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Perspective:
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Cheese industry myths

Edward Zimmerman

Edward Zimmerman is president of The Food Connector, a sales and marketing company focused on the needs of food manufacturers and distributors. He contributes this column exclusively for Cheese Market News®.

This time of year, pundits make predictions regarding what’s in store for the New Year. Some predictions are bold, but many are routine rehashes of what most people in an industry already believe. I thought I would try something different — what follows is a set of predictions that won’t happen in the milk and cheese industry in 2018. They are myths that many of us wish would happen.

• Dairy farmers will improve how they interpret market signals

With the crippling economic effect of boom-bust cycles, dairy farmers in 2018 will decide that continuing to oversupply over-supplied markets leads to market crashes that take two to three years from which to recover. As a result, in times of strong prices where the milk/feed ratio is high, co-ops, dairy farmers and their bankers have decided that making excess profit to save for a rainy day is actually what causes the rainy day. They realize decades of hoping that their neighbors’ slaughter numbers increase apparently doesn’t work.

Similarly, they determine that using rbST to increase cow efficiency produces an excess of milk that consumers don’t want. As plant after plant puts up signs at the silo that say “rbST Free,” thousands more farmers decide to police themselves and end the use of rbST.

The result of these decisions creates a more stable, long-term market. The arbitrageurs learn that Class III milk futures is a bad place to speculate and move on to coffee and cement.

Real Prediction — Dairy farmers will continue to produce milk in a vacuum, without much consideration of their role in the global market.

• Cheese buyers trade short-term prices for long-term gains

After years of demanding that cheese suppliers cut their prices and overages, buyers will collectively decide that additional demands on cheese plants drive expenses; as an industry, they reach a decision to allow an increase in overages.

As the New Year dawns, buyers unanimously realize that the cost to comply with dizzying regulations and food safety initiatives leaves little, if any, profit for cheese producers.

Food safety regulations, FSMA, SQF compliance, etc., are costly to deliver. Cheese plants have hired many more, high-skilled people to coordinate paperwork, run mock recalls and provide an ever-increasing number of documents. In addition, many larger companies require higher and higher levels of insurance to satisfy their legal and risk assessment teams.

Since innovation, R&D, packaging investments, etc., are funded out of profits, buyers collectively conclude that the lowest possible price today isn’t worth losing the benefit of long-term stable suppliers.

The cost to change suppliers and certify new plants is high. In addition, it takes new suppliers a long time to truly understand buyers’ needs. The nuances of order cycle, logistics, unique requirements for pack size and bag colors, for example, take months, if not years to get right. In 2018, cheese buyers recognize that squeezing current suppliers so hard that they fail or quit has hidden cost implications so they accept higher prices.

Real Prediction — Cheese buyers will continue to squeeze suppliers and wonder why they have so few choices of great supply chain partners.

• Cheese suppliers tell the truth about lead times

In 2018, cheese suppliers conclude that balancing supply and demand is nearly impossible. To produce multiple SKUs efficiently, producers need excellent demand forecasts from all their customers 4-6 weeks in advance. Buyers don’t have that luxury from their customers or internal planning process. The supply side capitulates and tells buyers they need more than two-weeks lead time.

Currently, sellers convince themselves that two-week lead times are a selling advantage, so they make promises that are hard to keep. Just-in-time production schedules force cost overruns that increase the misery of selling too cheap from the beginning. This practice results in a stressed-out industry that strives to do the impossible, 52 weeks per year.

In the New Year, sellers collectively tell buyers that the new industry standard is four weeks.

Real Prediction — Cheese suppliers will continue to over-promise and under-deliver. Buyers will remain frustrated as they endure wasted time to manage short-term fill rates and logistics issues.

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Tongue-in-cheek writing is hard to do; I hope that my sarcasm is not mistaken as arrogance.
I love the cheese industry and the distinct groups that make it work. Our three-legged stool requires that dairy farmers, cheese producers and cheese buyers all win. The perfect Chicago Mercantile Exchange price is the price where everyone complains. If one group wins, another loses, and that only sets up the current vicious cycle, where losses must be balanced in the next round with excess profits.

We all must make a profit. Let the other side win a little. Industry profits fund innovation, packaging improvements, food safety and long-term stability. Isn’t that worth a penny a pound? Profit maximization models create winners and losers. Profit satisfaction produces winners and winners.

Perhaps in this New Year, all of us will go back to our bosses, bankers, partners and private equity firms and share this message. Ninety-nine percent of the profit you could make, is good enough; 100 percent of the profit is a bad deal for your partner. A new view on the industry might make going to work fun again?

Who knows, if an attitude of letting both sides win spreads, maybe the lawmakers in Washington, D.C., can even balance a budget and stop investigating each other. Well, a writer can wish …Happy New Year, may 2018 be a wonderful year for all of us.

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.

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