Sales of cow's milk have been declining for years. And its volatile prices – determined by an archaic system – express the dairy farmers and processors with every stroke. Pressure has made it difficult for milk producers and buyers to compete with vertically integrated retailers like Kroger, who process milk themselves.

All in all, the dairy business seems to be collapsing. But that's not the case, argued Marin Bozic, an assistant professor at the Faculty of Applied Economics at the University of Minnesota.

Milk doesn't die. It continues to develop.

"It is painful," he said, adding, "some business models will no longer be sustainable." Ultimately, however, this period will lead to a healthier system that responds better to the changing needs of consumers.

There are bright spots in the industry. While American consumers have cooled off traditional milk, sales of lactose-free and grassy milk are increasing. The recent acquisition of a young, innovative dairy brand by Coca-Cola indicates that growth opportunities continue to exist.

A complicated pricing scheme

Borden dairy products from 1953.

The government has regulated milk prices since the 1930s.

Nowadays most processors have to pay a fixed minimum price for liquid milk. This price is set based, among other things, on the prices of butter, cheese, skim milk and dry whey.

Different prices apply to milk when used as an ingredient in ice cream, yogurt, cheese, butter and other dairy products, rather than being sold directly to consumers like liquid milk.

"There is an old saying in the dairy industry that only five people in the world know how milk prices are calculated in the United States and four of them are dead," said John Newton, chief economist at the Farm Bureau, a lobby group. "Milk pricing is very, very complex."

The minimum milk prices are set by the government due to the particular constraints of the milk sector, Bozic said. Milk is perishable, so producers cannot strategically replenish their product if consumer requirements change. And cheese, a more durable product, changes with age. A floor cap helps farmers stay in an unpredictable deal and provides a lifeline when needed.

Some farmers have been unable to survive the recent cycle of low milk prices, which has been dragging on longer than usual due to, among other things, a global milk flood and the trade war.

The system is "worth checking," said Borden CEO Tony Sarsam. The many regulations "exacerbate … the peaks and valleys because there are so many different interventions." Borden pointed to the recent rise in milk prices as one of the reasons for his decision to file for bankruptcy.

Due to the pricing scheme, the retail price of liquid milk does not respond to consumer demand for milk. Instead, it is, among other things, more closely tied to consumer demand for dairy products such as cheese and butter. So if milk processors like Borden or Dean "have to pay the same price for milk … no matter how high the demand is, no matter what the supply is – I think that's messy. I think it's inefficient," Newton said.

Inefficient or not, price conventions began long before milk processors began to buckle. If demand remained constant, the system would work better.

Vertically integrated competitors

Milk edges are less important for a grocer like Kroger than for milk processors or dairy farmers.

Retailers such as Albertsons, Kroger and Walmart are increasingly processing their own milk.

Kroger operates 17 dairies. Albertsons had seven milk factories in February 2019. And Walmart opened a milk processing plant in Fort Wayne, Indiana in 2018.

For Dean Foods, the move from Walmart was devastating, although the plant serves only a fraction of all Walmart stores. Dean said he missed selling 55 million gallons of milk in the second half of 2018 because of the lost Walmart business.

Although milk consumption has decreased, most Americans still like to have milk in the fridge. For grocery stores, this means that milk is a good investment – even if higher input costs lead to lower margins or losses, Sarsam argues.

When groceries advertise good deals on milk, they can bring consumers to the stores. While raw milk prices fluctuate and send shocks from the dairy industry, milk prices on retail shelves have remained fairly stable. In November 2019, a gallon of fresh whole milk cost an average of $ 3.19. That's 35 cents more than the average of $ 2.84 in July 2018 – the lowest price in over a decade.

Processors, on the other hand, are affected by low-margin products. Borden led the competition from grocery stores with its own dairies when he filed for bankruptcy.

However, the milk processor still has a bright future ahead.

Borden plans to continue the insolvency proceedings as usual. Sarsam notes that despite the tough competitive environment, Borden has had success with its innovative products, including its lactose-free milk and kid builder line, which contains less sugar than typical flavored milk and more protein than normal milk. The main reason for Borden's bankruptcy, Sarsam said, is that a strong investment from a private equity firm in 2017 put too much debt on the company.

"There's a point of view out there that says," Hey, everything in the industry is half empty. "We look at it and say," God, that Glass is half full. "We see all kinds of growth areas."

The future of milk

Coca-Cola acquired Fairlife in January.

There is no question that interest in milk alternatives has increased. During this period from November to November, balloon oat milk sales rose 662% and more established almond milk sales increased about 6%, according to Nielsen.

But there is a lot more money in milk.

Annual oat milk sales were approximately $ 60 million, and vegetable milk totaled approximately $ 1.9 billion, according to Nielsen data. Cow's milk sales during the same period were approximately $ 12 billion.

A closer look at the sales data shows that total milk sales are declining while sales of certain types of milk are increasing.

For example, sales of flavored whole milk in the United States increased 8.9% in the first ten months of last year, according to the USDA. During this period, organic whole milk sales rose by 4.4%.

Nielsen data show that sales of lactose-reduced or lactose-free milk increased by 11% between November 2018 and November 2019. Sales of grass-fed milk increased by 51% during this period.

This specialty milk niche is attractive for Coke (KO),

In 2012, Coca-Cola started with a partner Fairlife, a special brand for dairy products. On January 3, Coca-Cola announced that it would fully take over the dairy.

Fairlife sells lactose-free milk that contains less sugar and more protein than normal milk. An omega-3 enriched version of the product is also sold, along with a variety of chocolate, protein shakes, "drinkable snacks", and meal replacement drinks.

In a statement announcing the acquisition, Coca-Cola said that "dairy products with added value have grown steadily in the United States."

Drinks such as lactose-free, nutrient-enriched milk can help Coca-Cola achieve its goal of becoming a beverage manufacturer. They also match the functional beverage trend, which includes drinks that offer a caffeine boost, an energy boost, or health benefits.

"From Coke's perspective, they see milk as a strong food source," said Paul Ziemnisky, executive vice president of global innovation at Dairy Management Inc., a trading group.

While traditional milk grocery stores charge low prices, companies like Fairlife rate their products with a premium. A 52-ounce package from Fairlife & # 39; s ultra-filtered milk costs $ 3.99, making the product more than twice the price of regular milk, even when milk prices are high. Other fairlife products are even more expensive.

Ziemnisky referred to Slate, which produces lactose-free chocolate milk, as another promising startup. Slate products sold in aluminum cans contain much less sugar than normal chocolate milk and more protein. Live Real Farms, owned by dairy farmers, has started selling lactose-free milk and almond milk blends, as well as bottled whole milk smoothies.

"We see that people think differently," said Ziemnisky.