As the food supply chain shifted over the past year, so did consumer eating habits. Matthew Smith, vice president of Alltech, joins the podcast to reflect on changes in the dairy industry and to discuss the global demand for dairy products, the impact of dairy alternatives and the importance of sustainable dairy production and farm waste management.
The following is an edited transcript of the Ag Future podcast episode with Matthew Smith hosted by Tom Martin. Click below to hear the full audio or listen to the episode on Apple Podcasts or Spotify.
Tom: I'm Tom Martin, and I'm joined by Matthew Smith. Based in the U.K., Matthew is vice president of Alltech and is responsible for Alltech E-CO2, the global rumen function platform, and all (of) Alltech U.K. He's worked extensively in the feed industry in Asia and Europe for more than 27 years. Greetings, Matthew.
Matthew: Hi, Tom.
Tom: Well, the whole world has been through quite a difficult and strange year at the hands of this coronavirus and COVID-19. If you had to cite a few key outcomes of this experience, what would you say they are?
Matthew: I think, Tom, on reflection, that there are many of those reflections, but reality is, it’s the resilience of producers, (the) resilience of the food chain. I never thought that I would walk into a supermarket and see empty shelves in my lifetime, and like so many people across the world, (I) was witness to that, but I think the takeaway I would have is how quickly the food chain managed to rectify itself and how quickly we managed to get food onto shelves. So, it’s really that speed of recovery after the initial shock. That’s one big thing.
I would also say that within our industry, from talking to customers across the supply chain, it's been that demand shift from the QSR (quick service restaurant) segment into retail. So, retail for milk and milk products and meat. And then, finally, the big take-home for me, personally, has been the focus that we now have on food — about its provenance, about the way eating habits have changed. And there's a growing awareness of food health and that healthy food (equals) healthy people.
Tom: So, the nature of demand has shifted. What about pricing? What’s happened with pricing for dairy during this time?
Matthew: If we look at the situation today, I think demand is high. We saw, in the first six months of last year, a rapid drop in terms of farm-gate pricing. I mean, some regions (saw) demand dropping. However, that rectified itself, I guess, through the second half of last year.
I think one of the drivers on the demand side, Tom, is the idea that milk is a healthy drink and has health benefits in terms of improving immunity. And so, I think, from a commodity perspective, demand is still good. There’ll be lots of stockpiling going on, I would have thought. At the moment, there’ll be caution across the world. So, stockpiles will be going up, and that, of course, changes some of the shapes of demand.
And now, of course, we start to see shortages on the protein side — particularly soya. And as that run continues for most of the world, I think prices in many regions may well have held up by farm-gate prices, but feed cost has really been impacted. And with that growing and getting higher, that impacts margins. And so, the margins are quite seriously under threat in many parts of the world. And in some parts of the world, (they’re) getting up to 7–10% less than they were this time last year. So, with that demand, I guess, it’s going to stall later on in the year, Tom. That's what the markets are telling us, and that will become even more of a challenge for producers, and margins, I guess, will continue to stay under pressure.
Tom: According to data from the International Farm Comparison Network, the IFCN, there has been an enormous increase in dairy production. And in what parts of the world are you seeing the most impressive growth in production?
Matthew: I remember vividly, about 10 years ago, reading a report from Euro Monitor — the guys who pull data together on the food industry and in other industries — and they predicted a 10% compound annual growth rate for milk demand in Asia. I remember looking at that figure (and) thinking, “Well, that can’t be the case,” because the rest of the world (has signaled that) that number was less than 1%. But I think if I look back in a 10-year period — and having spent a lot of time in it myself — we have seen that come through. The demand is definitely there. People are looking to drink milk everywhere across the Asia-Pacific region. And you know, that still holds today and into the future, as far as the drivers exist.
So, we do see a growth in production as well, but it's a challenge. Raising dairy in parts of Asia is a massive challenge, given the fact (that) you’ve got your real limitations in terms of forage growth. But as we start to see more and more investment from large-scale processes around the world going to Asia (and) more education about growing those forages, about managing cows, then those factors are coming together now.
And we are seeing a huge explosion in production. It started in South Asia — principally in India, where they have an awful lot of cows and (are) making those cows more productive. Even taking a small incremental increase in production, we see a big change in the volume. So, Asia is where it’s happening, and other parts of the world. Some last year, you know — Russia really has been managing a bit of a turnaround in terms of production and (is) moving away from reliance on imports of cheese and butter and (is) really increasing productivity.
Tom: Are there spots in the world where production is in decline? And if so, what's happening?
Matthew: I don't necessarily think of it as production declining. It’s probably (simply that) it isn’t growing. It, you know, one could argue, is decline. There are parts of the world — some of the Latin American countries have found a major challenge because of economy and politics, (as have) parts of Asia. In fact, Japan (and) Korea have seen reductions in volume. But again, I think that's more driven by the high cost of production in those parts of the world, and people may be looking at other choices.
Tom: How are dairy alternatives derived from coconuts, almonds, rice, oats and other plant-based sources — how are they impacting demand for products derived from cow's milk?
Matthew: I think that segment is clearly — I know, from talking to trade companies and retailers, that segment is growing, and it's growing quickly. Of course, the numbers have to be looked into. The numbers don't lie. And the reality is that I don't think there's been a significant impact on the demand for dairy — although, again, when you look at statistics and commentary on those statistics, it's interesting to think that, you know, here in Europe, (where) I’m based, the total volume of those alternatives in 2019 was the same as 1% of the volume produced by the dairy cows in Europe. So, I would say (it’s) not a significant impact. People continue to grow. Consumers will exercise their choice. However, the demand for dairy continues to outstrip (alternatives) — maybe not in terms of growth rates, but certainly in terms of volumes.
Tom: What sorts of challenges to dairy production do you consider the most important to think about and to overcome?
Matthew: Again, looking at the world today, you know, in the present moment, I feel, Tom, that the sustainability debate is no longer with us. I think it's gone. I think it's now a question of policy-makers asking us in the industry, you know, “What are you guys doing about it?” It's a given; it's with us. So, that’s why I say it’s no longer a debate. And I think it's critical that producers don’t simply view sustainability as an added cost burden. If you view sustainability in its true light, it's an efficiency game. And we have to get that message across to producers, across to the supply chain. It's critical that we get that right.
You don't have to look too far back in history — it's clear, you know, across all species, (that) farmers and producers have become so much more efficient in the last 50 years. And if we look back with the right topics, we would probably say, today, (that) we've done a pretty good job, but we know there's a lot more to do, and there's a lot more (that’s) important to demonstrate to those policy makers and to the public, that we can implement those changes, and innovation will certainly help us measure, monitor and be able to describe how our industry is sustainable. So, I think that's the biggest challenge.
Tom: Matthew, from the perspective of your leadership role for Alltech E-CO2, what are your views about the EU Green Deal and the goal for Europe to become the first continent in the world to become carbon neutral by 2050?
Matthew: I think it’s a noble cause. At the same time, though, it is aspirational. And the targets, which are being discussed and may well become legislation soon, do require scientific basis, because those policies will have to take into account consumer demand.
Really, at the heart of the green deal lies human health. It is about human health. That sits right at the center. And of course, reducing the use of farming inputs, fertilizer (and) pesticides has been going on for many, many years, as machinery, as mapping systems and measurement systems have all become more efficient. But ultimately, reducing the use of those inputs could potentially lead to a reduction in food output, which ultimately will mean that the retailers can’t keep shelves stocked.
So, I think we need some science-based targets, and it's great opportunity, actually, Tom, for science to lead us in the right direction.
Tom: What about the issue of managing the waste produced by farming? What’s happening or would you say needs to happen in that area?
Matthew: Waste in any farming system has always been, probably, been perceived as physical. If you think about a typical dairy unit, you know, those losses can be as high as 25% from pasture and conserved feed stuffs, which are converted into milk. But I think we need to add to that the fact that environmental waste is also a big consideration.
So, producers are increasingly aware of the level of waste and understand, too, that as we make efficiency gains, the real heart of the issue is to reduce those losses, to reduce the waste. And management practices have taken us a long way, and machinery has taken us a long way. Nutrition has taken us a long way, particularly mitigating some of those losses with the use of feed additives. But everything has to come together, Tom. It’s about doing 100 things by 1% to achieve 100%. Everything needs to come together so that we get the right amount of feed converted into protein. And a 1% reduction in waste, ultimately, is going to impact that bottom line and self-sustainability.
Tom: And speaking of things coming together, do you see a need for more consolidation in the food chain? And if you do, what would that look like?
Matthew: I think it has to come. When I compare food chains in the Western world in comparison to some of the food chains in Asia — where they do have incredible integration right the way through, from crops harvested and to the farm, the feed stuff, the animals, the processing, right the way through to the retailer all in one chain. It is possible to do.
I think we will see a lot more integration in the next few years. I think some of the retailers will actually integrate back into the chain, take more ownership here in the U.K. Most of the retailers would have dedicated pharma-producer supply groups now, and that's good for the industry, because they take a keen interest in terms of cooperation — making sure that there’s transparency in that food chain, there’s providence to allow the whole chain to tell the story of food. And I think when you have the challenges that we faced in the past 12 months — the pandemic hitting — those integrated food chains are probably faster to respond to a crisis than a fragmented food chain would be. So, I think there are a number of forces at large, Tom, which are driving that integration anyway.
Tom: Let's turn now to food security. And first, if you would, define that for us. In your mind, what is food security?
Matthew: I tend to think of food security through a simple lens. You know, if, at the end of the day, you ask yourself the question, “How much food have I wasted today?” If your answer is “Zero, I’ve not wasted anything,” then food security is an issue for you. And ensuring that we can overcome challenges of global trade, challenges of regulatory hurdles, which do impact food security, I think the biggest challenges is disease — be that animal disease or human disease. We see how damaging the first virus, the African swine flu and the avian influenza can actually be on most supply chains. So, it’s important we try to do everything we can to stay one step ahead and, again, as I said originally, do everything that we can in that supply chain to make sure it’s resilient.
Tom: Jumping over to another area: labor. You have talked about fair treatment of workers. What are your concerns there?
Matthew: I think the concerns that I would have are the same concerns that consumers have today, Tom, in that when you make your food choice, that food choice is still driven by price. But of course, there are other factors that come into that decision now — more so, the nutrition — but where does that food come from? And concern over fair treatment of workers in that supply chain is now very much at the top-of-mind for consumers. So, again, I think the industry can work together to help with education and make sure that everybody involved in that supply chain understands the importance of the role that they’re involved in.
Tom: What sorts of innovations or emerging technologies are on your radar or have captured your attention and your interest?
Matthew: Technology, it’s certainly everywhere in our industry today. It does come as a surprise to some people who don't, maybe, understand the farming industry. I was talking to a group of school kids a couple of weeks ago who were asking me about believing that farming was just animals, and they were amazed to understand that, today, it’s about artificial intelligence, it's about big data, it's about robots helping make a big difference in terms of stock management.
So, for me, there’s so many parts to that technology question, but I think that keeping an eye on things, allowing producers to maybe spend time focusing on other parts of the business, (and) also giving the peace of mind that if intervention is needed, you know, you're going to be told that intervention is needed and warned that if you don’t do it, you know, there will be an impact on your business. So, I think that the collection of that data and what that data will tell us in terms of, ultimately, sustainability — the more we can amass, the more we can interpret, the more we can learn. So, I'm really excited about where technology is taking us. I think it's kind of keeping pace with this whole discussion on sustainability. And I think we need to focus wherever we can on making it work to tell our story.
Tom: That’s Alltech Vice President Matthew Smith, joining us from the U.K. Thank you, Matthew.
Matthew: Thanks very much, Tom.
Tom: And next in our dairy series, Kansas farm owner and manager Ken McCarty. I'm Tom Martin, and thanks for listening.
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