A special guest joins The Milk Check this month: Tom Gallagher, CEO of Dairy Management, Inc.

Ted, T3 and Anna ask about how DMI allocates the funds it collects from the Dairy Checkoff program; Gallagher explains why recent changes to DMI’s advertising strategy position the industry to interact with today’s consumers. (Spoiler: There’s a reason you don’t see “milk mustache” commercials on TV anymore.)

Gallagher also urges farmers to band together against aggressive animal rights groups who he says want to put dairy farms out of business.

Podcast: Play in new window | Download (Duration: 35:46 — 12.3MB)

Subscribe: Google Podcasts | RSS

 

Anna: Welcome to “The Milk Check,” a podcast from T.C. Jacoby & Co. where we share market insights and analysis with dairy farmers in mind. Today on “The Milk Check,” we interview Tom Gallagher, CEO of Dairy Management, Inc. DMI is responsible for increasing sales and demand for dairy products by spending the money generated through the Checkoff program.

T3: First, I’d like to say thanks for joining us today. We really appreciate you taking the time to discuss DMI and some of DMI’s activities and the Checkoff program. And I think the best place to start this conversation would be Tom, tell us about the Checkoff program and how the money is used and where DMI is spending Checkoff dollars today.

Tom: Okay. Well, on the Checkoff money we get money, $0.15 per hundredweight that is provided by dairy farmers by law to the Checkoff. And $0.05 of that goes to the National Dairy Board and $0.10 goes to local promotion groups. So let me start there and also state that the Checkoff’s been in place since 1983 when dairy farmers approached Congress and said, “Look, the government is sitting on 17 billion pounds of excess product. That’s not good for the government, it’s not good for taxpayers, it’s not good for dairy farmers. We have had a voluntary Checkoff for years. We’d like a mandatory Checkoff and we will fund it. We will pay for USDA oversight because we believe farmers need a voice in the marketplace.” And since that time, we have seen per capita consumption grow 75 pounds per person in the United States. And prior to that, which really shocks a lot of people, in the early decades of the 1900s, per capita consumption was on a straight decline until just about the time the Checkoff went into place.

So we take that money that we receive and we do a number of things with it. We have an export company that is run by former secretary Vilsack from USDA. And there are 120 members of that company that export dairy products. And through that company, the Checkoff funds about $20 million in marketing activities. The 120 members fund about $1.5 million that can be used for policy, trade policy, so the dairy in the street speaks with one voice, which is really a very, very powerful and important thing to do as an industry to make sure that we’re unified. And it’s necessary to have those member dollars because Checkoff cannot do lobbying. So with that, that company was created in 1995 by processors, manufacturers, traders, farmers. And then the Dairy Management organization itself focuses on increasing sales and trust. So maybe I should stop there and let you take it deeper.

Ted: Roughly what percentage of the Checkoff money goes to USDEC? Keeping in mind that Jacoby & Co. is one of the original members of the USDEC. And we greatly value the assistance that USDEC has given our company in marketing products overseas.

Tom: Yeah. Well, and we appreciate that you were an early member. And so Dairy Management, Inc. was formed by the National Dairy Board, which gets the nickel, and that’s about $100 million. And then state and regional organizations that get the $0.10 but not all of them are members. So they have about $100 million to $120 million. Not all state and regionals are members. We have about $200 million or $220 million in total and we fund, of that, about $21 million to $25 million. You know, when I think about it, it’s about $25 million. So 10% or a little bit better than 10% goes into exports. And, you know, with the priority of sales overseas, as Ted and you guys know better than anyone, we really believe China, as we get the trade reverse tariffs done, they will be a great market for U.S. cheese. We have great things that could happen in China. I mean, in Japan, Southeast Asia, and, of course, Africa. So I believe over time we’re gonna see a lot more resources move from the domestic program into the export program.

Ted: If 10% of the money goes to USDEC, where does the other 90% go, just roughly?

Tom: Yeah. Just roughly, about $35 million goes directly into partnerships with milk companies to try to stimulate innovation, companies like Dairy GO, Dairy Farmers of America, and others. And then some of the money goes into partnerships with Taco Bell, McDonald’s, Pizza Hut, and Dominoes where we have placed product development people to make sure that dairy is top-of-mind as they develop these products. So that’s where, you know, $35 million to $40 million of that money goes. And then the other categories, I would say nutrition and research is close to $10 million.

Over the last—since 2002, for example, we have funded 57 nutrition research projects at universities to show the value of whole milk in the diet. And that’s critical because as USDA and others create the dietary guidelines, it is not the best science that determines what they come up wit, it’s the preponderance of the science. So volume, in this case, matters. So another $10 million or so goes there. And then we have initiatives in sustainability. We have initiatives at school, “Fuel Up to Play 60.” And then a large chunk of our local and national budget goes into communications across the board to build trust about the various things that dairy does.

T3: Tom, when you talk about communications, is that including advertising and social media and things like that?

Tom: Yeah. You know, we have gotten out of TV advertising but we have really focused on social media and influencers. So both us doing social media directly with the industry and using influencers like chefs, nutritionists, and others to really get to the conversations that are influencing the discussions about the dairy products. And it’s just amazing the misinformation about dairy and its role in the diet. But maybe even more so than that, the environmental footprint of dairy and the misinformation there. So we found that being on social media is most critical to us right now.

T3: Tom, tell me a little bit more about kinda how DMI thinks about social media and is using that to help dairy farmers. And the reason I ask the question that way is I think, and I’ll speak for myself and I’m assuming that most of the population is kinda in the same boat I am, advertising has really changed a lot in the last 10 years as, you know, social media has become a much bigger source of ways to get the word out to the people that you want to hear your story. But I don’t think everybody really understands that change and how, for example, food marketing, in general, has changed. From your point of view and from DMI’s point of view, how has that change affected dairy and what is DMI doing about it?

Tom: Well, I think the change has been huge. And we really moved away from advertising around 2008 because both of the amount of money it was starting to take of the budget and then the dispersion of channels and, you know, so many options and then, of course, now, social media and live streaming and that. But, you know, I think one of the most important things about social media is that you really…people have a short attention span. And so you really have to have something that appeals to that target audience. And in the past when you think…when I was growing up when we had three main networks, well, it was all a one-way push-out of the advertising, one-way communication from the advertiser out. And you could saturate the market with one TV ad.

Well, now, you really need to segment people in a very refined, specific way. And those people, they don’t want to be talked at, they want to be engaged with. And so the most successful marketers today are those that really have things that cut through the clutter on social media and where people interact, even ideally, with the employees of the brand. And in our case, the most effective interaction occurs with dairy farmers. Dairy farmers carry a lot of credibility with the consumer. So I’d say, to answer your question, we’re out of the one-way push-out of information and the two-way conversation and the segmenting of the audience is more refined than it’s ever been.

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 question. Do it with one click. Submit your questions online at jacoby.com/askted.

Ted: You know, for years, Kraft Foods was the bedrock of dairy promotion, if you will, particularly where cheese, cream cheese, and cottage cheese was concerned. And now, we have Kraft a little bit aside and also we have Dean Foods moving aside who, basically, were the large marketer of food products. This looks grim from a promotional standpoint going forward. How does DMI and your organization propose that we’re gonna be able to deal with this when it comes time to market our products?

Tom: Well, I’d say a couple things and, you know, specifically in Dean’s case, you know, first of all, I think that yes, fluid milk has been on a decline while overall dairy per capita consumption has been on a, you know, straight line up. But in the case of Dean’s and fluid milk, I think Dean’s is a business story that’s been 30 years or more in the making. And what I mean by that is, and I’m gonna draw, you know, an absolute here when nothing’s that totally absolute but, you know, they are a predominantly white-gallon business. And the white gallon was created at a time in this country when there were large families who ate almost every meal as a family together. Today, a very small percent of families even eat a meal once a week together. We have more people who want things on-the-go because less than half of the dollar spent on food today are spent on at-home meals. And so I think we can say, well, it’s changing consumer tastes.

But the flip of that is innovation. You know, the dairy industry in some products and in some companies has not been quick to innovate. And by innovate, I mean package size, what’s in the bottle, the actual packaging itself. And, you know, you can look at some very clear successes in the fluid milk category the last few years. You have Fairlife, which is different what’s in the bottle with less sugar and more protein. But the packaging is unique and the size is unique. And they’re selling that at a rate that’s, you know, several dollars above what a gallon goes for. And when they introduced that, they’ve taken 60% of their sales now are coming from people who were formerly drinking plant-based alternatives. So, you know, there are successes but it takes innovation. And if you just are a company that’s gonna say, “Here’s our white gallon, take it…” And, you know, at Jacoby you guys know that better than anybody. It’s the same thing in the overseas markets. If people want butter of a certain color and salt constitution, we can’t say, “Well, ours is yellow and of this constitution.” So I am optimistic because people still love dairy.

The plant-based thing, I want to comment on that. You know, it’s just like soy. Soy was all the rage but they never had more than 5% of the fluid milk category. And now, they’re on the way down with almond milk on the way out. And they’re still not at 5%. So while, you know, fluid milk we could be very negative about because it’s been down so long, I think through innovation, different product sizes, and portability and shelf stability and more and more products being lactose-free and still tasting great, I’m very optimistic. So a long-winded answer but maybe if I didn’t answer the question exactly, you could follow up.

Ted: The point I was trying to make is that Kraft spent a lot of money on advertising and promotion and very effectively for many, many years, probably 20 of those last 30 years. And is DMI gonna be able to fill that void? And if they can’t or if they only can take part of it, who’s gonna take the balance? We agree that the future looks good and we agree that the high protein direction of things is the way to go. It certainly is in our household and in our way of thinking. But we’ve had so many years with skim milk and we’ve lost a lot of customers because it tasted so bad. Now, we’ve gotta bring it back. We’ve got to bring that consumption level back. That’s gonna be a tough job.

Anna: Well, and to tie that directly to what he was saying, you know, you have Fairlife who’s been a great success. And yes, they had an innovative product and yes, they have new packaging, but they also have a massive marketing budget and a huge machine behind them pushing that.

Ted: Thanks to Coke.

Anna: Yeah.

T3: Well, and that’s, I think the point. It’s, you know, where are the marketing budgets in dairy today, outside of DMI? You know, you always had Kraft. You maybe had some of the other, Dean Foods. You know, today, I think there are still companies that I think have good marketing budgets, you know, whether it’s the Fairlife and Coca-Cola, whether it’s Tillamook out west, whether it’s, you know, Dannon and Chobani.

Anna: I was gonna say Chobani.

T3: Chobani’s, I think, been a leader.

Anna: I think Bell Brands did a very good job for a long time too.

T3: So they come. And I also think the other thing, I’m glad we talked about social media because the other thing that I think has happened is there’s been a real shift in the way food is marketed in this country. And so part of it is the marketing happens in a different way than it did when Kraft was the leader.

Tom: I agree with everything you all are saying. And, you know, I think on that last point on social media, that’s why a lot of brand companies I’m working with now have gone from the lion’s share of their money to TV to now, maybe 30, 40% of it to TV, if that, because you can target more specifically and for fewer dollars through social media. But to answer the original question, you know, with this industry having thin margins and not a lot of money, even if they innovate to market, you really need others who can come into the category who have some deep pockets, who have some money.

So in the case of Fairlife, that’s one of the reasons we wanted to work with them was we knew Coke would put a lot of money behind it and they had staying power. They didn’t turn a profit for over three years and they were spending at marketing levels higher than all the brands put together in fluid milk. So to answer the question, I think that co-ops who are really leading the way in the resurgence of fluid and others are gonna have to partnerships with people…You know, we have the technology. We need partnerships with people who are willing to invest and have the staying power. So that could be equity funders. It could be, you know, a Pepsi. It could be a Coke. But I don’t believe the money to do the needed marketing exists within the confines of the industry as we know it today.

Ted: Well, it’s necessary that we come up with the money somewhere. And I like the idea of partnerships. But, you know, when it comes down to it, about 50% of the value on the grocery store shelf is in the marketing and what goes with it. Where you draw the line is, of course—logistics is probably included in that. But the dairyman is only winding up with 20% or 25% of the value of the product on the shelf. You know, we’re gonna have to do something about that. You know, it almost can’t continue that way. The dairyman has gotta be rewarded better. And yet, every time we turn around, we have more competition and we’re being harassed by some of these animal rights people and so on. So it’s a tough job.

T3: You know, since you brought up animal rights, why don’t we throw that question at Tom. From your perspective and from DMI’s perspective, what do we do about the increasingly aggressive tactics that, you know, the organizations like PETA and The Humane Society and Harm have started towards especially large dairy farms?

Tom: Well, I think there’s two things that need to be done. And I think the industry’s doing real well on one of them. One is we need to have the evidence base that we have the appropriate programs in place for animal care like the farm program and sustainability issues and that. And I think we’re making great progress there. The other is we have to have an awareness of what their strategies are. HSUS, to me, constitutes the single-largest threat to dairy. It’s not plant-based. It’s not lab-grown. It’s HSUS. They’re well-funded. They’re well-organized. They have shell organizations like the Organization for Competitive Markets. And their strategy has changed. Their strategy now is to infiltrate into organizations that really aren’t anti-animal agriculture but they might be concerned about climate, they might be concerned about other things, and then to gear their agenda against dairy and agriculture.

And one of the things they’re doing, they have people on their payroll, if you can believe this, that are former dairy farmers that work for HSUS that are going out to small farmers saying, “Sign our petition for this or for that because we’re on your side. We just want to get rid of large farms. it’s not you we want to get rid of, it’s large farms.” Well, once they get rid of the large farms, they’re gonna get rid of the small farms. So farmers really can’t fall for that. They need to stand united. They need to understand, “Yeah, we’re not all gonna agree, you know, on all things within the dairy farming community.” But I believe that our diversity and I think the secretary who runs DEC would tell you our diversity of geography, of types of farms, size of farms is really one of our great strengths. HSUS is using us to divide farmers and that way, they divide farmer voice on Capitol Hill.

Ted: Well, there’s no question that they’ve done a great deal of damage. How do we try to deal with that?

Tom: Well, I think there’s a couple of things. If you’ve watched farmers on different social media sites, that’s where a lot of this division occurs. And I think it’s up to the Checkoff and co-ops and other leadership groups to do a couple things. I think one is to give farmers the information and the facts to understand what HSUS really stands for. There’s so many farmers, guys that I talk to who have really bought into this notion that HSUS is against the large farms only. Well, that’s just not true. So I think one is information. But the other thing that I want to just mention is I think it’s up to people like me and National Milk leadership and promotional leadership and co-op leadership to paint a picture of what the farming of the future will look like and how people can be successful in that. That doesn’t mean we can guarantee success for all farms. You know, we’ve, obviously, been on a decline in farm numbers over the years. And I will take responsibility. I don’t think we’ve done a great job painting the picture.

And so farmers, I think feel, rightfully so, “Well, geez. Now, I’ve got this animal care stuff and it’s costing me money. And I gotta do this sustainability stuff. And then there’s, you know, consumers are getting anything they want and no one’s standing up to them.” I think if we look forward at where the consumer’s gonna be in 5 and 10 years and paint a picture of where farming will be within that and how it can be prosperous financially, I think that would be the best thing we can do to hold farmers together and defeat HSUS. And I think somebody raised it here earlier. It’s not something that I personally specifically can do something about because of the charter of the Checkoff, but I firmly believe that the industry has to look at how farmers are paid in the marketing chain.

And it’s an archaic system set up 80 years ago and, you know, it’s more about price discovery. But it doesn’t include—it’s kinda disconnected from cost. So it’s not realistic in today’s market, in today’s global market. So I think we really need to look at that as part of the future. And I do believe that there will be very important revenue resources for all size farms on the environmental side. I don’t think environmental has to be a negative with, you know, heavy regulatory pressure. I think we can do things whether it’s a large farm doing certain things or small farms that can actually be revenue generators. So I don’t know what…I’d love to hear what you all think.

Ted: Tom, you mentioned the methodology of compensating dairymen. And, of course, we do understand that DMI and your programs basically are on the marketing side. However, lately, we’ve been involved peripherally in some discussions with regard to the Federal Order system and so on. And I don’t want to wander too deeply into the weeds because I realize that, probably, that isn’t something that DMI is that close to. But, you know, in view of the fact that we have such a bad record with regard to Class I sales and that the Federal Order system is based basically on premium pricing for Class I sales, how are we gonna deal with this going forward? I mean, we have our lady in Class I marketer heading the law. And we have a record of continued decline in Class I, albeit whole milk seems to be reversing the trend a little bit. Is it feasible that we’re gonna be able to continue with the current regulatory system, business as usual, and put off changes to another day? You know, it seems to me that this is a rather urgent problem.

Tom: It is urgent. And, again, I’m gonna speak as Tom Gallagher and not as the Checkoff for a second because it’s an area that I can’t influence. I’ll just give you my opinion is farmers need a change in the pricing system in order to survive. This global economy and global pricing system was never contemplated back in the ’20s and ’30s when the system was put together. And one thing that I can do, and have done, is farmers working with the industry have created a project we call 2030. And we’re not trying to project forward current consumer trends. We’re trying to take a look at the consumer and how they will eat, what they will eat, and how they will consume information in the year 2030. And what we’re looking at is we’ve been about futurists, technologists. We’ve looked at patents from Google and otherwise really understand what that world conceivably could look like. And then from there, take any information we glean from that and immediately start implementing. We’re not gonna wait until 2030.

But I’m working with, you know, through the Innovation Center, which is a company we haven’t mentioned, but it’s about 200 dairy industry companies plus dairy farmers. And what we’re doing is we’re getting a study done on what that future looks like, not what dairy should do with it. And then we, as an industry, will look and say, “Okay. Here’s what we need to do to meet that successfully.” And so people like Jim Mulhern and Michael Dykes from IDFA and National Milk are on it. I reversed those but they’re on it, and processors and co-ops. And so when we get done with the initial work and we set up, “Okay, here’s the blueprint to the future,” we will break into different committees. One, I hope, deals with pricing and maybe pricing within the whole value chain. One with legislative issues. One with regulatory issues. One with how do you rebuild the plant infrastructure? One with, you know, marketing. So that, to me, is how I hope the industry can come together without the Checkoff, without Tom Gallagher, you know, being involved directly to say, “Yeah, we see this in the study. We see the need for change. And IDFA and National Milk, carry the ball forward.”

Ted: Well, we’ve noted from our viewpoint that the plant and equipment in the U.S. dairy industry, generally speaking, is rather antiquated. And one of the advantages of the current pricing system or marketing system, if you will, is classified pricing. And it’s gonna be a little difficult to make this change, to make a change in the pricing methodology while we foster increases in plant and equipment or bricks and mortar spending. And those prices have basically doubled in the last 10 years. Yeah, we do have some new commodity-type operations producing cheddar and barrels and even a butter powder plant or two. But we haven’t really seen an upgrading in the infrastructure for the U.S. dairy industry now for many, many years. And, of course, the quality of the product keeps getting better in spite of that. And another thing that’s happened is our testing gets better and more immediate. So, you know, it’s hard to visualize how we’re gonna be spending that money and how we’re gonna be paying the dairymen and then get it all done at the same time that we’re revising our Federal Order system.

Tom: Yeah. It weighs heavily on my mind because I think the future of farming is at stake there. And, you know, I’ve gone about as deep as I’m comfortable legally with the Checkoff feels going. But I will say, you’re raising all the right issues. And like the old saying goes, if it were easy, it would have been done already. So we have just got to—processors, manufacturers, farmers, and even retailers I would say—we’ve got to hold hands here and figure out a way that we can all survive.

Anna: Costs are rising. Margins are shrinking. Markets are more complicated. A lot has changed since T.C. Jacoby & Co. started in 1949. What hasn’t changed is our commitment to helping farmers focus. With the latest administrative support tools, we work every day to keep co-ops and family farms running at their peak. Start by emailing me, Anna Donze, at anna@jacoby.com. That’s anna@jacoby.com.

T3: There is one question that I want to ask. We talked quite a bit about social media. One of the great things about social media is the way it interconnects everybody. We have a social media presence. We know there is a lot of dairy farmers out there that have a social media presence. With DMI’s presence on social media, is there a way that companies like ours or other dairy farmers that are involved in social media can help spread the word that you guys are trying to create?

Tom: You know, there absolutely is. The Innovation Center, which is…it’s not a material real structure. It’s a virtual organization of the industry. As I mentioned earlier, they’ve put together a campaign called Undeniably Dairy. And through that, we provide, you know, like toolkit type information and turnkey messages that are tested with consumers. So that’s a way that companies can engage and hopefully, we’re saving them some research dollars and other things. And with farmers, we have some sites, the dairy Checkoff farmer group, and some other things. But I really want to try to step up our ability to get farmers on social media because, as I said earlier, they’re our best spokespeople.

T3: I agree.

Ted: Yep. Tom, do you have anything further on your end that you’d like to address?

Tom: No. I really appreciate the opportunity because that subject that came up about HSUS, I’d really emphasize to your listeners, let’s be aware of who is trying to divide us, what their messages are. Let’s be aware that HSUS and PETA are not your friend, no matter what they tell you that they’re on your side, just against big farmers or vice versa. They want you out of business. And so, again, I just appreciate the opportunity today.

Ted: Well, we appreciate it also. And if you have any further thoughts, we’d be very glad to give whatever input that we’re capable of doing.

T3: I would agree.

Tom: Well, I sure appreciate that. And, you know, as we get a little closer on the 2030 project, I’d like to be back in touch with you just to get your opinions, you know, to let you weigh in on a couple thoughts we have.

T3: We’d love to talk to you.

Ted: We’re always willing to weigh in, Tom.

Tom: Okay.

T3: Jacoby has never been afraid of having an opinion.

Tom: All right, guys. Thanks, everybody.

T3: Hey, thanks, Tom. We really appreciate you joining us today.

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 & Co.

Dairy cooperative support

We can put our insights to work for your operation. Learn more about dairy cooperative support services from T.C. Jacoby & Co.