better. My diabetes is fully in control. My cholesterol is actually below average, below for the first time in my life. But the other thing I want to comment on is my partner, who is eating the way I eat now. And frankly my diet, even though I’ve been on Ozempic for two years, was not prescribed by doctors. I did the work myself, because they don’t provide information. Part of that I think is because health insurance doesn’t really cover it, so they don’t worry about it too much. But he’s lost weight, too. He’s healthier, he’s more fit. So, my question is, this role of dairy protein and fats in our diets goes far beyond whether or not you’re on an expensive pharmaceutical from Eli Lilly or Novo. And what do we see as far as that broader impact? These benefits go beyond just the shot. A big part of my success has frankly been the diet change. And yes, Ozempic makes it easier. We just eat differently. And I think we don’t need to tie the success just with an injection. The point was made earlier. A lot of it’s just diet decisions and it’s how we educate our physicians and our health community to help people make the right decisions. Chris, what do you see as the best things that are effective in helping with that education? Because it’s more than just giving someone a shot. It’s got to do with changing the way you manage your diet. Dr. Chris Cifelli: Great question and point, Mike. There’s a lot of nutrition size out there. We’re pretty confident in what protein does, fat does, the different diets. One of the joys of being on Paul’s team and the innovation team is when I’ve thought about these things differently. Now, I think these things are wearables and these things are phones, are going to be our best educator. Because as we get better at reliably tracking what we eat through the day like they do your sleep and your blood pressure, that kind of data motivates you to make change. The biggest gap right now in technology is that we have no easy way of capturing what you eat. I’ll say to you, “Hey, what did you have for breakfast today?” Or the thing will ask you, but it needs to be more real time. Imagine merging your real time nutrition data with what your primary care physician and your insurance company takes from a healthcare. Now suddenly, you can enact change. You can start manipulating the two things and marrying to drive holistic change. In the next five, 10 years, you’re going to see this technology and the ability of AI to scan through some of that and say, “Hey, you ate this. Your blood pressure’s this. Tweak this a little.” Maybe for you, yogurt and cheese is the best option. Maybe for you it’s whole milk. Maybe for you you need to go lactose free. And then you see those real time changes almost like a video game and suddenly you’ll see those health improvements. It’s a really exciting, innovative time right now. I think nutrition field is poised to take a leadership in health. Mike Brown: Yeah, speaking of wearables, because I have a long-term serious type two diabetic, thankfully now completely in control. But the thing that’s helped me as much as Ozempic has been a CGM. I know what my blood sugars are. I can tell you right now what it is if I looked at my phone, and when they get to the point where they can do that through the skin and not having an attachment, I change every 14 days, it’ll be better. But that to your point is a tool and I’ve learned what I can eat and what I can’t eat. And if I eat six servings of whole grains a day, I’d be back above an A1C 6.0. I’ll guarantee you. So, those tools are going to help me as they become more accessible and affordable, it’s going to benefit everyone because cost of healthcare goes down if we’re healthier. As I’ve gone through this journey, the thing that’s been most exciting to me of all, what a big role dairy personally is paid for me in solving my health issues because of the proteins and the satiety of the fats. I haven’t changed my fat consumption. I tell people, if you’re a cheese maker, you still love me. If you grow wheat, potatoes or rice, you don’t like me so much. You do make changes in your diet. Dr. Chris Cifelli: For sure. And I think the exciting thing about personalized nutrition is… I’m Italian descent. I can’t give up pasta. I mean, I think my grandmother might come down from heaven and beat me. But how do I manage eating a portion of that or mixing it with Parmesan cheese or mixing in some ricotta so that I’m getting a little bit more protein and not overeating on the carbohydrate part? The more information, the more power then the consumer has and the more empowered they are to make these healthy choices. Like you said, continuous glucose monitoring is a great way. You do that because you have to link it to your foods. You want to know what’s spiking. Now the average person, they can make better and more informed choices and maybe stay away like I did right before this call because I was stressed and I grabbed a handful of Doritos. Maybe I’ll reach for the yogurt next time. Josh White: What are the next five years of this GLP innovation? What are the possibilities? Paul Ziemnisky: You’re seeing things in direct foods, high protein beverages, customs-focused products to help nutrition like PROTALITY from Abbott. Nestle is going big with Vitality. So, to give you food solutions that are higher protein, nutrient dense, low-processed carb, low sugars, you’re seeing food solutions. You think about the old meal kits that were hot a decade ago or during COVID, these custom boosters were GLP where they’ve got patented fiber blends. You got these online meal programs, high in fiber, low in fat, free of cholesterol, no added sugars. And this is where the dairy proteins, whether it’s dairy protein as a powder and different functional delivery vehicles are going to be put in. So, there’s going to be direct dairy as an ingredient on the pizza that Vital Pursuit has. There’s going to be direct milk as an ingredient in these beverages. But in these other meal pieces, these milk kits, these powder kits that you can be on the go take to the office, take it to work with you and do it yourself. And then how do we attack supplements? We haven’t played deep in the supplement space, but we’re developing technologies like encapsulation so we can encapsulate and deliver things. So, right now, we’re in the ability to do encapsulated lactoferrin because it loses a lot of its efficacy when it hits either the liquid processing or even like a colostrum, holding that efficacy and bioavailability, by taking that next level down of dairy components and putting it back into dairy even, and adding functional things to it. Looking at different ways we attack the supplement aisle and bring added value. Because the one thing, Mike, to your point earlier, when people go on those diets, the households spend more on groceries. They’re spending more on food. And we know why. Consumer’s number one discretionary spending is health and wellness. We don’t often think about it, but that discretionary spending of, “I’m going to a health club. I’m ordering X and Y,” that adds up. I remember when we helped launch Fairlife eight, 10 years ago, people said no one would pay $9.50 a gallon of milk and they’re paying 30 bucks a gallon of water that has no functional benefit. They will pay for high functional beverages for dairy and high functional foods for dairy, or just in an industry that’s been run by operations people. I come from the marketing side. You have companies like Procter & Gamble who make tons of money on margin on products on razors. They move people off a 10 cent Bic, into a $10 Fusion, $12 razor. I think the same thing’s going to happen in dairies. We’ve got to think value on top of the volume in these spaces because it’s a huge opportunity for us to look at the whole production line. It’s not just a cheese line, it’s not just a whey line, but we’ve got some great value added products that we’re going to be able to deliver. GLP just as carve out piece, when I was talking to you guys about health and wellness, they’re spending as much money in these other spaces in health and wellness as their physical performance. Mental emotional health is going to be 10 billion this year. Chris talked about dairy, and tryptophan and casein helps sleep, There’s $5 billion. So, you start to go to these places, you’re going to see a combination, Josh, of innovation, very specific GLP, but broader dairy is a functional piece to deliver all those health benefits and high margin areas that we haven’t thought about playing before. And so, the question is do we want to be a supplier as an industry of ingredients? Or do we want to get down the vertical chain? I keep encouraging the industry closer to the consumers where you make the money. Mike Brown: You’re right, you spend more for groceries. We eat out less because I can’t get the foods I want to eat if I go to a restaurant. We’d bring Chinese carry out home so I can make my way of making a California rice edibles so I can have that with my cashew chicken. Do you see innovation on the restaurant trade side to accommodate some of the people that are trying to eat the higher protein, lower carb diets? Paul Ziemnisky: Right now, you’re seeing it happening like chicken. Mike Brown: How do we make sure that that chicken still has a little dairy on top of it? Paul Ziemnisky: Yeah, we actually do a lot of concepting in that space and then we share with the dairy processors, “Hey, here’s ways to pitch.” I’d say it’s probably one of the biggest complaints we hear from the food service side, is we focus a lot as an industry on retail, but food service has got a huge opportunity for dairy. You’ll look at chicken channel, you’ll look at some of these different players and as a side as an ingredient, I think you’re going to see, Mike, a shift. Cheese is a part of that, but you’ve got sour cream and other components going in there and different ways to deliver it. If you look at Taco Bell’s menu 10 years ago, the most expensive item was Doritos. Now we’ve got a $7.99 grilled cheese burrito, but we’re also testing cheese shells. And we’ve got dairy whips and freezes for us in food service, beverage is a big venue to attack the carbonate soft drinks. You’ve got smoothies, protein, coffee at Dutch Bros is a great example of that. We’re just starting to scratch the surface. But in health and wellness, Mike, the top 10, QSRs control 45% of the sales and food service. Crazy. McDonald’s and Starbucks, all those guys. About 86% of food service sales go through the top 100 quick serve and fast casual places. And the rest are just the dine-in fine dining and stuff like that. It’s the emergence of these fast casual players that you’ll see move up that didn’t exist a decade ago. Chipotle is one, Panera is one. But it’s that next generation of player. Like Raising Cane’s is coming in and they don’t have a lot of dairy. It’s in their batter. How do you make it more prominent? So, there’s a huge opportunity just outside of GLP in the food service space. Josh White: I think we’ve covered the full circle in the conversation. Everything from infant to elderly, from athlete and sports nutrition, to overweight and pharmaceutically, and in all cases, it sounds like our products are superior. Dr. Chris Cifelli: And then a great point is dairy foods in particular, yogurt, kefir, cheese, are augmented end have tremendous health benefits. There’s strong science on its ability to help with gut health and lower inflammation as well. There was one area we didn’t hit on yet for GLPs that I think is important and maybe, I don’t know, Mike, if you’ve experienced this. But not only do you not want to eat, but you tend not to want to drink as much as well. So, hydration is such an important part of GLPs. And we know from studies that milk is more hydrating the water based on the beverage hydration index and other studies. So, it is the protein and all that stuff, but as you’re even trying to stay hydrated during the day and with older adults, this is already a problem. You can see where milk and the lower lactose ones for those who are lactose intolerant could be an awesome solution to get the protein, the vitamins, the minerals, and the hydration they need as they’re on these pharmaceuticals. Mike Brown: Well, the sports benefits of a drinking dairy are the same if you’re on a GLP diet. You’re absolutely right. The other thing is, lactose is digested differently. I’m not intolerant, a little bit slower. And now in our local grocery store, I have a choice of three high protein milks. I have Kroger’s brand, I’ve got Fairlife, and I’ve got Darigold FIT. They’re all lactose-free, too. I mean, they’ve all been treated with lactase. So, the options for that consumer are a lot greater. I think you got to get away from the amount of calories in milk to the amount of nutrition there is in milk for the calories you drink. And I think a lot of consumers struggle with that. One thing I’m learned through my wellness journey is that if you eat high-quality protein and good quality fat, you will eat less because you won’t be hungry all the time. I can’t tell you the last time we bought a bag of chips. It’s been at least two years. It’s just is what we do. I’m from a family of large people and this is what you do if you don’t want to be large anymore. The whole balance of calorie versus nutrition, I think, is something that dairy has the most wonderful story to tell. Always has. And we’re doing a much better job telling it frankly, thanks to folks like you. Well, it seems like plant protein beverages have had their day, at least for now. Of course, the amount of protein in some of them is also suspect. Paul Ziemnisky: I think the industry’s gotten together and done a good job informing whatever farmers do every day for a living. I think that education’s gotten out there. And what’s shifted is the consumer, this younger generation, gen Z and Y, they’re more diligent. If you look at where we had headwinds the last decade where we had all the famous celebrities, private equity, the billionaires chasing alternatives, plant-based and cellular, that private equity and that money’s drying up. I mean, they’re still out there. You’ve got Europe doing their crazy things. But domestically and internationally, we’re set up long-term. So, instead of having headwinds the last decade, we have tailwinds, investment back into dairy, not just the 10 billion of assets our own industry is doing, but you see the private equity guys are looking, the brands are coming back, all the different health spaces, they’re putting more assets and more investment in it. So, you’re seeing companies act. You’re seeing consumers act in the space and the tailwinds behind us now, the high quality protein, all these different growth spaces that the consumers are spending against. And that brain cognition. We’ve got research emerging there. We haven’t even talked about the future milk fat globule membrane, WPPC. Historically, they will waste products right. Now those are going to be the next value areas you’ll hear about in dairy in the next couple of years outside of lactoferrin because they’re meeting these functional needs. If you look at the macro at retail and at home, this area of food is medicine or precision nutrition. As you start to understand what affects each person personally, there’s going to be that component. But we also forget if you shift over to food service, it’s mental health. When you think about mental health also, it’s a relief. And so, that’s why still 60 plus percent of the decisions at food service, I’m going to go and just get something great. I want to cook. I want to have something that keeps everybody happy. My friend grew happy, my family happy, whatever. And guess what? When you look at that list of products and you ask them, it’s mac and cheese, and pizza, it’s ice cream, and dairy by far is the number one ingredient product in the food service space for meeting that mental health space. I say we’re set up to win because the two areas of growth is going to be this health and wellness space in this space of taste enjoyment that drives our society forward. If you look at exports, you’re seeing we’re penetrating markets. Pizza’s still underdeveloped and burgers’ underdeveloped, and all these other dairy carriers are across growing economies. The tailwinds are pushing us in all these spaces, in the US the way we’re set up is really to win. Ted Jacoby III: Awesome. Paul, thank you, Chris. Fantastic conversation today, guys. Paul, Chris, really appreciate you guys joining us. This was just a great conversation about all the different ways that dairy’s got a really bright future. So, thank you. Dr. Chris Cifelli: Thank you. Paul Ziemnisky: Thanks for the opportunity to talk to our farmers. We represent all the US dairy farmers. And we’re the voice for nutrition, science and product science on behalf of them. And our job is to drive dairy growth incrementally, so we’re trying to find ways to do that. That’s our team’s role, so thanks for the opportunity. Outro with music: We welcome your participation in the Milk Check. If you have comments to share or questions you want answered, send an email to podcast@jacoby.com. Theme music is composed and performed by Phil Keggy. The Milk Check is a production of TC Jacoby & Company. Dr. Chris Cifelli: Rock and Roll.

Bienvenida, Ruth: fortaleciendo a Jacoby en Latinoamérica

En este episodio de The Milk Check, le damos la bienvenida a Ruth Aragon al equipo de Jacoby, quien se une a sus colegas de muchos años, Miguel y Yara. Es una reunión basada en décadas de experiencia, relaciones sólidas y un enfoque compartido: fortalecer la presencia de Jacoby en toda Latinoamérica. Acompáñanos mientras el equipo analiza: Cambios en los patrones comerciales y el crecimiento de las exportaciones de queso en México, Centroamérica y Sudamérica Por qué más compradores en Latinoamérica están optando por importaciones directas — y qué significa eso para los productos lácteos estadounidenses Dinámicas de mercado: desde la incertidumbre arancelaria hasta la volatilidad climática Un apetito creciente por las proteínas lácteas en toda la región Desde leche fluida hasta productos terminados, Ruth aporta una experiencia que abarca toda la cadena de suministro. Juntos, este equipo ampliado está listo para ofrecer más valor a los clientes de la región. No te pierdas el episodio 80 de The Milk Check: Bienvenida, Ruth: fortaleciendo a Jacoby en Latinoamérica.

Dairy on a knife’s edge

The U.S. dairy market is balanced on a knife’s edge, and everyone’s wondering what the summer will bring. In this week’s episode of The Milk Check, the Jacoby team convenes to dissect a dairy market that feels balanced – barely. From milk still trickling in past the flush to range-bound commodity prices, this episode covers the major trends shaping the back half of 2025. Cheese exports are keeping Class III in check Culling numbers are down as producers are keeping heifers longer Global butterfat advantage fading with tighter GDT spreads WPC, WPI demand stable, but new production capacity looms And what if prices fall off the edge? From trade risks to recession fears, the industry feels one light push from price chaos. Listen now for insights on margins, milk flows and market forces. The Jacoby Team: Diego Carvallo, Director, Dry Dairy Ingredient Trading Jacob Menge, Vice President of Risk Management & Trade Strategy Joe Maixner, Director of Sales, Dairy Ingredients Josh White, Vice President, Dairy Ingredients Mike Brown, Vice President of Dairy Market Intelligence Ted Jacoby III, CEO & President, Cheese, Butter & Dry Ingredients Intro (with music): Welcome to The Milk Check, a podcast from TC Jacoby & Co., where we share market insights and analysis with dairy farmers in mind. Ted Jacoby III: Hello everybody, and welcome to this month’s version of The Milk Check podcast by TC Jacoby & Co. This week, we will have a classic market discussion. It is June 9th, so we’re approaching the midpoint in the month of June 2025, and joining me today are Diego Carvallo, our Director of Dry Dairy Ingredients Trading. Jacob Menge is our vice president of risk management and trading strategy. Josh White, our Vice President of Dairy Ingredients. Mike Brown, our VP of Market Intelligence. Joe Maixner, our director of dairy ingredients and resident butter expert, is also there. I think we’ll go ahead and start with milk. It’s the middle of June. We’re past the flush, but milk is probably a little bit heavier than we expected. Milk production has been up. We know what is going on. The dairy farmers are making money, and they’re keeping cows. Their culling numbers are down, and so we’re seeing cow numbers up, maybe a little bit surprisingly, given what we know about the heifer replacement numbers, which means they’re keeping them for an extra lactation, that is keeping milk solids output maybe a little bit lower than we expected. But the solids are still up as well. So as a result, we’re seeing milk still on the long side, not too much out of what is normal for this time of year, and I wouldn’t be surprised as the weather in the upper Midwest starts to heat up, we start to see that milk production drop off a little bit and everything get a little bit tighter. We just haven’t quite reached that high temperature yet. And so that’s what we’re seeing in milk. Jake, how does that translate into cheese? What are we seeing in the cheese market right now? Jacob Menge: It’s funny, I think from the last time we had a market discussion to today, the message will be very similar, which is a lot of mixed signals on the cheese side. You can talk to certain people who say, Hey, our orders are way down. And then you might talk to somebody else, saying, Hey, our orders look pretty good, meaning the demand is there. I think it’s a bit of a tale of two cities regarding how exposed you are to the export market. Exports have been the thing that has been keeping us afloat on the cheese side. I think domestically, we’re not doing great. I would say that the prices that we’ve been seeing, this kind of upper 190s, mid to upper 190s, we’ve come off in the past week or two, but I think that mid to upper 190s did hurt demand on the export side. I think that’s kind of where we’re at. I would say good, not great. It just seems like we’re going to be range bound a bit on the cheese market just given this kind of pendulum swing of our prices move too high, which kills exports a little bit, but if we go down even just a little bit, you think the export market comes back in, so that’s the feel we’ve got right now. Ted Jacoby III: How is the dollar affecting exports? Jacob Menge: Yeah, I think it’s helped certainly. That is probably the biggest risk to hurting exports going forward, but we don’t have a particularly strong dollar. I wouldn’t say we’ve a particularly weak dollar, but yeah, I would say that has been a catalyst, if anything. If I had to pick a direction of whether it could hurt or help exports moving forward, I would say if the dollar strengthens, it’s much more likely to harm our exports than the dollar weakening further in helping. Ted Jacoby III: So, Mike, I have a question for you. You’ve been looking at some of our milk production numbers lately. Have we been seeing milk move from class four to class three with these new cheese plants, or even though we’ve built some of these new cheese plants, are we still seeing milk production remain in class four? Mike Brown: Well, more of it’s remained in class four I think, than some of us expected because some of the startups have been slower than expected, so you still have some class four plants, particularly in the south central US that are balancing some of that market. So I think that the opportunity to move more milk into cheese than we currently have exists. So much of this key is exports, and one thing we did see last week with the GDT is we saw how the spread between US and world cheddar prices get a little tighter, which makes me a little nervous about exports moving forward, but we have the opportunity to move more milk into cheese and that milk is basically ready to move into cheese when those plants demand it from what I’m understanding, talking to some of my powder friends in the Southwest. I think that there is still some opportunity for that to happen. We’ve also seen the spread between three and four has remained relatively tight compared to some recent years, which means that the incentive to move milk one way or the other isn’t maybe quite as great. It will be demand-driven and in my mind, those cheese exports going to keep that milk moving into the cheese plants, because they have been the key to the growth of cheese sales. Ted Jacoby III: Thanks, Mike. So, Diego, on the other side of the coin, non-fat and our powder market, is there any reason to see powder prices strengthening in a way that would pull some of that milk away from cheese? Diego Carvallo: I doubt it, Ted, because of the investment and the medium—and long-term plans these companies have for those new facilities. My expectation is that milk will be pulled from class four. Ted Jacoby III: So, as milk tightens up, would you expect that the class four plants will lose milk and that the cheese plants will keep it? Diego Carvallo: Yeah, there’s going to be exceptions, but I think that’s a general rule. Ted Jacoby III: Okay. Have we seen any pickup or any strengthening of international demand for non-fat and skim milk powder? Diego Carvallo: Not right now, and it’s because Europe is significantly more competitive than the US, but whenever we see Europe, the market tightening up, we will probably see a market that could move higher fast. At the current moment, the Europeans are the most aggressive in Asia, and at the same time, demand hasn’t really picked up, so for that reason, we have been range-bound for the longest time. Ted Jacoby III: Joe, if we’re making skim milk powder, that means we’re usually making either butter or cream and the butter fat market in the US been the talk of the year with cream multiples getting down into the 70s earlier in the year. We’ve been having a fair amount of butter exports. What do you think this butter market’s going to do going forward? Joe Maixner: Well, I think we’re going to continue to have exports and we’re continuing to penetrate new markets with multiple products. It’s not just 82% anymore that a lot of these markets are taking. They’re taking 80%. AMF has been extremely strong in the export markets. As long as cream continues to be readily available, which it has been for the entire first half of this year, we’ll continue to be a player in the world market. That coupled with the massive discount from the rest of the world. Ted Jacoby III: So what would you expect the butter price to do? Are we going to stay right around here or you think we’ll get higher or are we going to have one of those classic years where everything stays right around here, but we have this one, two week spike sometime in September? Joe Maixner: It’s a hard question to answer, Ted. I think we’re probably looking at more of a traditional year only because of the amount of exports that we’re able to put on the books. Otherwise, I think that we would be significantly more flush with inventories because domestic demand has been good, but it hasn’t been great. I think that if we can continue to get product out of the country, we should have a relatively stable butter price. Ted Jacoby III: I thought you said it was a normal year? Stable butter price and normal year don’t go hand in hand. Joe Maixner: Normal pre-COVID, how about that? Ted Jacoby III: Joe, that still doesn’t work for me, but I understand what you’re saying. We’re going to stick right around here. We’re probably going to have a relatively stable market that people should expect to stay in this range going forward, at least right now. Joe Maixner: Yeah. Take 2016 to 2019, for example, we spent the better part of almost four years in about a 40 cent range. Ted Jacoby III: Got it. I like the sound of that. I think the market would like a stable butter price. Everybody, we will be right back after these messages. Center commercial (with music): If you’re a dairy producer or a cooperative looking for a better market for your milk or you’re a food manufacturer hoping to strengthen your dairy procurement or risk management strategy, please reach out to TC Jacoby & Co. We’ve been building worldwide relationships with all sides of the dairy supply chain for over 75 years. Tap into our expertise for unlimited free consultative support and we’ll develop a sales or procurement strategy that hits all of your targets. Please visit us online at www.jacoby.com to get started. Thanks for listening to The Milk Check. Back to the show. Ted Jacoby III: Josh, we kind of skipped over the whey market and the protein market. The protein market right now might be the craziest market of all this year. What’s going on right now in WPC and WPI? Josh White: Well, on the higher proteins, I think there’s a lot of different things pulling on this market in both directions. I think on the bull side, despite consumer trends, we continue to see really good and resilient per capita consumption across a lot of the different products, not just your traditional protein-enhanced beverages and some of the new and innovative ones like the clear proteins going into different drinks, but we’re also seeing, I think pretty good orders from consumer packaged good type products as well. What’s unclear is it really bucking the trend that we’re experiencing across other food service related items and other things, or is it just lagging? That’s really unclear to me at the moment. I’m pretty confused about the direction, but I think on the bull side of the case, we continue to see strong WPC 80 orders. Whey protein isolate feels like it’s in a bit of a short squeeze right now. People need product. Both of those products have recovered to near the highs that we saw ending 2024 and starting 2025. I don’t know that I would say across the board that we’ve set new highs yet, so we’ve had arguably kind of a stable quarterly price market despite all of the trade rhetoric in both headwinds and tailwinds that we’re dealing with. We can’t ignore the fact Europe is still quite a bit higher than us for our whey proteins. That combined with a weak dollar, I think we’ve seen some pretty decent international interest. What’ll be interesting to see is what happens when we start to print some new headlines. I am certainly not going to predict it, but I think we all can see a scenario where we’re going to start headline trading a little bit again as some of these trade deals wind up to some milestones. It’s not just the bullish side. I think that there are some things that we got to pay attention to on the bear side of the case right now. We’re realigning our price relationships with the underlying sweet whey powder and that market is experiencing some big changes this year. I mean, you had several factories go offline with sweet whey powder production replacing that with WPC-AD predominantly production. You saw some WPC-AD facilities expand and you’ve got some new whey protein facilities that are in the process of filling up those cheese vats, that at some moment will add some extra protein onto the market and right now I think it’s a coin flip on whether or not the market quickly digests or consumes that additional product or not. Generally speaking, I would say that the trade distortion and headlines probably lean bearish initially when they come across, and so we got to pay attention to that. It’s a fun one. I think it’s going to be an interesting second part of the year and don’t forget, we’ve got another one of these cheese plants coming online right now that’s going to make a fairly sizable amount of sweet whey powder. There’s a lot of things pulling on both the bull and the bear side of the whey markets at the moment. Ted Jacoby III: So I have a question on whey proteins. We had some pretty high prices in the fall and then the calendar flipped to 2025 and usually that’s a time when price increases would be passed through at the retail level. Did that happen this year? Are we seeing demand stay this high even in the face of higher protein prices to the consumer? Josh White: I don’t know that I have a great answer for that. I think I would start by answering that question that I think there was room to absorb some of those price increases and those price increases were being layered in over multiple quarters and we’re now entering our third consecutive quarter, where I believe that the quarterly negotiations from processor to large packer have been at similar type levels. We haven’t been talking about quarter-to-quarter dollar a pound or more price increases for all of this year. And to answer your question, yes, there still seems to be demand. Now if you start to really unpack that, I think there’s probably a lot more of the story that we’re not seeing quite yet. It’s a long supply chain, but some of the growth that we’re seeing is in healthy eating snack foods, things like that, where the inclusion rate as a percentage of the total product cost is smaller. They’re not realizing such a dramatic price increase as you would see in maybe your sports nutrition drinks and things like that. If we start to peel the onion back, there’s a lot of explanations for it and I believe it all drives back to the fact that just consumers are paying more attention to the type of calories they put in their body, and protein is one of the gold stars of that, and whey protein in particular seems to be doing quite well in that environment. Less frozen pizzas maybe and take out there, maybe people are still willing to buy the higher protein snack foods and supplements. Ted Jacoby III: Mike, what do you think is going to drive this market over the next six, seven months? What’s the thing that we’re not really paying attention to, do you think is going to surprise everybody? Mike Brown: Boy, we are at a point with this older dairy herd that if we get to where margins drop significantly, IE milk prices do see some decline. We could see some insane [inaudible 00:13:19] worth a couple thousand dollars. Not too many years ago we were paying less than that for a herd replacement for dairy. I think that’s something we have to keep our eye on is just that overall margin. High [inaudible 00:13:28] prices are contributing to a good margin on the dairy. World demand, we’re in such a tumultuous world right now in trade and tariffs. Our price advantage under the world prices has given us a huge advantage in exports, particularly on the butter and cheese side. Obviously not so much on the powders. If we don’t keep that when we have lackluster food service and retail demand, will that give us some weakness in market moving forward? As long as exports stay strong… So far our expansion of American style cheese and to a lesser degree mozzarella seems to be moving and prices are staying pretty stable, but if we reach a point where that export market starts to not be the outlet that has been, that’s my biggest concern, that world trade is extremely important to keeping the whole supply chain healthy over the next 6 to 12 months. Ted Jacoby III: I couldn’t agree more with that, Mike. Jacob Menge: Yeah, I’ll chime in. Mine’s just going to be macroeconomic factors. It feels like we are kind of on a knife’s edge right now, frankly with a light push getting us off that knife’s edge one way or the other. Could be tariffs, could be recession in the second half of the year, who knows? Could be the trade war heating up again with either in a region we’re not really focusing on or the opposite, who knows? It just feels like we’re probably range bound. It feels like that’s kind of a delicate balance though. That if the shoe drops, it really could swing violently. It really feels like we’re potentially range bound on a lot of our products, not because supply and demand is in perfect harmony right now, but rather because the market’s kind of waiting for that next signal. So that’s just kind of a gut feel. I wish I had more data to put behind that, but that’s just how the market feels to me right now. Ted Jacoby III: So if we’re on a knife’s edge, I can come up with three or four different scenarios that would tip us off that edge into the recession side. What is it that would tip us off the edge into the economy is now going better than expected side? Jacob Menge: Yeah, I don’t know that it would be that the economy goes better than expected. It would be that the clouds clear, those uncertainties get cleared up. There’s kind of a definitive resolution of some sort to the trade war. Maybe the dollar recovers a little bit as a result. That’s how I think we get to that more positive outcome. I think there is a lot of uncertainty weighing on the market and if that gets cleared up, I think it’ll drive probably better domestic demand, maybe better global demand, et cetera. Ted Jacoby III: Okay. Is this just one of those markets where in just about every product right now we’re kind of range bound and we’re waiting for some piece of information that would tip us one way or another? Josh White: I think we’ve got to pay attention to the timeline that we’re on, and what I mean is the same fundamental variables that have influenced markets and price over the past six months will have a different impact on markets and price in the next six months. We came out of our heavier milk production season. The majority of milk in the world is produced during the Northern Hemisphere spring season. We’re going into lower seasons both in Europe and the US, which makes us slightly more vulnerable to just risks to our forecasted supply. Right now, I think we’re expecting Europe to be flat to slightly better on either side of unchanged, correct me if I’m wrong, and the US we’re expecting year-over-year growth in milk as well as growth in components. All of that being true. We are going into the season where we make a little bit less. And at the same time, if you look around the world, I would argue that the world is facing a lot of economic uncertainty. The world has been in a position for the last several years to buy hand to mouth and do that without having big risks to their procurement strategies. But the world is destocked. This is not necessarily to say we should be bullish. I’m not suggesting that at all. I just think that we’re vulnerable to volatility and to some price movements. You add on the fact that, again, as I mentioned earlier, there’s a lot of headlines and the headline impact on the market can be there. You add on that we have shifting product mix in a couple of key regions of the world. We know that Oceana has been shifting their product mix over the past few years. Certain markets are emerging as exporters of dairy products that traditionally haven’t been exporters, and the US has added a whole lot of class three cheese production capacity that will consume some of that available milk, and I just think it’s tough to evaluate tomorrow based on yesterday. Ted Jacoby III: Makes sense to me. All right guys, thanks everybody for joining me. I think this is a great market discussion. I think the message is loud and clear. Markets are probably going to be relatively stable, at least for the short term, until there is something that tells us that markets need to move, whether it’s weather, like heat or it’s something in the macroeconomy or it’s something on the demand side, like less exports. Let’s go ahead and head into this summer and let’s see what the heat brings. Take care everybody. Outro (with music): We welcome your participation in The Milk Check. If you have comments to share or questions you want answered, send an email to podcast@jacoby.com. Our theme music is composed and performed by Phil Keaggy. The Milk Check is a production of TC Jacoby & Co.

Fire in the belly with Nate Zwald

Are you missing the biggest leap in dairy performance since the milking machine? From fertility breakthroughs to Holsteins with 4.5% components/5% fat, today’s cows are not your grandparents’ cows. In this episode of The Milk Check, we sit down with Nate Zwald, president and CEO of Progenco, to uncover how genetics is quietly reshaping the dairy industry. We tackle: Why genetic progress is accelerating and how that changes your herd strategy The rise of gender-selected genetics and the fall of dairy bull calves What makes a cow “better” — and how to breed more of them Why embryo technology could be the next big leap Listen now to the latest episode of The Milk Check to learn why cows engineered for fire in the belly could have improved lifespan, higher fertility, better fat composition and a better life. Special Guest: Nate Zwald, president and CEO of Progenco The Jacoby Team: Gus Jacoby, president, fluid dairy ingredients & dairy support Mike Brown, vice president of dairy market intelligence Ted Jacoby III, CEO & president, cheese, butter & dry ingredients Intro (with music): Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind. Ted Jacoby III: Welcome, everybody, to the podcast. This month’s version we have a special guest. We have Nate Zwald, former CEO of ABS Global and current president and CEO of Progenco. Joining us from the Jacoby team is Mike Brown, our VP of Market Intelligence, and Josh White, our VP of Dairy Ingredients. Nate, we’ve asked you on this podcast today because you’re one of the foremost experts in bovine genetics out there, and we’ve been talking a lot about some of the changes in cow genetics and how it’s been affecting our dairy markets. It’s something we’d love to learn a lot more about. Why don’t you start us off? Tell us a little about your background, and we’ll go from there. Nate Zwald: Yeah, sure. Well, first of all, a pleasure to be here. I appreciate being asked and appreciate that introduction. I’ve had a long career in dairy genetics, starting with growing up on a farm and learning about dairy genetics from where it should be learned about, in a barn with my dad, thinking about milking cows and recognizing that the next generation of cows was going to be better than the current generation of cows. And that was a pretty fun thing to see firsthand. When you think about having a daughter of a cow out in the heifer yard, that’s going to be better than the cow you’re milking today. And I think that’s the whole idea that we think about when we think about genetics is making better animals faster and trying always to make sure that the next generation is going to be more productive, healthier, happier, better for the farmers, better for the community, and better for the world and the next generation than the cows are in this generation. And we’ve seen tremendous progress through time in doing that compared to when I was a kid milking cows thinking, “Hey, I hope the heifer is going to be better than the cow herself.” Because here we are, we’ve gone through so many technologies like selection for fitness, longevity, and fertility, and then we went through genomic technology that’s had a huge impact on the industry. And then more recently, sex semen and the use of beef on dairy cows have all had substantial changes to the genetic progress curve compared to what seems like not that long ago from my standpoint, just milking cows in the barn with dad. Ted Jacoby III: So, currently, what are some of the major trends in genetics that the dairy producer is either utilizing or needs to be aware of, that are coming down the pike? Nate Zwald: Well, I think some of those things that I mentioned, I mean, when you start thinking about the early 2000s, we were going through this time and the shift from selection really for production, which was primarily fluid milk production, and how the cow looks. From a dairy judging perspective, the show cows must be better than cows that don’t look like show cows to thinking about the data and saying what makes a cow live a long, happy life and what makes cows be more productive for their owners? And does that mean that she’s got to be taller and sharper and milk more in terms of fluid milk production, or does that take on a little different thing? Is it the cows that just love to live? If you think about today’s environment, everybody loves those cows that are first to the parlor. They want to get milked. And those cows that are just always happy, they’re the ones that go and they eat, they sleep, they milk, and they love their life and they love doing it for their owners every day. And then not only do they eat, sleep, and milk, but they do it most profitably and productively possible. That’s been through a series of genetic advancements, and really, that started with looking at those type characteristics and saying, is it type that makes a cow more profitable, or is it things like, does she get pregnant quickly? Does she have an easy calf? Does she live a long time? Is she that kind of aggressive animal that has that fire in the belly to live? And I think it’s more the latter, those things that you can’t necessarily see physically and phenotypically in the cow. And that was probably the starting point to a whole series of things that kicked off a tremendous amount of genetic progress, where when we think about cows today versus cows 20 years ago, it’s amazing the amount of change we’ve had. And that doesn’t mean they all look like show cows today, but it means they’re more profitable animals. They’re producing a tremendous amount of more components, which is probably something that you guys and your listeners deal with regularly now. And that’s because of the selection, what we’re selecting for, it’s how we’re selecting for with genomics, but then it’s how you implement those things. And that’s probably the most recent thing, probably something that kind of came about quicker than what anybody was ready for, is how dramatic the impact of breeding your best animals to sex semen and your worst animals to beef semen would be in how dairy cows change and how quickly that happened. Ted Jacoby III: And so what are some of the results you’re seeing from your point of view on that subject? Nate Zwald: So the first thing is we reversed the trend from what was perceived 20 years ago as Holstein cows that were difficult to get pregnant and didn’t live as long as we wanted them to. And a lot of that came back to their health, their fertility rates, and ultimately then because of those things, their longevity. So we’ve changed that trend. That was the 30 or 40-year trend where we were making cows that milk more and looked better, but they were getting less and less fertile, especially Holsteins. Jerseys, to some degree, too. And so you think back to that time, many people thought they had to cross-breed to solve that fertility issue in Holstein cattle. Through genetics, we can make better cows faster. When you define better correctly, and you say better means they have to get pregnant and they have to live a long, profitable life. When we changed that and implemented that and redefined what was better, we made that progress. And so we reversed that trend and now cows are getting more fertile every generation and producing more pounds of milk, but also especially more pounds of components. And I think that was a lot due to the genomic revolution. So not only did the AI companies and the genetic companies make more progress with the bulls and the genetics that they had for sale and offer, but then dairy farms started implementing the genomic technology on their females. They started testing those females and that allowed them to make decisions. Any information isn’t valuable unless you use that information for something. And so for a while, there were a lot of farms that did genomic testing and didn’t use the information correctly or in a way that advanced genetic progress, meaning better cows faster. But more recently, with the advent of sex semen, people started doing what they should do, and that is breed the best of sex and leave the rest for beef. And so when you think about a bell-shaped curve of your dairy, whether you have 10,000 cows, 1,000 cows, or 100 cows, you’ve got this nice evenly distributed bell-shaped curve of animals. You got the best ones on the right-hand side of the curve, and you got the worst ones on the left-hand side of the curve. And when you think about using sex semen and you just think about, I can get a female replacement from all my best animals and equally importantly, I don’t have to get any dairy replacement from all my worst animals, the progress of genetic progress, the speed of genetic progress absolutely doubles if not triplicates, because bell shaped curve has a lot of variation in it. There’s a lot of spread between your best animals, your average animals, and your worst animals. And you think about that genetically, there might be up to a thousand dollars of difference just genetically between your best and your worst animals in your dairy. And before the use of sex semen and beef semen, there was an equal chance that that worst animal was having a heifer calf, and your best animal was having a bull calf as the opposite of that. And today, you can ensure that your best ones have female calves and your worst ones do not have a dairy replacement. And that’s the part that even I underestimated the impact that would be on the breed and on the industry in terms of genetic progress. And part of that reason is why we see Holstein herds that are averaging well over 4.5% components, potentially in some months, at the time of the year, up to 5% fat. When I was a kid, these were component levels that not even Jersey dairy sometimes met, and now we got Holstein herds that are doing it. Not only did we solve the fertility issue in the Holstein cow, but now we are also really making what some people call a black and white Jersey because they got the component levels of a Jersey and the health and fertility of those Jersey cows, too. And Jerseys have made a lot of progress too, just not quite at the same speed as Holstein because of the smaller population. Ted Jacoby III: You just shared a lot of information, but I heard you say earlier that you hinted at the possibility that dairy cows, probably especially the better ones in your herd, can probably be high producers with a longer lifespan today. Did I hear that correctly? Nate Zwald: That’s absolutely right. And more fertile through it as well. Part of that is because we’ve changed the definition or the selection goal. It used to be better looking and more productive, but now there’s this big component in the selection goal that is a healthier, more fertile, longer-lasting cow, and I think that’s good for the owners of those animals, but it’s also really good for the world. Consumers want to consume products that are produced sustainably, and there’s probably no better story in the industry than genetics for sustainability. When we make more production, first of all, that’s more sustainable per unit of whatever output. Still, there’s also a real story for making just animals that are happier and healthier and more productive, love doing what they do, their job every day, for example. There’s no reason to breed animals that aren’t good at doing that. Right? I think that’s a real story in and of itself. The amount of progress we’ve made in terms of the average dairy cow in the industry today compared to 20 years ago, we’re making three times as much genetic progress for those categories of more productive, healthier and longer lasting and then more efficient, and it’s three times as much progress as we were making 20 years ago, and that’s really, really impressive to think about that rate of genetic gain, and we just changed the rate of progress that dramatically over 20 years. Mike Brown: I worked for Jersey for years on the milk marketing side. A couple of things that I saw in my career at Jersey were, first, a productive life. You discovered that some bulls that didn’t make cows at one fair may live longer. We call them constitution. They just were tough, and you had bloodlines you could track that in. They weren’t necessarily high-tight bulls. The second thing is net merit, which kind of ties everything together to the way we look at bulls now, and you can even look at net merits depending on how you sell your milk, different net merits for different types of milk markets. But when you look at that and you look at what’s happening with Holstein, efficiency, some of the work that was done with Kent Weigel at Wisconsin was working across the country on feed efficiencies, and now we have that as part of our selection tools as well. You got into that profitability. How has that changed what the modern Holstein cows are going to look like versus that true type ideal that we had back in basically from the 50s through the 90s? Nate Zwald: Yeah, it’s a great question, Mike, and it’s a great insight. I think you’re leading there because what those cows look like has already changed. And you mentioned Kent. Kent was my major professor during my grad school at University of Wisconsin. We worked on some of these initial studies, and one of the things we worked on while I was there was how to evaluate health traits in dairy cattle. So that was one of my grad school projects, evaluating is there a genetic component for these traits like early metabolic health in dairy cattle and things like that that honestly Jerseys were better at than Holsteins as a breed at that time. Jerseys have some inherent breed advantages, components, health, and longevity, but Holsteins have caught up. Jerseys have continued to make progress, too, which is great to see. But going back to your core question, what do Holsteins look like today? They look a lot different than they did 20 years ago, and cows 20 years ago looked different than those 50 years ago. So I think we kind of went through 50 years of making cows really, really pretty and good for type. They were very, very functional. One of the ways I like to explain this topic of type is type is still important. It’s important to have animals that are functional. We don’t want big swing bags. We don’t want cows that can’t walk on their feet and legs, all of those things. But the genetics for those traits that made big swing bags and cows and udders that couldn’t be milked, they’re no longer present in the breed, so the average cow now is way better than functional. And so one of the questions is, once you get to this level of utility, what extra value do you have to be better than utility? So if you can do your job really well and you don’t get called or you don’t leave the herd because your udder is poor or because you can’t walk anymore or things like that, then we can focus on other traits, those feed efficiency traits, longevity traits, fire in the belly even. That’s a hard trait to measure of course, but you mentioned the jerseys kind of have, and even that one is associated with longevity. Of course, cows that live a long time in today’s commercial environments, they got that fire in the belly. They love doing what they do and they’re first to doing it every day, whether that’s eating, drinking, lying down and sleeping or coming to the parlor and milking. That’s a huge thing. And then I think when it comes to what they look like, they’re going to be smaller, they’re going to be more efficient, they’re going to be healthier, and they’re going to live a long time and they’re probably going to produce a lot higher component level in their milk than cows did 20 years ago. That story is actually quite incredible how different Holsteins are in terms of their component levels than what they were 20 years ago. Ted Jacoby III: Nate, it almost sounds like what you’re saying is that even though we’ve seen right now, one of the big topics is our heifer replacement numbers are too low and we’re not going to be able to continue to replace the cows that we’re sending to slaughter. But what you’re saying is the genetics are so good right now that that’s an easy leap for us to keep those better cows in the herd. And so the average lactations on the national herd, that’s just going to go up as the better cows stay in the herd and we continue to breed the beef, the cows at the lower end of the bell curve. And so what’s going on right now? This isn’t just kind of a 2, 3, 4 year phenomenon. This is probably going to go on for a while. Am I reading that correctly? Nate Zwald: Yeah, I think that’s partially true. First of all, the price of beef is really driving producers to have a different mindset towards how they make their money, right? Ted Jacoby III: Mm-hmm. Nate Zwald: The amount of profitability that’s coming from the beef side of dairy producers right now is astronomical on a percentage basis and in a total quantum basis, and it’s driving people’s mindset to be different. Now that said, I think it’s also important to recognize if we had more dairy replacements, that is going to drive the turnover rate. If there’s 9.4 million cows in the US right now, we can only replace as many as what we have heifers for. So if we had three and a half million heifers instead of 2.5 million heifers, we’d turn over that national herd quicker because the average heifer is better than the average cow. In every farm that you go to, if you say, “Well, if you had more heifers, what would you do?” Well, you’d call more of your crappy cows. And so I think that’s a real trade-off. So is it possible that you can keep more of your older cows that are later lactation and things? Sure. Are those cows better genetically than they were five years ago or 20 years ago? Absolutely, but there’s still this trade-off between making genetic progress and phenotypic progress, which both come from having more replacements available than what you can do if you short yourself on replacement. Everybody’s trying to dial that in right now and saying, “Well, I need exactly 318 dairy replacements a month, for example.” Well, is that the minimum? Is that the optimized number? Or is that the optimized number plus some extras, right? In case you have some challenges with your heifer operation or your calf operation or whatever. I’m a proponent of a few extras that allows you to do a couple things. It allows you to have options. You can sell springers, you can sell first lactation cows, or you can cull more cows. It’s an interesting dynamic and choice to make right now. The CFOs love to have the cash that’s associated with more beef calves, but what that does is it cuts off the options that you have two or three years down the line with what extra replacements can bring you. And so you can sell dairy replacement heifers, you can sell first lactation cows, or you can cull more animals that are older in the herd and need to be replaced with the next generation of better genetics and better phenotypes. I’m a big proponent of having a few extra replacements available versus cutting that to the bone and saying, “We only need X. I’d like it to be x plus 10%.” The other component is everybody that thinks they’re not going to grow in this business tends to find a way to add a few cows or figure out how to milk a few extra cows in their current facilities, and if they don’t have those replacements available internally, they’re pretty costly right now. Ted Jacoby III: Are we at the bottom of the trend yet where everybody is breeding to beef because the money’s just too good to pass up? Have you started to see anybody start to switch back to breeding more and get that plus 10% or do you think that trend is still running away from us the way it’s looked the last couple of years? Nate Zwald: Definitely, I’ve seen some people that have moved back towards more sex semen, especially those that think that they’re going to be in a unique position to grow and they value the genetic quality and superiority that they can produce internally versus buying effectively an unknown animal or worse yet somebody else’s bottom 10%. Ted Jacoby III: Right. Nate Zwald: If you’re a smart dairyman today and you’ve got extra animals available, you’re not selling your average anymore. With all the tools you have available, you’re literally going to sell something that you don’t want. And I don’t know too many dairymen that say, “Well, what I don’t want is my average or my best.” They don’t want their bottom end. Now, your bottom end could be better than somebody else’s average. That’s always an option. But really when you think about the progressive producers that think in their future plans they’re going to grow and they’ve seen the impact of what better genetics does, they want to grow with known genetics, known animals, and also a known background in feeding program versus just buying springers from wherever they can find them for a pretty astronomical price right now. Mike Brown: The bottom end though changes. If you’re breeding two thirds your herd to sex semen and a third to beef, that means that even your bottom end genetically is better than it used to be. Genomics has had a huge impact because we know before a bull can produce viable semen what his genetic merit estimate is. If you’re a professional in this, I’m an interested cow guy. How much has that increased that generation? But what are we seeing now in annual improvement in genetic value versus what we saw before genomics? Nate Zwald: Right now it’s reasonable to say the Holstein breed is making about a hundred dollars of genetic progress a year. Mike Brown: That’s amazing. Nate Zwald: Interestingly, when you think about that, a lot of the credit goes to the genetic companies for embracing the technology, and that probably doubled the genetic progress trend from say, $30 a year to 60 or 33 to 66, something like that. But that last third of the inflection point of why we’re making so much progress right now all has to do with the dairy farm community and dairy producers and how they’re implementing that technology in their operations. So we’ve seen more dairy replacement heifers going to feed that aren’t good, that are on the low end of the bell shaped curve genetically and/or don’t get pregnant on time because again, you can earn a lot of money from feeding those animals out. But we also just have the implementation of sex semen and beef back to that bell shaped curve that I talked about. And that last third, or say 25 to $30 a year is all because dairy producers on the female side, which traditionally we haven’t made any progress on because every cow got bred for the hope or the plan to make a dairy replacement. Half of them had males, half of them had females. That last third of the genetic progress that we’re making today to get to a hundred dollars a year is really because producers are breeding their poor animals to beef semen and not giving them an opportunity to have a dairy replacement calf and breeding their best to sex, ensuring that those best genetics have a dairy replacement female calf, and that’s really driven the genetic progress curve forward. To the degree that done correctly, a dairy producer can make more genetic progress because of how they implement that plan with genomic sex semen and beef semen in their dairy than they can through the bulls that they’re choosing from the AI organizations. And what that means is if you get a good genetic partner, they’ve got their bulls and they’ve got some bulls that are better than poor bulls, but that group of bulls is all really genetically pretty elite and preselected from the population to be a bull that produces semen that they’re going to market semen on. So there’s not as much spread between a genetic companies vast and average as there is in a dairy herd where you’ve got maybe a thousand cows and that spread between your best animal and your worst animal is like a thousand dollars genetically potentially. So that last part of genetic progress has really come from how these technologies and tools have been put to work on the dairy farm level. Ted Jacoby III: Nate, are any of the semen organizations using technology in CRISPR is the one that comes to mind to identify that semen which will produce higher butterfat, higher protein or something like that, or is it almost purely just selective, these are the better producers, we’re going to breed to these versus the lower producers? Nate Zwald: Yeah, so that technology is available. And interestingly now, some gene editing technology with CRISPR in pigs has been approved by the FDA now. So that’s an interesting step in the progress of how gene editing could be part of genetic progress in the future. But today, when we talk about bovines and we talk about what’s been done for genetic progress, that’s completely due to traditional selection methods, helping us with those traditional methods with genomics and with sex semen and things like that. When we think about butterfat for example, and the amazing amount of progress we’ve had for that, it’s simply selection multiple generations of the best butterfat producing genetics both on the male side and the female side, putting those together and making a tremendous amount of progress. And so when you think about gene editing, that potentially is another stepwise component where you could potentially use genetics from Jerseys and Holsteins or make a synthetic breed that could do that. Personally, I think that the impact of gene editing is, it’s really good to see how it’s been researched and how it’s been implemented to this point in the porcine side because they focus specifically on a disease, PRRS, which is a really bad virus for a pork producer, and they’ve gene edited the genome, so basically they’ve got a genetic vaccine for that disease. And so when you think about that from that perspective, if you can use genetic tools and technology to make animals healthier and happier and less likely to contract the disease or impossible for them to contract the disease, that’s a really good way to implement it. I like that application a lot better than trying to insert genes for productivity or longevity simply because it takes a long time to get disease resistance and potentially you’ll never achieve the ultimate disease resistance without a gene edit. But that’s exactly what they’ve been able to do in pigs, and it’s good to see that technology being used for that purpose versus some other potential applications. Ted Jacoby III: Everybody, we will be right back after these messages. Center Commercial (with music) If you’re a dairy producer or a cooperative looking for a better market for your milk or you’re a food manufacturer hoping to strengthen your dairy procurement or risk management strategy, please reach out to T.C. Jacoby & Co. We’ve been building worldwide relationships with all sides of the dairy supply chain for over 75 years. Tap into our expertise for unlimited free consultant support and we’ll develop a sales or procurement strategy that hits all of your targets. Please visit us online at www.jacoby.com to get started. Thanks for listening to The Milk Check. Back to the show. Ted Jacoby III: My next question for you is how much higher can butterfat percent in milk go based on genetics? You look at the graph over the last 25 years, it looks like a hockey stick. Is that hockey stick going to keep going up at the 2, 2.5% a year increase in butterfat or is there a plateau at some point? It’s just beyond a cow’s body’s ability to get any higher. Nate Zwald: Yeah, so I anticipated this question because I’m sure as we think about the amount of butterfat in the industry today and the fact that it takes a pound less of milk to make a pound of cheese versus what we all learned of 10 to 1 and things like this is really dramatic for the industry today, but as we calculate out or project out the next 10 years, it has a tremendous impact on what we do. And the short answer to your question, Ted, is that I think it’s going to continue, and if anything, it is likely to go faster versus slower over the next 10 years versus the last 10 because of everything I just talked about with genetics and genomics and the application of those things. And also, the other component when we think about breeding cows and what we said makes a better cow today and what we say makes up that hundred pounds of genetic progress we make each year, because we’re thinking about that more focused on keeping cows healthy and fertile as well as productive, what we’ve seen is a bit of a shift inherently that cows that are healthier and longer lasting, they probably aren’t going to make 180 pounds of milk per day, but they can make 140 with incredibly high component levels. And so we’ve seen more of the progress on production due to the component levels as opposed to the flow, what my western friends would call flow, which is just pounds of milk. So we’re actually making more progress to make a pound of fat or protein. It used to come from another pound of milk. Today, it’s coming from higher component levels in that milk, and that’s partially because we’ve really changed the selection goal in genetics to make cows healthier and longer lasting and more feed efficient. So when we think about more feed efficiency, a little bit smaller cow, a cow that’s going to drive that feed efficiency through, it’s potentially easier to make her more feed efficient by getting another pound of components through the component level in the milk versus another pound of fluid milk or water, and I think that’s having an impact. Mike Brown: Well, when you look at water for the majority of producers in the United States anymore, particularly in the growth areas, which we’re all manufacturing, water costs money. Every pound of water you make and don’t increase components, you’re basically wasting your money because you’re going to pay the hauler, you’re going to pay promotion on it, all these other things. It’s illogical. The market has sent signals to producers as well to focus on fat and protein, particularly fat with our strong butter markets. Another question I have is that we’ve had relatively low herd replacements. We continue to modestly grow our herd. We continue to see growth in overall productivity. How much of the genetic improvement are we seeing looking at lifetime merit, nighttime profitability, whatever you want to call it, how much of that is due to that improved longevity, and how much longer do you think genetically our cow is going to last compared to what they were 10, 15, 20 years ago, if you just look at the pure gains in productive life and other such things? Nate Zwald: So sometimes productive life, it’s a good topic to bring up, Mike, and it’s a good thing to think about because I do think that part of the reason we’re able to use so much beef semen is because cows can live longer, but how long they live is also a little bit of a choice, right? So of course cows can live longer. Mike Brown: For sure. Nate Zwald: Each individual dairy says, “Well, if she’s not pregnant, milking below this level of hopefully components, but too often it’s on fluid milk production, then she’s replaced with a new better cow.” If a herd expands, generally they lower that threshold and they keep more cows longer, and if they’re kind of full with lots of replacements, they’d raise that threshold and make their herd better quicker. I like to think about it as not only longevity, but fertility, longevity, health together, those things all kind of drive that longer lasting cow. Mike Brown: Productive life is a function of all those other things. Nate Zwald: That’s right. Mike Brown: Productive life is a decision. It’s the time the cow leaves the herd. Unless she dies, that’s going to be a dairy manager’s decision when she leaves, and we can continue to be able to have a smaller heifer population to keep the herds where they need to be. When you’ve got 15, $1,800 beef cows, you’ve got a thousand dollars bull calves right off the farm, the alternative source of income, particularly look at risk of raising a heifer versus that bird in the hand with that cash up front, it has completely changed. Select sex semen, and the beef market has basically given farmers a way to manage their milk supply. I think we have the genetic tools today that are helping them do that. We can continue to need less cows to maintain. If you’re one of these outstanding dairymen, we all enjoy so many of them now in this country. It’s just amazing. How many less heifers are they going to need to maintain that herd before we even grow? How many less are they going to need just to maintain their herds? Nate Zwald: Is it comprehensible that we could have less in the future years than we have today? I think that’s going to be driven by the beef prices. So if the beef price stays really, really high like it is today, and those producers that you’re talking about, Mike, continue to get upwards of 15% of their revenue from beef, they’re going to continue to drive that number as low as they can. I think the balancing point is if beef price moderates and goes down a little bit, then it’s going to be more advantageous for them to have a few extra heifers and replace a few more of those cows. What they can get by with and what’s optimized is a different question. So could we get by with even less heifers than we have right now, which is at an all time low, right? 2.5 million heifers expected to calve this year, that would basically tell us that we’re going to only be able to cull 2.5 million cows from the dairy herd if we stay at 9.4 million cows, and that would be an all time low for culling rates. Now, is that partially because of genetics? Absolutely. But I would contend it’s more because of the incredibly high beef price that those replacements didn’t get created, and therefore we can only replace 2.5 million cows. We’ve only got 2.5 million heifers there. Is it conceivable that we could go to 2.2 or 3 million heifers that calve in the next year? It’s conceivable. I wouldn’t say it would be a great plan because I think what ends up happening then is you just heat more cows that really should be replaced. To drive profitability of an operation, I want to have a certain turnover rate so I can continue to replace my worst producers or the animals that are the least productive in my herd with ones that are at least average productivity, if not better coming in as a virgin heifer. Mike Brown: Isn’t part of that, Nate, because of the improvements in fertility? All the things we’ve done, we have less involuntary culling. Nate Zwald: That is true. Mike Brown: You have less cows that have to leave the herd and you have more cows that you decide need to leave the herd. Nate Zwald: There’s no question that we get to make a lot more choices on what cows leave the herd than we used to, and that’s where that threshold comes in for pounds of milk or pounds of components where our herd manager or owner is deciding which cows to cull versus literally needing to cull certain cows because of functionality or because they’re just not a profitable production unit. So it’s a good situation to be able to say, “Well, we’re replacing a cow that had a certain level of profitability with a cow that we expect will have a higher level of profitability versus probably before where we had to cull some cows because they just weren’t profitable for one reason or another or weren’t healthy for that matter.” Mike Brown: Right. Nate Zwald: There’s also that component that we sometimes forget about. I mean, as a kid, there was more animals that just didn’t get through that post-fresh period, had larger calves. I mean, lots of problems that we’ve really bred some of that out of animals by extreme amount of genetic progress that we’ve made. Mike Brown: When I was in college, it was all about feed rations, and during the 80s, cow comfort really became a bigger part of the equation because we realized at some point only so much you could do to ration the cow, again, that happy healthy cow that you talked about, Nate. It’s so many different things, but to me, that’s been a big part of it too. We’re breeding healthier cows that people know how to take better care of. Nate Zwald: That’s exactly right. It’s the management cows get to live in today that do make them happier and healthier. Large scale production doesn’t always get held in the best light, but frankly, cows love living their life. If they’re in a great operation, they get to lay on sand bedding. They get feed all day. They get water all day. And we’ve done a lot of management as well, not only in the housing and the feeding part of it that you mentioned, Mike, but also in the knowledge side of things. You look at things like synchronization systems that give cows the best chance to have another calf on time and live another lactation. Those things extend the cow’s lives and that turnover rate as well. Ted Jacoby III: Nate, there used to be a saying among dairy farmers that you can only increase protein in the milk by increasing lactose in the milk. Is that still true today or has some of this new technology started to break that relationship? Nate Zwald: Some of it has started to break the relationship a little bit. The old saying was probably because the way to get more protein was to get more milk, and so more fluid milk came with more lactose, but now we’re seeing the component levels of protein go up. That doesn’t necessarily come with the lactose component level going up. So I think that’s broken a little bit, and it goes back to the same thing we see with fat. Pounds of milk used to have a higher correlation with pounds of fat and pounds of protein than they do today. So genetically, we’ve broken that relationship where you don’t need to breed for more milk to get more fat or more protein pounds, and of course, there’s always been this negative relationship with component levels, percentages, and pounds of milk genetically on an individual cow basis. So yeah, I think the short answer is we’re starting to break that, and that’s all comes back to because we’re focused in selecting specifically on those pounds of fat and protein in combination with that health and longevity that kind of drives a certain type of cow that is going to be more efficient at producing pounds of fat and protein through component levels than just flow or fluid milk. Mike Brown: You’re letting me live my old life. I’m enjoying this immensely. This is a great conversation. I’m back at Jersey. I feel like I’m talking with you if I’m enjoying it. Josh White: I figured this group would really enjoy, Nate. Nate, I really appreciate you taking the time to be on this call. It’s really fascinating stuff. You see it from afar from where we’re at, we talk about it, but having you drill down a little bit on this podcast today was, I think a lot of fun. Nate Zwald: Yeah, very good. Well, I enjoy it. I love talking about this stuff. It’s fun. It’s fun to see the impact of genetics firsthand, whether I’m a little kid thinking about the next generation versus the current generation or in today’s world where you think about the amount of progress we can make and how much better next generation is going to be than this generation and kind of quantifying that and thinking about how the definition of what a better animal is today is quite a bit different than what it was 20 years ago. So that’s all exciting stuff, really good for the industry. It’s a very sustainable message as well. When you think about what genetics is able to do, it’s always great to be able to say, “We’re making better animals faster.” Josh White: Right. It’s- Ted Jacoby III: All right, Nate, one final question. From the seat that you sit in, is there anything, any technology, any trend that you see evolving that maybe the general population in the dairy industry isn’t seeing that’s going to really affect dairy cows and milk production in the next 10 years? Nate Zwald: The next step, honestly, Ted, is seeing this progress from this bell shaped curve where dairy producers have bred their top half to sex semen in their bottom half to beef, and how that’s transformed the genetic progress curve and really just put us on a different playing field. The next step of that is using embryo technology where instead of getting all their replacements from the top half of their dairy herd, they start to get all their replacements from the top 5% and that technology is coming and it’s being implemented by more and more farms because the embryo technology has gotten better. And so this is a technology that can be implemented both to make better beef calves, which is pretty valuable as well. When you think about the impact of beef on the dairy herd, putting beef embryos that are not half beef, but potentially full blood beef, but also in the dairy replacements, so now you don’t need half of your cows to breed to sex semen to make your dairy replacements. You think back to that bell shaped curve. When you’re talking about the best 5% of your dairy cows, those are really elite compared to your average or your 50th percentile. So that could put genetic progress on a whole different playing field again, if that technology gets cost-effective enough to really be implemented across the industry on a wide scale basis like sex semen was. Ted Jacoby III: How far away from that do you think we are? How many years? Nate Zwald: We’re not that far. It’s probably the biggest threat to sex semen is embryos. There’s a lot of companies, including Progenco, my current company that’s working on that. You’ve got the long history companies as well that are doing that. And the key is that it’s being looked at now as less of a niche product than a niche system and more of a commercial opportunity to really embrace the embryo technology, I would say today. And so each form has to make their own decision on when it’s profitable to do so. But some really large scale producers have already been doing it for five plus years, and actually that’s the majority of the way they’re making their next generation of replacement. Something to think about today as opposed to how many years in the future. Ted Jacoby III: Wow. Mike Brown: It’s mind-boggling how quick you can make genetic progress, particularly with genomics, that you can identify at a very young age which animals have the most potential. Ted Jacoby III: Yeah, absolutely right. That’s pretty cool. Well, Nate, hey, this was an absolutely fantastic conversation. Thank you so much for joining us today. Really appreciate it. Really enjoyed the conversation. Thank you. Nate Zwald: Well, anytime guys, I appreciate and I enjoy the opportunity to talk about this kind of stuff. Mike Brown: Well, thank you very much. Josh White: Right. Thank you, Nate. Appreciate it again. Outro (with music): We welcome your participation in The Milk Check. If you have comments to share or questions you want answered, send an email to podcast@jacoby.com. Our theme music is composed and performed by Phil Keaggy. The Milk Check is a production of T.C. Jacoby & Co.

Tariff talk with Will Loux from the USDEC

It’s May 8th. Do you know where your tariff is? When the tariff winds shift, the Jacoby team is there to help you steer your strategy. Tune in to the latest episode of The Milk Check with special guest Will Loux from the U.S. Dairy Export Council, as we cover: Tariff tensions – How will ongoing trade talks between the U.S. and China impact dairy exports? Shifting trade strategies – How are global buyers adjusting to new tariff realities, and where does the U.S. stand in this complex landscape? Innovation and adaptation – What moves should U.S. producers and buyers make to adapt and thrive amidst tariff uncertainty? Don’t miss this conversation as we explore how tariffs are reshaping the dairy trade and what the future holds for U.S. dairy exports. Listen now to The Milk Check episode 77: Tariff talk with Will Loux from the U.S. Dairy Export Council Intro (with music): Welcome to The Milk Check, a podcast from TC Jacoby & Company where we share market insights and analysis with dairy farmers in mind. Ted Jacoby III: Welcome, everybody, to this week’s version of The Milk Check. It is May 1st, 2025. Once again, we’re going to revisit the topic of tariffs and international trade. And as everybody knows, it’s a shifting landscape. We have a special guest today, Will Loux from the US Dairy Export Council. Will is Senior Vice President of Global Economic Affairs. Will, thanks for joining us today. Will Loux: Thanks for having me, Ted. Good to be on. Ted Jacoby, III: We also have some of our usual suspects. Mike Brown, VP of Dairy Market Intelligence, Miguel Aragon, our director of Latin America Cheese Sales, and Josh White, our VP of Dairy Ingredients, and Tristan Sellentrup. Thanks for joining us, guys. So Will, we’re going to start in the obvious place. What is DC’s attitude about everything that’s going on in tariffs, especially with regards to dairy? Do you see anything changing anytime soon? Is there anything in the works? What’s the landscape as you see it? Will Loux: There’s a lot of uncertainty. We were talking about several different types of tariffs that are effectively going on because we have our bilateral relationship with China where we have very high tariffs both for products coming into the US and China has very high tariffs for our dairy products going out, but we also have the 10% universal tariff. We have the steel and aluminum tariff. We have the USMCA question marks between Canada, Mexico, everything else. So right, now I would say there’s about four different tariff balls being juggled all at once. And as far as where we’re going in DC, I think that’s anyone’s guess where obviously within national milk and the Export Council, very hard at work these days. Very grateful. Jaime and Shauna and Tony Rice on our trade policy team get to live this every day while I get to check out, I guess, what’s happening in the markets. Ted Jacoby, III: There’s been rumors that China and the US are talking and they’re trying to work out some things that could lower those tariffs. What are you hearing? Will Loux: Good question. Right now, at least what we’ve heard is there are talks, at least attempting to. I don’t know how far along these talks have gotten. When we look at the tariffs between the US and China right now, there probably needs to be some sort of path to de-escalation, but this is also something that when we had the first round of retaliatory tariffs between US and China, that lasted 18 months. So I personally don’t necessarily expect this to change overnight. That would surprise me. There are a lot of things that would surprise me these days in DC, but I would expect this to be in for the long haul. Whether it stays at 125%, I don’t know, but at the same time finding an off ramp for what seems to be at least somewhat of a strategy towards decoupling the US and China in a lot of ways continues to be at least very much forefront and likely to stick around. Ted Jacoby, III: One of the things that we’re curious about since roughly 17% of all of our weight production in one form or another has been going to China. And a lot of it goes to feed the pigs because 50% of all pigs in the world are in China, and keeping the Chinese population happy seems to be highly correlated to their access to pork. Is there any possibility that they’ll make exceptions to some of their tariff rules for things like whey permeate just to make sure that the pigs can continue to be fed and they keep their population happy? Will Loux: It’s certainly possible. They made that exception last time around with the last really six months effectively of that earlier trade war between the US and China. This time around, it is certainly possible but I’d also say China is also likely to seek alternate sources too just like they did last time. They can find at least some of that sweet way that they’re after from Europe. Turkey is now getting more involved. They still buy quite a bit from Belarus. Argentina ships them a decent amount of whey. They’ve also been stocking up a decent amount of whey before this happened that I think they’re actually sitting on ample stocks to at least see them through some of this disruption. Again, supplemented elsewhere. Lactose is probably the one where they buy about 70% of their lactose needs from the United States. Again, I don’t necessarily anticipate them giving exemptions. It’s part of a much bigger conversation as to whether they start giving those exemptions, but again, they’re going to look to Europe who’s really the only other game in town. Europe could pull back from their sales to New Zealand, Japan, India maybe as well. That’s their biggest market outside of China. I think there’ll be some trade shuffling a little bit within this too. Permeate, we are probably the main game in town here, but again, it’s is this cost-prohibitive when you’re adding 125% tariff at least right now? And can they make due, at least for the time being? Because Chinese consumption isn’t all that great either. So it’s not exactly like there’s this huge surge to build up the hog industry within China today either. Ted Jacoby, III: Josh, what are you hearing on the ground right now with our contacts in China? Josh White: Yeah, a lot of mixed messages. I think that generally speaking over the past few weeks, it’s been a lot of paralysis. Most were saying the situation’s fluid. It’s changing. We don’t maybe fully understand it. I think the industry well recognizes that a big lever to pull in trade discussions is probably not whey permeate and the trade. But as you mentioned a moment ago, it’s a pretty important ingredient to the Chinese pork industry, particularly the younger animals, and that’s a recovering industry after the swine flu issues that have previously experienced. So there was some optimism that let’s let the situation evolve, let’s see if we can come out of it if there’s some type of resolution, and we can conduct business as usual, just with a pause. A couple of things that have helped that most are reporting that at the end of last year around the time Trump won the election, the Chinese started to take action pretty quick. On some of the higher value products, they were out seeking alternatives, but on the ones, as Will mentioned, that they’re buying from the US like permeate, they did a little bit more stocking. We’re not talking stocking in the traditional sense of building large warehouses full but more days in inventory than they had been operating off of. At the same time, that sparked a price movement in the US and the whey permeate price increased significantly by about a dime and moved higher. Well, that allowed people to de-stock in the US as well. So we entered this issue with inventory space. Within the actual processing facilities, that’s being tested now. We’re right at the cusp where some people are now running into issues or they’re a week or two away from running into issues. Many processors did their best to extend that by going out and making some sales or front-loading other contracts to other parts of the world, or in some cases feeding it back to the dairy cows where it makes sense to do so. But that just buys a little bit of time. There’s a lot of this co-product, as we like to say, but effectively the by-product of the by-product that has to find a home. ADPI, for instance, has a task force out there right now that has been working on what are new innovative ways that we can use permeate, but none of those are going to be quick solutions. As a result, I heard at least this past week, was the ADPI trade show, a lot of people talking. I at least picked up on a few different processors that are resuming some shipments and working in conjunction with their Chinese customers to try to figure out how to make it work out of necessity, maybe not the pure economics of it. We haven’t experienced that capitulation point yet where we have to make a decision, but we’re really close to it for a lot of different US processors. Another thing that I would ask Will on is we had also picked up a headline this past week. It’s a headline. I haven’t studied it at all, but that Walmart told some of its Chinese vendors to resume shipments. Any insights to what might be happening there? Do we think that these trade relationships are just looking to bear the cost out of a need, or is there at least some hope that there’s some positive dialogue happening between the two countries? Will Loux: I didn’t see necessarily that headline or anything else. I would be surprised if Walmart has any inside knowledge as to what’s going on. I suspect it’s probably out of necessity simply because the US and China are highly integrated economies and a highly integrated supply chain. And for a company like Walmart, you can’t turn on a dime where you’re sourcing from. There are select products that maybe you can shift some of that production if that one company has a plant in Vietnam or elsewhere, but it’s not necessarily a one for one. So I would estimate that more out of necessity than anything else. And I think also if we look back to what happened in 2018 and ’19, dairy got caught in this, but as far as US-China trade, it was only really select products back then. But if we look at what happened in the US exports in China, it took a while before we really saw a hit outside of the low proteins. China was still buying at least for a while more high proteins and everything else, this time around because it’s much higher tariffs on both sides. I think that impact is coming much starker, but I do think the expectation, at least from retailers and everything else, is these will have to get passed on to the consumer at some point unless they can find an alternate source. And even then, they’d face a 10% tariff coming in unless there’s some US supply on those particular products. Josh White: Hey Ted, we went right to probably the worst or most painful part of that trade, talking about low value carbohydrates that are going into that industry, but it would be good to spend a minute on how everything else seems to be rationalizing. For instance, the whey proteins might be the second most impacted directly by this trade. China’s our largest export partner for higher protein whey products, but at the moment, because the alternatives such as Europe are so highly priced, it just seems to be shifting trade lane. The immediate impact was this could be potentially pretty bearish for US supplies of WPC 80 and WPI. That seems to be a little bit calmer over the past few weeks. We’re finding some alternative places to go. I’m not ready to celebrate that that just meant the world shifted its trade lanes and rebalanced. I think that similar to the remarks I made about permeate, it’s plausible that there was some internal inventory space that could be filled while we’re waiting on this situation to stabilize. But that being said, it doesn’t seem to be quite as disruptive on whey proteins as it is on whey permeate. My question for the group is that even less disruptive as we go across some of the other key products in the dairy complex, some of the other powders and the fats. Ted Jacoby, III: My reaction to that, Josh, is the big, big difference between protein space and the permeate space is I think there’s a lot of demand in protein that sits on the sidelines just because they either don’t have access to the protein they need to make certain products or it’s just too expensive for them to use. And so if the price just has to adjust a little bit to pull more people into that market or you’re suddenly giving someone access that didn’t have access before, there’s a realistic alternative domestically for a lot of that protein. And then internationally, whether that protein’s being sourced from Europe or it’s being sourced from Oceania or somewhere else, or if they’re pivoting and making, whether it’s a slight change to a milk protein concentrate instead of a whey protein concentrate or some other kind of protein, I think there’s just better options. And so with all the disruption going on, it seems calm relative to a situation like permeate where if you’re not going to China with that permeate, you’ve got to figure out how to make it go away because you really don’t have a realistic sale. Will Loux: And I’d agree with that. China, at least on the low protein side, so sweet whey and permeate, is a third of the global market. Southeast Asia is the only one close. That’s if you combine all the countries, there is no other real option for a lot of our permeate sweet whey. We can move. I think sweet whey, we have an opportunity to move some more into Southeast Asia, Mexico, maybe some other places, but I think permeate is the one that’s really hard to find another buyer for, or at least quickly, at the volumes we’re talking about. Proteins, they’re definitely our largest market, at least in the international one, but Japan’s not that far behind. Our teams also looked at the trade data and said there was some wonkiness in the unit value, so we actually think there’s a little bit less going to China than what the US Census and USDA reports. So there’s some of that going on too, that it is certainly our biggest market. I would expect Europe and New Zealand to be making a lot of calls to customers within China right now. But I think as you said, Ted, there’s plenty of opportunity for us to find other buyers, especially domestically right now. And then everything else, cheese, milk, powders, those we sent quite a bit really before 2018, we had already started to decouple from China after that, and our market share never really picked up, and China’s buying a lot less milk powder in the first place here too. So I think for us, those other markets don’t feel the hit from the China discussion. I think cheese probably feels much more of a hit from the overall economic implications of this is really where I think the cheese market will feel this more so than any actual direct sale impacts. Ted Jacoby, III: So when we’re talking about cheese, obviously China’s not our top market. I don’t even think it’s in our top 10 export markets for cheese. The press is so focused on what’s going on between the US and China when it comes to tariff talks. I honestly have lost track of what may be going on with some of the other countries we’re exporting to outside of the 10% addition that has been put everywhere. Are there any other countries that you guys are watching closely that have handed tariff rates more than that 10%, and is it causing some significant disruptions to our ability to export to them? Will Loux: Right now, effectively the 10% universal tariff is across the board because all those other reciprocal tariffs, including the incredibly high ones on places like Vietnam and elsewhere, were put on that 90-day pause until July. So at least for right now, it seems like most countries have stopped any retaliation or at least paused any sort of retaliation. Europe had a list that came out, but otherwise they had put a pause on that as well. The only exception to that is Canada, and this is from before and really was the first tariff action that came out was a 25% universal tariff on Canada and Mexico. But that also got paused, at least for all USMCA compliant products. On the whole, that doesn’t impact a whole lot. Canada has continued to retaliate against over-quota levels, but in practice, we’re not sending a ton over-quota into Canada today. So things like butter for import, for re-export, that is not being tariffed, and some of the whey products I believe are. But for the most part right now, the US is still outside of China able to export at the same tariff rates it was before. Now, I’m sure you have customers who are maybe asking questions or they’re changing their buying patterns out of an uncertainty when we get to July or elsewhere. We’ve started to hear rumblings of that, but at least for right now, it’s business as usual outside of that 10% or US consumers. Ted Jacoby, III: Miguel, is that what you’re sensing from our cheese customers internationally? Miguel Aragón: Yes, indeed. We were at CheeseCon a couple of weeks ago. We were at ATPI just last week. And at ATPI, we had conversations with a lot of customers from Mexico and the number one issue was tariffs, tariffs, tariffs. That’s what everyone wanted to talk about first. In regards to patterns of purchasing, they’re going hand-to-mouth, immediate shipment for immediate purchase. That seems to be how things are happening right now. However, we have two issues helping us not to disrupt the trade within Mexico, mainly Mexico. We haven’t gone above 1.80 a pound and cheese, and the Mexican peso is now 19.6 for the last couple of weeks. That is helping them. That is helping us get rid of product. But the minute we see 21 pesos per dollar, that’ll be a different story. If you remember we had in one of our podcasts a month ago or something like that, we were talking about that they were expecting us as US suppliers to keep a lid on prices. So far, so good. In there, taking advantage. I have to take my hats off to the US DEC because they have helped us get into other markets, Central America, South America, where the disruption that is happening right now and it’s moving European product to other channels is given us a chance for those markets to actually taste US products, taste cheese, get a feel for it. Just like it happened with Mexico, I see it happening in Central America. I see it happening in Colombia, Peru, Chile, and we have to take advantage of that right now. With everything that is happening, at least something positive is coming out of it. Who knows how it’s going to last, but hey. Ted Jacoby, III: Everybody, we will be right back after these messages. If you’re a dairy producer or a cooperative looking for a better market for your milk, or you’re a food manufacturer hoping to strengthen your dairy procurement or risk management strategy, please reach out to TC Jacoby & Company. We’ve been building worldwide relationships with all sides of the dairy supply chain for over 75 years. Tap into our expertise for unlimited free consulting support and we’ll develop a sales or procurement strategy that hits all of your targets. Please visit us online at www.jacoby.com to get started. Thanks for listening to The Milk Check. Back to the show. Miguel, you’ve just taken me by surprise. What you’re saying is all this disruption, there’s a silver lining and it’s actually creating some opportunities for US exporters in dairy right now> Miguel Aragón: That is correct. That is correct. Some of the conversations we had with people from New Zealand is that they are saying the US producers are cheaper right now in cheese. We’re going to go ahead and produce more whole milk powder, put our fat on our milk and other products. That is giving us an opening. That’s a silver lining right now. We need to take advantage of it. If we go above $2 again in cheese and then the exchange rates start going all crazy, that’ll be a different story. Right now, we’re moving and we’re moving fast to try to capture that market for the long run. Ted Jacoby, III: Will, what are some of your other members saying? Are they feeling pretty good about how exports are going so far this year with all the chaos in DC regarding tariffs? Will Loux: In some ways it is, at least for right now, business as usual. The tariffs can be so overwhelming in a lot of ways. We see it on the ingredient side. But as far as cheese exports go, and we’re even getting a lot more inquiries for butter right now too, just given our big price spread compared to Europe and New Zealand, I would say those two exports are going to look really strong as we go forward, and I think we’ve already seen that. There’s probably some more questions maybe around whether we keep up the incredible growth that we’ve seen to Mexico because the last two years, Mexico has outpaced the domestic market in growth, like just total aggregate growth. So whether that continues, I’m not sure, but I think as Miguel said, Central America, the Caribbean looks really good. I think we’re moving more to Australia as well. Another one of our key markets, Japan arguably the most competitive cheese market in the world that we’re seeing sales pick up to as well. So on the cheese side, we look pretty good. I would say butter’s going to have a pretty nice year just by necessity as much as anything else. The ingredient side, we one don’t have that much powder to export in the first place. We saw pretty weak sales to Southeast Asia, but that was more a function of pricing than anything else. That’s where I think we’ll see somewhere of the weakness. But cheese, butter, our fats really look good. Proteins, I think, will be somewhat mixed. It’ll depend on the price and demand for places like Japan, Korea, Southeast Asia, and some of that trade between us and Europe and how that looks on price, because we should be exporting it to Europe right now too. Ted Jacoby, III: That’s true, especially when it comes to butter. Will Loux: Yeah. Ted Jacoby, III: Okay. Well, from where you sit in DC, is there anything that you think our industry needs to be talking more about that’s going on right now that’s falling under the radar because everybody’s so focused on tariffs and specifically China? Will Loux: Yeah, there’s probably two things that we’re starting to watch a little bit more, and the first one I’ll say is what are the implications of a 10% tariff on European product coming into the United States and really what is that impact on both Europe sales to the US as well as their product mix? Because last time around, the US consumer was in a pretty good place. We didn’t see much of a dip when we place tariffs on Europe over the Airbus disagreement. This time around, I am curious. US consumer is pulling back on a lot of things. Do they pull back from your Irish butters? Do they pull back from your specialty cheese, et cetera? And does that help boost at least some of our demand domestically? That butter demand has been okay, but certainly that would help tighten the screen market cheese. I would say there’s an opportunity there. I think the one thing we’ve pointed out to watch is if Europe doesn’t sell the US or doesn’t sell specialty cheese abroad, they tend to put a lot more into their Gouda and into their mozzarella. It is a delayed reaction, but effectively if the Italian cheese-makers aren’t making that specialty, the milk ends up in Germany as Gouda or something else. So that is something to watch on that front. The other one is probably more longer term at the export council and everything else that we’re watching is everyone’s been talking about the fat percentage in milk, the growth in that fat to protein ratio. What are the implications? I’m probably on the side of, at least today, I don’t actually think we have a fat problem. I think we have an American-type cheese problem that would normally be absorbing a lot of this cream, at least when we look at the data. But with milk production now picking up, we might have a cream problem and an American-type cheese issue. So then our question is do we need to start thinking about other ways to export fat? We really don’t have a release valve for our butter when we get long on cream. We export a little bit to Mexico, but frankly we’ve got a smaller market share than New Zealand and Mexico when it comes to butter. They are dominant in AMF as well. That’s a region that in general, we should be price competitive on with tariffs and freight. That’s something we’re watching pretty closely. The same would hold true for Central America. The Middle East has traditionally been our release valve for butter. We’ve often moved a lot of butter. The white butter is preferred in a lot of ways or can be used in processed cheese, but their butter demand is half of what it was 10 years ago because they’ve switched to palm. So we need to go develop probably some new release valves even if we think this fat market’s going to tighten up because I think what we see today is the US industry takes a long time to turn the ship on fat from making 80 domestic style towards 82 unsalted export style, so how can we speed that up to tighten the cream market so it doesn’t take as long to turn this ship is something we’re talking about, especially with these components growing at the rate they’re growing. So there’s a lot of things we’re watching beyond just the tariffs that just keeps us pretty busy on the day job and everything else. Ted Jacoby, III: Well, I have to say, when it comes to butter fat, I think, Will, you and I are thinking along the same lines. I don’t think this trend with higher butter fat percentages in milk is going away anytime soon and there’s going to be a certain point, maybe we’ve already reached it, where we’ve reached a tipping point and we have more butter than we know what to do with in the US and we’re going to have to find those export places for. You mentioned palm oil in the Middle East. What’s the relative price of palm oil relative to butter? And at what point do you think they start to switch back? Will Loux: Oh, that’s a good question. I looked at the palm oil price the other day. It’s still fat to fat, still cheaper than butter. Really what happened is Europe and New Zealand butter got insanely expensive. We’re still sitting north of $2. We are a great value buy if you are specifically wanting butter. It’s not that we’re going to go take a ton of share from palm necessarily. We did see that actually a little bit. This would’ve been during the inflation run up back up in ’21. We more saw it in the fact that natural cheese took share from analog cheese. That was where we beat out palm because also it’s a much better product. And so that I think is where we saw it. This time around, I haven’t heard a ton of switching back. Butter has traditionally been the most price elastic product on the international market because it is the most easily substitutable one. We hadn’t seen a ton of fat demand growth over the past few years. China has really been the one who’s been growing while the Middle East has declined, and they’ve basically canceled each other out. And so the opportunity is where else can we grow it, especially as incomes rise where a higher quality fat is there, as well as also where’s the cold chain for it? So for now, I think butter is still that premium fat, at least right now in the marketplace. Mike Brown: You talk about the cheddar cheese is going to absorb the fat. The challenge we have now is we raise fat so much faster than protein is extra fat, even if you’re making full fat cheddars for most cheese-makers. So we are still going to be spinning off some extra fat and that’s a challenge for them. They’re trying to figure out how to best market that depending on their volumes of it, but I think you can’t just assume that’s going to absorb into that, and that’s the challenge we have. Back to the question of butter and butter fat and the demand for 82 versus 80, at what point does a world, at least as an ingredient say, “Well, US 80% butter is a lot cheaper per pound of fat even though it’s 2% lower.” What do we have to do to get world buyers more interested? Because 2% fat is different, but it’s not that different. Will Loux: I think we’re already starting to see it. We’ve heard a couple folks who are just launching butter with 80% fat and see enough consumers notice. I’d also say depending on the application, it’s really just a price point. They may not need the 82%. They can buy it. The question is the salt is probably the bigger thing. If you’ve got 80% salted versus an 80 unsalted, it’s probably the easier thing where there are some applications where salt’s already in there and that’s perfectly fine. I’m thinking of maybe some chocolates or something else that that could work well. The salt may be the bigger challenge perhaps in our base butter than necessarily the difference in fat content. Josh White: I also think moisture, moisture because I think that there’s restrictions going into Europe that moisture is our limiting factor that they can’t bring the product in above a 16% moisture, and so that’s created some problem to where I think there’s a lot of inward processing applications and processing applications that can deal with the drop in fat, but it’s restricted because we exceed the moisture requirement. So if there was a way to have 80% fat with the 16 max moisture, I’m pretty sure we’d be loading boats tomorrow for Europe. Mike Brown: It’d be pretty salty butter, Josh, if you would. Josh White: Right. Let’s some sugar in it. Mike Brown: So it’s a regulatory problem, not a users’ ingredient because most products that are going to use butter probably use some other kind of moisture in them, water, milk, whatever it might be. Ted Jacoby, III: Sounds to me it’s a non-tariff trade barrier, isn’t it? Josh White: With enough time, people will figure it out, right? It’s just like anything else. We know how much confectionary blends and things like that exist today coming into the US. That’s another area where this fat situation starts to adjust itself. In the event that we’re surplus fat or cheaper fat, then a lot less of these confectionary blends will come into the US from New Zealand. New Zealand and other markets will shift that fat elsewhere and will keep more at home. It’s just like anything else. The gap gets filled in so many spots other than just butter as well. Will Loux: Even whole milk powder should be pretty cost-competitive, right? Josh White: Right. Will Loux: Yeah. I think it’s something we may see pick up at least a little bit in the coming months based on that margin if you’ve got the ability to flex. Ted Jacoby, III: Well, speaking of whole milk powder, it seems like New Zealand has switched away from making as much whole milk powder as they used to. Will, do you think the market is out there for them to switch back? Because one of the things that I have to wonder is if butter gets cheap enough, both in the US and even in Europe, it’s going to put pressure on New Zealand to make more whole milk powder just to make sure they clear that fat, but they have to have a home for it. Will Loux: I think the question’s always on China. We’re back to this again. To me, there seemed to be enough rumblings that China is at least buying a little bit more. I still think China is structurally investing in their milk supply and have reached really a tipping point in that, but I think temporarily with their reductions in milk production, I think they may need a little bit more whole milk powder this year. I think there’s enough smoke around that to say that China will buy more. I don’t think they’re getting anywhere close to the highs that they had a few years ago though either. I think it’s just improved from this low end that we’re at. It’s also the other markets that New Zealand tends to ship whole milk powder to Middle East, North Africa. They are really dropping off. We saw a lot weaker demand from Algeria so far this year and we’ve seen okay demand from Southeast Asia, but not as good as actually I was expecting. And then you’ve also got the Argentines and Uruguay who Brazil’s not buying as much this year either, so they’re a little bit more active. So I think New Zealand will make a little bit more of a switch to whole milk powder to feed China, but it may just come at the expense of the Middle East. When I look bigger picture, I think New Zealand at a certain point is going to need to decide what they do with those old whole milk powder dryers. Their milk production is stable, but I don’t know if long-term that’s going to be the best return. I think you’ve already seen them invest in proteins and level up their skim side, and I would expect that to continue at least right now. And for now, China really wants their fat. They really want the cream coming out of New Zealand. They really want the butter. AMF is not quite as strong, but those two, butter and cream, to China are actually still running really hot. I would expect New Zealand as much as they can flex because they only have so much flexibility in their flush, I would expect them to keep going towards that butter S&P because their butter value is still a lot higher than where ours is right now and more comparable to Europe. And they also have additional access to Europe now, too, that they got as well recently. So I think those two things will make them probably keep going in that stream before switching wholesale back to whole milk powder. Josh White: Is there any product that feels heavy globally right now? I understand that we’ve talked about whey permeate and its disruption short term, but is there any product that we feel like the world market is well stocked in? I have the view that for three years in running now, we’re running on pretty short global inventories of most dairy products, and we’ve been able to do that because global demand has been lackluster. But any spark in that, I don’t know how ready the global market is to respond to that. Will Loux: I would agree outside of the permeate side of the conversation that we’ve already discussed, I don’t know that anyone’s really sitting on heavy inventories anywhere. This has really been an era of under-demand and under-supply creating this balanced market. I think skimmed milk powder has been the one that I was hoping for more upside on. We’ll see what Mexico looks like this year and otherwise we tended to ship quite a bit of non-fat. If cheese got retaliated against, we’d expect non-fat shipments to Mexico to pick up. There are some of those trade-offs. Indonesia’s got a school milk program. China’s buying a little bit more. It’s still tough for me to really get to a super strong demand outlook for milk powder. I can come up with specific examples, but it’s tough for me to get too bullish on it. I think quietly what we’ve seen here is over the last six to nine months, our metric of global dairy trade, which had spent three years basically languishing after China’s pullback, is now actually growing again at the same rate it was before COVID. So it’s 2 to 3%. It’s not a super bullish environment, but it’s a whole lot better than what we saw before. It coincides nicely with US milk production. Picking back up here, I think the question is how much can this last. And a lot of it’s being driven by China coming back, so I think these are the things we’re watching is there’s not a cushion right now in the market for most products from an inventory perspective. The question is how much do you believe demand’s coming back, and is supply coming back at the same time? Josh White: I wonder if the EU fat situation and the global protein situation might be some early indicators that you better make sure your supply’s secured. And you add to that disruption over global trade and how easily accessible it will be to get the products you need. Coming off of a period where people were able to return back to the just-in-time inventory model, I’m wondering if this trade disruption doesn’t change some business purchasing strategies a little bit. And then I would also be curious if anyone has a view on what the current trade environment may have from a logistical impact. We have a pretty real-world example of what happens when you stop trade flows coming out of COVID. We know what the outcome of that was afterwards when containers were just in the wrong parts of the world when people wanted to resume trade flows. Yeah, I think that is there an opinion across the group on what happens if we don’t reconcile with China anytime soon? And also, what happens if we do reconcile to our ability to execute logistically to the global demand? Ted Jacoby, III: Will, has the US DEC had any conversations with anybody about potential container logistical disruptions? Will Loux: Yeah, there’s a few different pieces here that I think is right. So one is on that inventory cushion, so going back to your question, Josh, that would be the logical move if folks believe that there is more disruption and demand is picking back up. I have broader questions around what the global economy looks like in this environment if we don’t sort this out in the US, which frankly even when we had high inflation, was really the best performing major economy in the world over the last few years. If we’re not driving this forward, what does that demand look like? But especially if interest rates come down, that calculation on inventory could change a lot as to whether you want to hold longer days in inventory. On China and on logistics and everything else, I think there’s two pieces of this, is one, just the implications of less bilateral trade within China, but then also the new rules around Chinese vessels or carriers with Chinese vessels. This is still a highly fluid situation with where this is. I think I ran a back of the envelope calculation as to where this is of, well, it would cost potentially an extra half a cent per pound starting out, maybe picking up from there per container, or half a cent per pound of products within those berths basically being passed back to exporters. If you have fewer port calls, if you have fewer containers, I think there is a lot of uncertainty within this market. I think we’re starting to hear it from our members already, questions and uncertainty. I don’t know if we’ve seen the full impact of this, but I think this is something that folks are watching and it’s something US DEC unfortunately had to become an expert in pretty quick. My colleague, Tony Rice, has spent a lot of time becoming an expert on logistics, working with a lot of the folks within USG, the US government to really understand what’s going on there. So US DEC is unfortunately ready for this, but we had the practice from three years ago to assess what’s going on. Mike Brown: We were talking about milk and whey proteins in the trade and those in the world, finding new markets or potential new markets, from my experience in manufacturing, you’re not going to take a spot market away and introduce a product to change your production or your sales strategy without making sure it’s longer term. If someone’s not taking those proteins, they get diverted to a new market. That could change not just who the buyer is, but long-term strategy on products. If China wants to continue these fights and they don’t take the product, they could lose it long-term and not get it back to lose the supply available. And whether New Zealand makes more proteins and makes that available long-term or what it might be, but there’s some implications just from the standpoint of a manufacturer’s decision. They aren’t going to take spot protein without knowing they’ve got a ready supply longer term. I would agree. Ted Jacoby, III: Oh, yeah. Are you all seeing anything within Mexico itself, and this is maybe a question for Miguel, how are consumers in Mexico reacting to a lot of this? Mexico’s economy has been one of the best performers along with the United States. I think those two go hand in hand, and we have, as an industry, developed incredibly close partnerships with our friends in Mexico. How are Mexican consumers watching what’s happening? Certainly the tariffs are a piece of this, but I also think of things like remittances going to Mexico as well, and some of these other pieces. What is that outlook and what does it mean for our demand from our biggest trading partner and closest partner? Miguel Aragón: That’s interesting that you mentioned that because remittances have taken a hit from the beginning of this administration. A lot of people going back to Mexico instead of staying put here, we could see agricultural production here. At the same time, given that Mexico has, and I’m just talking about cheese in this case, has that flexibility of going from natural cheese to analog cheese making, and given that we as an industry have different lines of production, we have number one product, we have under-grade product and we have trim, for example, and milk powder. Mexico has the ability to go from using all number one product to actually increasing their production of analog cheese product, which it goes to that market that doesn’t have that much money to get cheese. We’ve seen that flow between products reflected in the marketplace. The interesting part is that just like in Canada and Mexico, when I was visiting there, you saw the pushback on getting US products, not as bad as in Canada. Also, you have agricultural products that are not identified of, oh, that cheese is coming from the US. That milk powder is coming from the US. Those products are coming from the US. It’s other things, so we’ve been lucky that close proximity makes products move really fast, so there is no time to identify at least food products as coming from the US and we’re going to reject them. There is a pushback. There is also lack of resources, but so far, so good. I don’t know by the time July comes if we see a big disruption, but so far so good. Ted Jacoby, III: Miguel, our Mexican consumers, is there an anger in Mexico regarding the US and the Trump administration, or are they going with the flow right now? Miguel Aragón: I would say there is an anger, but I have to think that the president, the Mexican president, she has handled the situation so good in the Mexico side that it hasn’t exploded. You do have a nationalistic team right now going in Mexico, but it’s more like less produce in Mexico. The US is our biggest commercial partner, so we have to live with both of those things. We can’t move. The US is not going to move. We’re joined forever despite what our administration thinks or says, or despite what nationalistic views in Mexico are. We’re joined forever. So we just got to live with it. This president has made a lot of efforts to direct that anger or that energy into something more positive, as in, all right, we got to produce more in Mexico. Ted Jacoby, III: Cool. No, that makes a lot of sense. Well, I’ll end with this. True or false? Despite tariffs, we’re competitive globally on every dairy component for the first time in recent history. Is that a true statement? Will Loux: Seems like a true statement to me. The US has, I think, a great opportunity here. The question is what else is going on? I feel pretty good, at least where we’re at today. Talk to me again in a week and who knows what’s happening. Ted Jacoby, III: I agree. All right, Will. Hey, thank you so much for joining us. This was a great discussion. I think our listeners will enjoy hearing everything that you had to say, and I think that last comment really sums it all up. One of the things that we’re really losing in all this chatter about tariffs lately is we’re continuing to export a lot of dairy products to every other country in the world besides China, in spite of everything that’s going on, because we’re competitive price-wise and because we make a good product. That gives me a lot of hope for the future of the US dairy industry. Thanks everybody for joining us today. Have a great weekend. Thanks, everyone. Thanks again, Will. Will Loux: Oh, this was fun. Sounds like a good time. Mike Brown: All right, thanks. Josh White: Thanks, Will. Mike Brown: Great. Will Loux: All right. Yeah, of course. Mike Brown: Nice to meet you, Will. Outro (with music) We welcome your participation in The Milk Check. If you have comments to share or questions you want answered, send an email to podcast@jacoby.com. Our theme music is composed and performed by Phil Keagy. The Milk Check is a production of TC Jacoby & Company. Ted Jacoby, III: All right.