Did you rediscover the joy of cooking this year?

You’re not alone.

There’s no doubt that dairy consumer behaviors have changed in the COVID era. Who does it help and who does it hurt? Who can capitalize and who’s in trouble? Ted, T3 and Anna debate.

Also, T3 observes an even more worrying trend among Millennial and Generation Z consumers on the horizon—and it’s got nothing to do with the pandemic.

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Anna: Welcome to “The Milk Check,” a podcast from T.C. Jacoby & Company, where we share market insights and analysis with dairy farmers in mind.

Ted: You know, we’re heading down the road from fall into winter, and temperatures are dropping and worried reports of the virus picking up speed in various parts of the country. Do we expect to have another debacle of dumped milk because of it? Obviously, my answer would be no.

T3: Mine would too.

Ted: And I think that there may be a silver lining, you know, not because of the virus but because of the fact that we now have some experience with it. I think it’s correct to say that retail cheese sales are up. And I think they’re up by, I saw, I’ve seen a number of different reports but anywhere from 1% to 3%.

T3: Oh, I think it’s more than that. I think most assumptions right now, they may be up 1% to 3% in the current week. But I think, you know, since let’s say April 1st, most of the numbers I see are within, let’s say 3 or 4 percentage points of 10%.

Ted: Retail.

T3: Retail. And there’s an offset obviously on the foodservice side.

Ted: Yeah. Well, the question that I wanted to raise, even though I don’t recall 10% but the question that I wanted to raise is, will we lose that going forward? And I’m beginning to come down on the side that we won’t, I don’t think it’ll sustain necessarily that level of increase but I doubt if it’s going to go back to where it was before the pandemic. People started using cheese and eating cheese and became more accustomed to cheese. And I’ve several times used the example of my cheese counter at one of the stores I shop at that specializes in organic and really good specialty cheeses, and sometimes their cheese counter, which is relatively small but really well-stocked, is so crowded. I can hardly get at it. I have to elbow my way in and they stock a lot of artisan cheese and foreign cheeses and so on. Especially cheeses with cranberries and chives and all sorts of stuff.

I think the increase in sales of cheese are locked in. Now, is that going to translate to increases in cheddar block or barrels? Well, that’s another question, isn’t it? And I don’t know whether it will or won’t. I tend to think that we may see this vertical integration sort of come to a halt and we see more diversification in cheese manufacturing towards different styles of cheese. In the last—Teddy correct me if I’m wrong—10, 20, 30 years. We’ve seen vertical integration where people have gone huge plants to mot the cheddar blocks to cheddar barrels, in some cases to parmesan, and they basically chew up milk at a commodity sale cheese.

I think we’re heading more towards specialty kinds of pieces. I think of Emmy as a good example. They produce a lot of different styles and they market them. I get this one website called The Deli Markets or something like that, that I happened to be on the email list for and all those different styles of cheeses, Carr Valley, Cowgirl Creamery, and all those different styles of cheese are on display at these cheese counters now. And people are picking up these little pieces and trying them. I think it tended to go in that direction. And I believe that that’ll continue because percentage of our cheese disappearance to increase.

T3: So I am going to agree with you but I’m going to come at it from a different direction. I have been under the impression for the last few years that mozzarella growth, for example, domestic consumption of mozzarella growth has been plateauing. And I think most pizza cheese manufacturers would agree with me that the demand domestically for mozzarella and for pizza cheeses has really started to plateau. The pizza industry has just grown so much that it’s just gotten to a point where that growth has really slowed down. There’s still nice growth, I think, for mozzarella internationally but domestically it’s dropped off. And so I do tend to believe that mozzarella production in domestic consumption is going to be relatively flat. Maybe small increases less than 1% going forward.

I think cheddar demand also is going to calm down. And I say that this way: I think one of the reasons we’ve had such great demand for cheddar cheese in 2020, and as a result, very high cheese prices is because during the pandemic, as people have been forced to spend more time at home, one of the things they’ve done is they’ve tended to revert to their comfort foods. And cheddar cheese, in particular, tends to be very much a comfort food. A cheese that you grew up with, let’s say. How is that going to change going forward? What is our expectations of the dairy industry and demand for dairy and then specifically demand for cheese going forward as we come out of our COVID experience?

I’ve been reading a couple of different articles, there’s been a lot of food industry magazines who are trying to make predictions on how the world has changed when it comes to food going forward because of COVID. And there’s three things that have stood out to me. One, people have re-learned their joy of cooking, and there’s a strong belief out there going forward there will be a lot more cooking at home, at least in the, let’s say next two, three, four, five years because people have really enjoyed cooking at home. And as we go forward into a more normal environment, my expectation is that cooking at home is not necessarily going to be only comfort foods. And so the consumer’s diet is going to start to diversify even more towards being adventurous in their foods and trying specialty cheeses, like the ones you named.

I suspect we’re going to have some nice specialty cheese growth retail-wise, you know, in 2021 and beyond. The big question is what is going to happen to the white tablecloth restaurant? One of the interesting articles I [read] made the case that you’re going to have a lot more of the nicer restaurants have a lot more patio seating and outdoor seating. Maybe not in Florida but in most parts of the United States, that means their sales and their restaurant traffic is going to be a lot lower in the winter than in the spring and the summer and the fall. And so they’re actually expecting more volatility and they were talking about food in general, not just cheese. But they were saying you may start seeing more volatility in food prices seasonally because of the way restaurant traffic is going to be more volatile seasonally because those sit-down restaurants that do open back up, the weather outside are going to have a big effect on their traffic.

I think that makes a lot of sense to me because we’re already seeing the restaurants that have survived this and that have opened back up, they’ve actually taken up four or five parking spaces in front of their restaurant and put kind of a temporary fence around those parking spaces and put tables in it so that they could have more outdoor seating. And so I think you’re going to start seeing more and more restaurants expand their patio seating. And I think that’s going to affect cheese consumption as well because people do not eat the same at home as they do when they’re at the restaurant.

But you know, the specialty cheese companies that we work with tell us that that loss of the white tablecloth demand for specialty cheese is a significant loss and they have not gotten it back yet. And even though they’re saying that their retail demand is actually up and for a while, even though overall cheese retail demand was up, my understanding was it was almost all up in the dairy case and not in the deli case. But now you’re starting to see increases in the deli case but you’re not getting the demand all the way back on the white tablecloth restaurant side. And the feedback is that specialty cheese companies for the most part are doing fine but they are concerned about their foodservice sales because of that. They’ve seen a drop-off that they haven’t fully gotten back yet.

Ted: Let me interject a little bit of contrary, thought. You know, one of the things we’ve seen in the last 30 years or so, 40 years, is the increase in the fast-food restaurants. The McDonald’s, the Burger Chefs, and Arby’s, and so on. And we have all these chains now that use basically processed cheese that are fast, what we call today, fast food restaurants, as opposed to a white tablecloth restaurant.

Now, speaking for ourselves and thinking about the view that you just put forward, we continue to patronize white table restaurants for a couple of reasons. First of all, the people who own them are friends of ours. And so we want them to know that we haven’t forgot them. And so we go out and every once in a while go to a nice restaurant in the Italian section of St. Louis or others who we have patronized for many years. But overall, the population over the last 40, 50 years has moved away from cooking at home towards fast food. Is it right to say that the damage will occur in the white tablecloth restaurant as opposed to the fast-food joint? My inclination is to say that I would think that the white tablecloths will probably be the better of the two choices, just thinking about it. Because the people who learned to cook at home basically are people who formerly went out to the fast food joint. And they’re not the people who frequent the white tablecloths.

Now, will they continue to do that when they open back up? You know, we drove down through Illinois here Monday, and you can’t even stop at a McDonald’s or anything because they’re closed. All you have is a drive-through, and the line is out to the street but just the same, you don’t have any sit-down spots. And I think Illinois is a special case. I think they, as opposed to Missouri, had to have that policy but I’m inclined to believe that people who have been frequenting the fast-food joints are the ones that are going to do more of the eating at home, as opposed to the ones that frequent the white tablecloth as a matter of going out with the family on a Friday or Saturday night. Anna, what do you think?

Anna: Well, I disagree with the long-term people cooking at home a little bit. We’ve always liked to cook and we cook a lot here. And I think that a lot of people may be rediscovering that. But the one thing that strikes me about that is when kids have activities again, and you’ve got soccer and football and hockey and everything else going on, people didn’t go out to eat instead of cooking because they hated cooking. They did it because they were busy. That to me will be the determining factor in whether or not people are cooking more or going back out to eat.

Ted: I think you make a good point but not everybody who goes and frequents fast-food joints, follow up on my line of thought, does so because they’re trucking the soccer or hockey game. A lot of people go just to go, just to not cook.

Anna: Yeah.

Ted: And the question that I raise is that going to change? And I’m going to argue that I think it will change. The only question is how much compared to how it used to be. Cheese sales are up right now, and we’re talking about how much, a little bit earlier and how much of that increase is going to be sustained over the next six, eight months as we get back to normal. I think it’ll be significant. And yes, as Ted argues, it will be at the expense of the restaurant industry. And he’s thinking white tablecloths, and he’s thinking the deli counter. And I think he’s obviously correct, but my argument would be that I think what I’m calling the fast food joint will probably suffer more if people get used to cooking at home.

Anna: On “The Milk Check,” podcast, we tackle questions and share ideas that move dairy forward. Now we’re making it easier for you to get answers to your lingering questions, do it with one click, submit your questions online at jacoby.com/askted.

T3: I actually do disagree with you, Dad. I don’t believe it’s the fast-food restaurants that’ll suffer. I do believe it’s generally the white tablecloth restaurants that will suffer. But I’m also going to say this, from a cheese perspective, you know, one of the things that the restaurant industry is adapting to, ignoring COVID for a second, is the millennials don’t like processed cheese, generally speaking. And this is very true of Generation Z, which is those kids just graduating from college and starting to come into the workforce. Big believers in eco-friendly, sustainability, you know, good for the environment. And what’s going to happen is you’re going to start seeing fast food restaurants or QSR, quick-serve restaurants, you’re going to see a big evolution in that industry towards more sustainable and more eco-friendly foods.

Panera has been kind of a good example of how the fast-food industry is changing away from a McDonald’s towards a Panera. And the next step will be towards foods that are better for you, foods that have more vegetables, maybe more foods that are plant-based, which is a scary thing for the dairy industry. And that’s going to affect the diet as well, is I think that people are going to start very slowly moving away from your foods that lack nutrition towards foods that are more nutritious, but I don’t think they’re going to give up the fast food part of it. Much of which for the reasons that Anna mentioned, which is they just don’t have time. In today’s world, they’re just too busy, especially if they have kids.

Ted: Well, I guess we’re going to find out. It’s a lot easier to cook at home today than it was 50 years ago. I mean, 50 years ago, you snapped your own string beans and so on. And today you buy a packet, you immerse it in hot water and, you know, you still prepare food like a small plate or something like that but they come precut and ready to cook and so on. So cooking at home and structuring a nutritious meal, I think over the last six months, as a lot of people who have had a lot of practice.

Anna: I don’t know how I feel about because we’re probably an anomaly here but we still snap our own green beans and everything, anyway. I don’t buy a lot…

Ted: You are an anomaly.

Anna: Yes. I don’t know. I’m trying to think about, you know, with my whole family, with my siblings and everything. I think that those types of meals, a frozen lasagna, or a bag of green beans that you would throw in the microwave or put in the pot. I think that those were things that people were doing anyways, when they were cooking at home, just for the convenience factor. And again, I think that’s the same argument that I’m making for fast food being just fine. I think that those are the things we go to when we’re busy. Especially the fast food question, that’s something that I don’t think changes for a really long time. I think we’re in this spot with this market trend or whatever, for a really long time. I don’t see people going back to any kind of normal behavior until really what are we thinking, fall of next year?

Ted: Well, I don’t know how long it’s going to take to get to what we call “normal” but my own calendar is sort of set for next spring, given the development of vaccines, and so on and treatments. Wall Street Journal this morning talks about treatments other than vaccines that are evidently rather effective. So, you know, there’s a lot of treatment knowledge that’s been gained in the last six months that we didn’t have when this whole thing hit us. I’m sort of thinking that by next spring we’ll be back to some semblance of normal.

T3: And, Dad, I agree with you and I’ll just make another statement to that effect. I’m actually personally a little bit pessimistic about the development of a vaccine within the next six to nine months. I think it’s going to take longer. And, for example, there was a couple of trials, one by Pfizer, and I think the other by Eli Lilly, they just put a pause on the trials for the vaccine. They weren’t coming out as they expected them to, I guess.

Ted: Well, let’s wrap this up. You know, the cheese market is going nuts right now again. How long is it going to last?

T3: All right. So today is what? October 14. We’re recording this on Wednesday, October 14. We’re at $2.72 on cheddar block, $2.2050 on cheddar barrel. We think this market is about as high as it’s going to go. It could go another five to 10 cents higher. The real question is how long is it going to stay up here and what’s going to happen when it’s over? You know, this time of year, I think when we are in the calendar plays a major role, October 14, you know, between now and Thanksgiving is when the majority of orders are placed for the holidays. You get some reloading the first week in December.

But my gut tells me that we are going to stay up here for a few more weeks. And then when we drop, it’s probably going to be slowly at first. You may have like an air pocket drop down to two bucks but that’s still the high level of what cheese markets are historically. And then you’ll probably kind of hover right around there until the holiday orders are filled. And then somewhere around December 15th, my guess is you’ll drop down into the $1.70s, let’s say. Maybe lower than that for barrels. It’s going to be interesting how things in the first and second quarter of next year play out. My gut is there’s a lot of inventory rebuilding that has to take place.

This volatility in these high prices we’ve been dealing with has been a direct result of actually not having much cheddar at all in inventory. And so that’s going to keep prices from getting too low in the first half of next year. It is very, very difficult to predict what demand is going to be like in 2021. I’ve had heard a number of economists who by this point, they’re usually giving their prediction to the quarter of a cent as to what they think the market’s going to be like in the following year. They’re just declining to answer the question. They say that the data is just too hard to read and they really don’t know.

And so that’s going to play a big role as to what prices do next year but the first half of the year, I think we’re going to maybe average something in the $1.60s or $1.70s because we do have a lot of inventory to build back, to get our usual amount of cheddar that we carry in inventory, the aging program with our cheddar. You make parmesan in the same equipment that you make cheddar, at least industrial parm. All of those inventories need to get built back. And as a result, it’s going to take a while before we see prices get too low. And then whether they do get a lot lower than let’s say dairy farmers would like, is really going to depend on what demand is like next year. You know, if we go into a recession of some kind, obviously we’d have some reason to be concerned.

Anna: I know we’ve talked about food service trends, restaurants, grocery stores, and everything else. When you’re talking about all of those things, whether it’s price or demand, how much are we factoring in the election?

T3: I would tie the economy to the election. But honestly, I don’t know if anybody has a good feel if one or the other [candidate for] president gets elected, what demand’s going to do. I think that usually, you can kind of have a feel for that, you know, Republican versus Democrat, whatnot. But this year, I think actually, you know, the whole COVID thing, the whole how the government reacts to COVID, can play a role. I actually think it may be a bigger deal as to who controls the Senate after the election, rather than who’s president in terms of the economy. I’m not sure how the economy is going to react to one president winning or the other, or one party controlling the Senate to the other. It’s just a hard question to answer this year.

Anna: 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 & Company.

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