Time for the dairy industry to get tough with processors

Monday, February 28, 2011

So says Canada's number one ice cream maker, arguing that processors who use vegetable oil for frozen desserts shouldn't benefit from program rebates, incentives and the use of blue cow logo

by SUSAN MANN

If dairy farmers want stronger markets, they should encourage their organizations to get tough with processors using non-milk ingredients for substitute products.

So says Ashley Chapman, vice-president of Chapman's Ice Cream Ltd., who argues that processors making frozen desserts using vegetable oil instead of 100 per cent Canadian milk, cream or dairy ingredients are getting dairy industry program rebates, incentives and the ability to use the blue cow logo. He thinks that's wrong. "They (processors) are not judged heavily enough by farmer organizations on the fact that they're switching out of dairy for vegetable oil."  

Chapman's, which has always been committed to using all-Canadian dairy ingredients, has become the number one ice cream maker in Canada through no real action on its part, he explains. It vaulted to the top spot, which had been traded back and forth between Nestle and Unilever, because most of what the other companies are making now is frozen dessert.

According to a discussion paper released at last year's Dairy Farmers of Ontario (DFO) spring regional meetings, frozen desserts made from palm oil have acquired 30 per cent of the total domestic and imported ice cream market since being introduced in 2007. But that could change. Chapman says that, according to ACNielsen data collected for 16 weeks last summer, ice cream sales were up by 10 per cent, while frozen dessert sales were down by 10 per cent.

The war hasn't been won yet, though. Chapman says that, to win the war, farmer organizations must take a tough stand with processors using vegetable oils for frozen desserts and exclude them from rebate and incentive programs and from using the blue cow logo.

In 2009, Dairy Farmers of Canada launched an advertising campaign explaining the differences between real ice cream and frozen dessert. The ads haven't stopped, but Chapman doesn't think farmers are taking the matter seriously enough.

"This is the biggest issue that they are going to have to face in their entire lives," he says. Nor does it just affect ice cream. Another product involved is chocolate milk drinks. "Try finding one that's actually made with a decent amount of dairy and you'll be looking for a very long time."

Chapman says it's hard for his company to compete with the large, multinational processors when he pays $5 a kilogram for butterfat to make ice cream and they're paying $1.50 a kilogram for vegetable oil to manufacture frozen dessert.

While Chapman says he doesn't want to make frozen dessert, one day he may have to just to stay competitive. When Chapman's rebuilt its Markdale ice cream production facility, which was destroyed by fire in September 2009, the company installed oil tanks and oil production equipment, just in case.

For its part, DFO projects the Canadian dairy industry's overall growth rate during the next 10 years to be around one per cent annually, about the same as the population growth rate. With strong competition coming from substitute products, it's clear the industry will have to "make intelligent use of competitive pricing and promotion initiatives, while avoiding any cannibalization of our higher returns 'domestic classes,'" says a milk board discussion paper.

DFO senior economist Phil Cairns says that this doesn't mean there won't be price increases. Instead the statement "should be interpreted as we have to price in recognition of where competition may be more present in certain markets than in others."

John Palmer, DFO board member for Oxford and Waterloo and a member of the markets and allocation committee, says he'd like to see more growth in the industry. One of the best ways to achieve it is to increase the per capita consumption of all dairy products.

"This would have to be done by promoting the health and nutrition benefits of consuming more dairy products," he explains.

According to Statistics Canada figures for per capita consumption of milk products for 2009, the most recent numbers available, are 57.22 litres for fluid milk, 9.99 kilograms for cheese and 5.47 litres for yogurt.

One area that's been proven to help the industry grow is providing products for the ethnic market. Four years ago, DFO hired an ethnic marketing specialist, Nissim Avraham, to help develop this market. Almost one per cent of the quota now held by farmers in the five provinces of the Eastern Canadian milk pool (Ontario, Quebec, Nova Scotia, New Brunswick and Prince Edward Island) goes to ethnic markets. "I expect over the years that will grow as we adapt to providing ethnic groups with products that are more what they're used to," he says.

The same opportunity exists for new and innovative products and packaging. The growth in innovative products, such as cheese strings and drinkable yogurt, won't be large but it could be steady.

The biggest opportunity to strengthen markets is to address "the ever-increasing importation of ingredients and products that come into our domestic market," Palmer says. Filling those markets means dairy farmers will have to be price-competitive and take a decrease in their blend price. "But it will give us more market and therefore more quota," he says, adding that "it could be the total revenue on farm would stay the same."

Taking a decrease in their blend price may not be politically acceptable to all farmers, Palmer says, noting that farmers will have decide if they'd be willing to go this route.

There are opportunities to replace some of the solids-non-fat ingredients now being imported and used in the domestic market and to provide butterfat coming in under an import for re-export program. "I believe there's an opportunity there that would give us more growth than any other area if we were prepared to take as small decrease in our blend price."

Palmer says there hasn't been sufficient growth in the industry during the past 20 years and "I think we'll need more growth in the next 20 years for our Canadian dairy industry to be viable and sustainable."  BF