The Viral Milk That Helped Set Off America's Protein Boom

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1:53Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Allaway. And I'm Joe Weisenthal. Joe, you're a gym person, aren't you? Notice I did not say gym bro. Yeah, that's right. That's right. Thank you. Aspirationally. I do go to the gym regularly. I don't go to the gym regularly enough to see a difference. I think because I'm at the stage of life where every day I'm getting a little bit closer to death. And so I'm holding serve. I'm sort of holding at the same. So I know progress, but maybe I'm not regressing. But yes. I still think if you go to the gym regularly, you're a gym person.

2:25Yeah, okay. Yeah, all right. That's impressive. I'm going to have less shame about it. Okay, here's my question. Yes. Have you noticed the drinking habits of some of your fellow gym people? Have you noticed anyone walking around with bottles of milk? I have. I mean, I still see more people with, like, the energy drinks rather than milk. But, yeah, I've definitely seen it. You know, I think, like, back in the day, you know, you had these guys. I think some of them still do with actual like people who try to drink a gallon of milk in a day. There's that famous guy. He has a book called Starting Strength.

2:59He's like a cult guru within the barbell world whose name I'm blanking on. I think he's a big like drink a bunch of milk guy. If you're serious about it, you got to mix raw eggs in with milk. That's what I say. You do? Have you done that? No, I haven't. Although I did when I triple fractured my foot when I was in Hong Kong and I did have a doctor who advised me to drink a lot of milk to build up the calcium and heal the foot. Anyway, we're getting slightly off topic. Yeah. OK, one of the milk brands that you see a lot in gyms is something called Fairlife. Yeah, I've seen it. And I actually literally like had never thought about what it is or.

3:36But yes, I had seen this brand. Okay, so I don't know that much about it, but I first got kind of interested in the company reading Austin Frerich's book, Barron's. There's a whole chapter in there about dairy barons, and it's about fair oaks, which turned into Fairlife. All I know about Fairlife is that Coke bought them. They had a big distribution deal with Coke, and we know how important distribution is in the beverage industry from our previous conversations on Celsius and things like that. and it's turned into this phenomenon where fair life is this milk that's i guess supposed to be healthier it has more protein yeah it has less lactose or no lactose i can't remember which means you can keep it in your fridge for like a hundred days which is actually i find that useful so we should talk about it because it's also kind of kicked off this whole protein craze protein oh my god protein everywhere i know i don't get it like uh yeah starbucks they have these.

4:35Now you can get this protein drinks. I haven't tried them yet. I, you know, when did it become a crime to just eat normally? I got, I eat some meat and I eat some veggies and occasionally eat some carbs and stuff like that and whatever. But yeah, you, over time, it's like different macronutrients trend, right? So there was a while it's like good fats, right? People were really into fats for a while. And then it's like, oh, you need fermented stuff. So, you know, let's eat It's good for your gut health. But we're certainly in a protein bull market right now. People really want more protein because of reasons.

5:09Yeah. And what's interesting, again, about Fairlife is it's making a lot of money. Yeah. That's feeding into Coke's bottom line. Yeah. The share price has gone up quite a bit. And it's also at odds with basically everything else that's happening in the dairy industry where prices tend to be pretty low and have been kind of stuck in a downward spiral for a long time. Yeah. margins are very, very thin. So this is an outlier. People are consuming less traditional dairy. I think a lot, you know, at least I don't know how big it is, but some of the, quote, alternative milks, the almond milks of the world, the cashew milk, soy milk's probably taking some.

5:47Yeah, plain old regular dairy. No one ever talked about, by the way, number two milk. I feel like everyone is either skim or fat these days because more of the sort of like polarization of society that no one likes a nice middle ground milk anymore. So now apparently they want super high protein milk too. All right. So we have the perfect guest to discuss Fairlife and the dairy industry in general. We're going to be speaking with Corey Geiger. He is the lead dairy economist with CoBank, which is a very big lender to the industry. So really the perfect person to speak to. Corey, thank you so much for coming on All Thoughts.

6:21Well, I'm glad to be here, Tracy and Joe. So I'm going to start with the basic question. What differentiates Fairlife from traditional milk? I think there's two big parts to this, protein and portability. The portability is it's ultra-pasteurized and uses aseptic packaging. So that means you can actually ship it without refrigeration. And when you think about the dairy industry, the dairy industry is the largest refrigerated food chain in the world, really. You think as soon as we milk a cow and we cool the milk, it's cooled in the truck to the processing plant. And then traditional dairy products are refrigerated all the way to the grocery store or convenience store.

7:05But the Fairlife story and products like it now are when you go to that aseptic packaging and ultra filtration, until you open that bottle, it's got a lot longer shelf life. Of course, once it's open, you're at the 14-day clock starts ticking. This technology that allows you to store milk for a long time without refrigeration, is this something that's been understood for a long time and now there's suddenly a demand for this milk? Or is the technology relatively recent and then the industry is like, oh, we can, because of this technology, we can market and get people excited about a new product that can take advantage of these capabilities?

7:47Well, Fairlife first came on the scene in 2014, so it's been with us about a decade. But one of the things that the team at Fairlife had to really perfect was this high-temperature, short-time pasteurization. So you're heating the milk up quick and then cooling it quick. One of the things I like sharing is that milk is nature's most perfect beverage. You talked about it being a health beverage. If it's nature's most perfect beverage, that also means it's a great place to grow bacteria. So pasteurization, you know, over 100 years ago, the pasteurized milk ordinance came about and that set a national standard so that a Wisconsin farmer could sell milk in the Chicago market or upstate New York farmer could sell milk into the New York City under the same rules and standards.

8:33But going to this ultra, the HTST, the high temperature short time pasteurization, originally you kind of got a burnt milk taste. So if you're a consumer and you're tasting that, you're like, eh, it didn't hit the mark. But now they perfected that process and you really get the flavor that you've come to expect from a dairy milk. You mentioned having to sell into markets, and I'm not quite sure why, but I was reading a book about small-scale farming from the 1950s last night. And it was talking about if you're a small-scale farmer and you want to get into dairy, you have some options. One option is you sell into a local market that's very close to you because, you know, you can't refrigerate the milk for that long.

9:17or you sell to like a cheese factory or something like that. And you can go a little bit further, sell maybe more in bulk, that sort of thing. How big a deal was Fairlife's distribution deal with Coke in its success? This idea that now you have a beverage that can be shipped over very, very long distances, long timelines, and you have Coke distributing it. I think it was huge when you really look at it. If you look at the founders of the concept of what became Fairlife, originally they were experimenting, Mike and Sue McCloskey, with a product that they eventually called Athlete's Milk Honey. And so they were looking at finding a health beverage for consumers in that market.

10:03So there's one thing to be innovative, then it's distribution. And one of the, for me, I grew up on a sixth generation Wisconsin dairy farmer. one of the obstacles always for milk has been portability. You have to have this elaborate transportation system to move it. I'm talking beverage milk here. And that really overcame the situation with what Fairlife has done with aseptic packaging and the HSUT process to high pasteurization. It was game-changing. I think this is old news, but it used to be the case that milk prices, what's the deal? They were like set based on your distance from Eau Claire, Wisconsin, or something like that, because there was this premise like, oh, we want milk very far away, and you sell it to your local market.

10:55Explain that. That went away or something. But why was Eau Claire, Wisconsin, this sort of central hub for a while of the index for pricing milk? Explain that. Yes, there's a number of reasons for it. Actually, we'll start with a little dairy history Up until about 1910, New York was the largest milk-producing state in the United States. Then that became Wisconsin, and obviously now America's dairy land is on the license plates. Wisconsin, actually, in the late 1800s, a gentleman who became governor of the state, William Dempster Hort, secured the first refrigerated rail car to ship Wisconsin cheese to New York City in the 1870s.

11:37And today, Wisconsin exports about 90 % of their milk production via cheese, and that export could be the other 49 states and certainly now around the world. But because of all the cheese made in Wisconsin and Minnesota, Eau Claire was that kind of center point between Wisconsin and Minnesota to establish a base price for milk. That went away here in about 2000 and we have a different system, but milk is still highly regulated under federal milk marketing orders, which is really what establishes milk prices. Could you just real quickly explain what are these, what does that mean, like it's regulated?

12:17Because the prices do fluctuate, so what does that mean that it's still highly regulated? Yeah, highly regulated means that federal milk marketing orders, there's four classes of milk. Class one would be beverage milk. That would be the traditional milk that you drink. And when you come back to the Fairlife story and you discuss that fluid milk sales have been flat, but products like Fairlife and Core Power and those are actually a mixture of fluid milk in class two products, which traditionally have been scoopable products like yogurt, ice cream would be in there, sour cream would be in there.

12:54And then class three, I liked sharing Little Miss Tuffet sat on her muffin eating her curds and whey. So class three is cheese, curds and whey. And then class four products are butter and powder and butter would be nonfat dry milk. But each of these classes has different pricing mechanisms. And today, beverage milk is priced on the higher of class three or class four. It gets complicated. And that's why I call dairy very regulated. But these orders came about in 1937. It was an act of Congress. And it was to ensure the orderly marketing of milk and ensure fluid milk in markets that didn't have a lot of dairy cows.

13:40So one thing I learned from reading my old farming book is that there are a lot of levers that you can pull if you're, again, this is for small scale farming, but there are levers you can pull to boost profits. So maybe you're not going to make that much from milk itself, but, you know, you can sell the calves for veal or once the dairy production starts going down with your cows, you can sell those or you can sell manure for fertilizer and things like that. All these different levers. Can you talk a little bit more about the actual business model of a dairy farm and where money comes from nowadays?

14:16Because I imagine it's changed quite a bit. This is a dynamic space. And from an over, we'll talk about the dairy farm in a second. But dairy right now has$11 billion of new plant investment in the United States. And it's in a number of categories. So there's a lot of energy taking place and a lot of investment. This is historic investment. When you get to the dairy farm, obviously, if you're milking cows, your number one revenue source is milk. I would say up until five years ago, 90 % of your income came from milk unless you were selling a lot of crops. But one of the dynamic things that have changed, and it's in the news a lot right now, is beef prices.

14:58And every cow has a second career as a beef animal. So about five years ago, well, I considered the dairy cow the most researched animal on planet Earth. We know more about her. We have over 123 million records on her over the last 100 years. In 2008, the science of genomics came into the industry. I was actually the first one to write a public article about it. But what you do is you take a DNA sample from the cow, you run her profile, and you can compare it to all this phenotypic data, that 123 million records. And with about 70 % accuracy, we can predict what that baby calf will do as a cow.

15:41And that has changed a lot of things in dairy. We are improving butterfat and protein levels at paces we've never seen before. And these days, one out of four heifer calves, baby calves, that will eventually become cows have a genomic test run on them. And that has really changed things. Then as that took place, gender-sorted semen came into the industry. So they use lasers. They can sort out the Y chromosomes, which make a bull calf. And with about 90 % to 95 % accuracy, produce a product that makes dairy heifer calves. So dairy farmers were planning their replacements. They're using science to predict the ones.

16:26And that opened a whole new door to use what we call beef breeds. Think Angus, Limousine, Charlay. That we breed those. We use artificial insemination, the original AI in agriculture, not artificial intelligence, to inseminate the cows. And dairy farmers are making more money on that these days. So about five years ago, back to Tracy's original question, a dairy farmer was making about$1 per 100 weight per 100 pounds of milk equivalent from beef sales. And say a dairy farmer is making 18 to 20. So it wasn't 18 to$20 per 100 weight for milk. It wasn't a big deal. But today that number has gone to 4, 450.

17:10So we're generating a baby black-hided calf, an Angus calf that's destined for a feedlot eventually, is selling between$1 ,200 and$1 ,800 right now. And so it's a big revenue stream. No matter what size your farm is, everybody can play.

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19:43With more than 870 locations, find the one near you at ExpressPros.com. That's ExpressPros.com. So when you're talking about improving sort of butterfat and so forth, what is going on? Is it selective breeding that just means that you're more likely to get a baby cow that has high levels of whatever you're looking for? And better production rates. Yeah. What is the source of, I guess, higher yields? So I'm past president of Holstein Association USA, which is the largest dairy breed organization in the world. And that source is a bundle of metrics. We study a lot of traits. Certainly the big two would be butterfat.

20:25Well, big three would be butterfat, protein, and milk. But we are also looking at mastitis resistance or the ability to combat an infection in the other. We're looking for longevity, which is a trait we call productive life, or even daughter pregnancy rate, which is a fertility metric. So it's this bundle of better yields from the cow and reduced costs from the standpoint of health care and those kind of things. And right now, if you use the best group of Holstein bulls or even Jersey bulls on the next generation, each year we're improving genetics$100 per year. Prior to genomics, that number was like$13.

21:06So this is like significant improvement. And using natural science and really doing a better job. Sorry, I started laughing at the mastitis reference because... It's hilarious. It's hilarious. No, one of the old-timey solutions for this in that old book was using a bicycle pump to inflate the cow's udders. Huh. So I'm guessing people don't do that so much anymore. That is true. We do not do that anymore. Okay. What about, you know, you're talking about income that dairy farms can generate. What's going on with the actual input prices? Because Because it takes a lot of, again, from reading this book, it takes a lot of feed, a lot of hay, a lot of grains to actually get these cows producing milk and also up to size if you're going to sell them for beef.

22:00So the biggest costs on a dairy farm are feed and labor. My wife's family was actually the first to put robots in 25 years ago in the United States to start milking their cows. So some farmers are using robot technology, but that's not exactly mainstream at this point. But look at the near-term prices for feed, soybean and corn grain, certainly in alfalfa are some of the core constituents. Those prices are down. Now, that's a good thing if you're a livestock producer, not a great thing if you're a row crop farmer. The other thing these days, 37 % of the U.S. corn crop actually goes to biofuels, ethanol.

22:39So there's byproduct feeds there, as well as in the soybean space, we're making biodiesel. And one of the byproducts of that is soybean meal. So the cow is a great recycler. In fact, that four stomachs of the cow allow her to eat a lot of byproduct feeds. And I've traveled, I think I've been to 48 states covering the dairy industry. You know, I've seen tomatoes and carrots that didn't make human grade food in California get fed to cows. I've been in Ohio where reject jelly from Smuckers has been fed to cows. I've been to Canada where a farmer plows out the driveway next door of the plant that makes biscuits for McDonald's.

23:21And the reject biscuits go into what is a total mixed ration, a TMR. So it's a big food blender, mixes up all the food and the cows get a blended diet. So it's kind of a remarkable story. Honestly, a cow fed on McDonald's biscuits sounds pretty good. Sounds great. It sounds like a cow is just an amazing machine. All of these discarded food products go in that people that there are no other use for, because most of us don't have four stomachs. And then every year the cows get better at production or you get better at producing higher producing cows. Sounds like a great business. It is remarkable.

23:58And that's why even though milk is a product that is very consistent, every farm is different in how they approach it. You know, there's very there's similarities to it, but there's a lot of regional differences as well. Wait. OK, so cows might be amazing machines, amazing machines. Yeah, good one. Thank you. I had to get at least one pun in there. But the dairy industry we hear has been challenged. Right. So consumption has been going down. I think I read somewhere it's down 40 percent in the U.S. since 1975, something like that. profit margins are still pretty compressed. Prices seem to be on.

24:39Basically, it's a race to the bottom. And so you've kind of seen a lot of consolidation of the smaller farms into these big dairy conglomerates. Is that the story there? Well, I want to back up first, though. Dairy consumption is actually at the highest level it's been in 40 years. And we measure that. We have some really good USDA data on that. But if you look at near term, you know, we started out talking about Fairlife, that's Coca-Cola's newest$1 billion brand. If you look at yogurt, year over year, it's up almost 10%. One of the big stories in the yogurt category is certainly Shabani. And I would have half of the sales of yogurt these days are Greek yogurt, which are high protein yogurt.

25:23Another category that's been exploding, it's we made grandma's cottage cheese hip again. And cottage cheese is up. Cottage cheese is great. I always thought it, it always feels like it should have a moment more like Greek yogurt. It's like, oh, this is cottage cheese's year. Is it finally happening? It is. And people can't make it fast enough. I was actually talking to a dairy processor at a Wisconsin cheesemakers meeting just last week when it comes to yogurt. And one of his customers said, can you get me more? And he goes, well, not until next year. And he goes, well, just send me whatever you can.

25:58It's, most products are very tight right now. And then cheese consumption is at an all-time high, actually, at 40 pounds per person per year, per capita. So those are some big growth areas. What you're probably seeing, Tracy, though, is the story on fluid milk. In the 1970s, the average American drank 30 gallons a year, and now are probably closer to 19 gallons. One of the things for fluid milk is it's hitched to dry breakfast cereal, complements to one another. And in fact, one third of all fluid milk gets consumed on dry breakfast cereal. And that category has not been going well. But then we flip over to the core power, which is really a high protein milkshake.

26:42And that is not actually tracked in the fluid beverage category. It's considered a different product. We have seen consolidation in the dairy industry. There's fewer dairy farms each year. But the interesting thing is I graduated college in 1995. While dairy farm numbers are down, the number of dairy cows are the same, essentially, about 9.3 million. But milk production from those cows is up 45 % during that time. It just speaks to the efficiency of the dairy cow and what things are taking place on a dairy farm. And my intuition is correct that within the liquid milks category, we've sort of everything in society has become so polarized and everyone loves extremes and we see it in politics.

27:32We see it in everywhere. This is well known. No one likes the middle ground anymore. Within the liquid milk category, has everyone sort of gone to the extreme ends? They want the high-fat milk or the skim, leaving that good old 2 % milk, the missing middle? That's a very interesting question, Joe. What's taking place in fluid milk? Three big trends. Protein, so products like Fairlife. Another one is lactose-free. A new milk plant going up today will have membrane technology in to do reverse osmosis. And about everybody on the new milks are pulling out lactose. And you've got to remember about one third of Americans are probably lactose intolerant, about 120 million.