What's Happened to Dairy Product Sales and Why? by Karen Bunch a

What's Happened to Dairy Product Sales and Why? by Karen Bunch a Introduction Dairy products have historically been an important component of American diets. In terms of volume, more dairy products are consumed than any other type of food. In 1983, approximately 307 pounds of dairy products were consumed per capita. Fluid milk products accounted for almost four-fifth of this total, or 245 pounds. Dairy products provide 75 percent of the calcium in the daily nutrient supply, and are important sources of other nutrients in the nation's food supply. However, as most of you are well aware the consumption of dairy products has declined steadily in the last 3 decades, as measured in pounds or as a component of total food consumption. In terms of expenditure on U.S. farm foods, dairy products have fallen from 17 percent of total food expenditures in 1960 to 14 percent in 1983. The objective of this paper is to present a clear picture of what has happened to dairy product sales, and to isolate and discuss some of the factors that have led to the decline in consumption. Because of their relative importance this discussion will focus on the consumption of fluid milk products. What has happend Data on fluid milk sales are available beginning in 1924. A look at the consumption figures over this long time series puts current consumption in perspective. In 1924, per capita fluid milk consumption was 294 pounds per capita, of which an estimated 52 percent was consumed on farms where produced and 27 percent of the population lived on farms. By 1945 per capita consumption had increased to 375 pounds per capita, an historic high. In that year on farm consumption was 25.2 percent of the total. Both per capita consumption and the percentage consumed on farms has fallen steadily since the peak year. By 1960 per capita consumption of fluid products had fallen to 300 pounrls per capita and continues to decline. As the population on farms declines so does consumption of milk produced on farms. Between 1960 and 1975 fluid milk consumed on farms where produced fell from 10 to 2 percent of total fliud milk consumption. Decline in Fluid Milk Sales Since 1960 Since 1960 sales of fluid milk and cream have fallen 15 percent, from 286 to 243 pounds per capita in 1983. Reviewing consumption trends in the af Economic Research Service, U.S. Department of Agriculture

-2- three major categories: whole milk, other beverage milk, and cream and specialties, it is clear that the increase in consumption of other beverage milk has partly offset the rapid decline in whole milk consumption. The decade of the 1970's was the period of fastest change. Between 1970 and 1980 per capita whole milk sales declined at an average rate of 3.6 percent per year while sales of other beverage milk were increasing by 5.6 percent per year. In 1960, with 251 pounds sold per capita, whole milk accounted for 88 percent of total fluid milk products. In 1970 that percentage had declined to 75 percent and by 1983 whole milk represented only 54 percent of the total. Sales of other beverage milk were only 26.6 pounds in 1960, and increased to 57 pounds by 1970 and to 103 pounds by 1983. Further breakdown reveals that low fat milk accounts for most of the increase in the other beverage category. Sales of low-fat milk have increased from only 2.3 pounds per capita in 1960 to almost 80 pounds in 1983. Consumption of buttermilk has declined slightly while that of skim milk remained relatively constant. Sales of flavored milk have increased by about 38 percent but still accounts for a only 4.2 percent of total sales of fluid milk. Sales of products in the cream and specialties category have increased in the last decade, after declining from 1960 to 1970. Most of the increase is due to higher consumption of yogurt, which has shown phenomenal growth in the last 15 years. Sour cream sales have also increased. Cream and blends have suffered from competition from nondairy toppings and coffee whiteners. Sales of cream have fallen by 40 percent since 1960 when 2.6 pounds per capita were consumed. The decline has leveled off in recent years and cream sales increased in 1982 and 1983. The process of ultra pasturization has contributed to this by increasing the shelf life of products and providing a less perishable product for use in restaurants. Consumption Has Declined in Every Age Group Another dimension of the decline in fluid milk sales is the change in consumption by age group. According to USDA's Nationwide Food Consumption Survey (NFCS, Spring 1965 and 1977), average daily milk consumption has fallen in every age group except over 65 years (10,11). The percentage of individuals consuming milk in one day also fell in every age group and declined from 75 to 65 percent for the sample as a whole. The greatest consumption decline was in the under 5 age group, for whom 1977 consumption was 31 percent lower than in 1965. Among individuals 9-14 years of age, milk consumption in 1977 was 22 pprcent lower than in 1965, while the percentage of individuals using milk fell from 88 to 82 percent. The decline in consumption for adults was 12 percent between the two surveys while the percentage of adults consuming milk in anyone

-3- day fell from 66 to 58 percent. For all individuals in the survey, average daily consumption fell from 11.3 ounces in 1965 to 8.5 ounces in 1977. Economic Factors Why Has Fluid Milk Consumption Declined In an economic analysis of demand, price and income are theorized to be the most significant factors influencing consumption. In the case of fluid milk, however, changes in price and income do not appear to be significant determinants of the decline in consumption. Over the last 2 decades, milk prices have increased less than other major food items. Since 1963 the consumer price index for fluid milk has risen 146 percent, compared to a 196 percent increase for meats, and an increase of over 200 percent in the CPI for all food. Economic analysis has detemined that milk consumption is not responsive to changes in price. Estimates of the price elasticity for fluid milk range from -0.12 to -0.3 (2,4). This implies that when price increases by 10 percent, demand for fluid milk will fall by less than 3 percent. In contrast, price elasicity estimates for red meat and poultry are -0.68 and -0.89 respectively (5). The response to income change has been estimated to be very small as well. Using data from the 1977-78 USDA Nationwide Food Consumption Survey, Dave Smallwood and Jim Blaylock of the Economic Reserach Service determined that as household income increases, expenditures for fluid milk products decrease by a small amount. The negative response to changes in income was due to declines in whole milk consumption. In rpsponse to a 10 percent increase in income level, expenditures on whole milk declined by 1.3 percent, while those for other beverage milk increased 2.6 percent. These two responses balance to a total expenditure response of -0.09 percent for every 10 percent increase in income. The authors suggest that the negative effect of income on whole milk expenditure may indicate that higher income households are more health conscious, and substitute lower butter fat milk for whole milk (1). This small income response suggests that sales of fluid milk have not benefitted from rising incomes in the last 20 years as have other foods with higher income elasticities such as beef and cheese. Demographic Factors One of the major factors discussed in relation to the decline in fluid milk consumption is the changing age composition of the population. Population statistics confirm that the median age has been increasing from a low of 28 years in 1968 to 30.9 years in 1983. More significant in terms of milk consumption is the decline in the percentage of the population under the age of 19 -- the major consumers of fluid milk.

-4- This percentage has fallen from 39.3 percent in 1965 to 30.2 percent in 1983, and while the total population has increased 20.7 percent in this time period, the number of individuals under 19 years of age has fallen fallen by 7.2 percent. Economists have attempted to quantify the impact of population change on milk consumption by incorporating demographic variables in economic models of milk demand. Estimates indicate that the changing age structure of population is responsible for a 3.5 to 7 percent decline in fluid milk consumption since 1965. Through use of a crossectional model based on the 1965/66 Household Food Consumption Survey, Salathe (1979) concludes that changes in the age/sex structure of the population resulted in a 3.7 percent decline in fluid milk consumption between 1960 and 1975 (4). Research by Boehm (1976) found that the percentage of the population under 5 years of age is a significant determinant of milk demand; a 10 percent reduction in the population under five years of age resulted in a 3.5 percent decrease in milk consumption. Extrapolated over the period of his analysis this implies that the 22 percent decrease in the under five population between 1966 and 1978 is responsible for a 7.7 percent decline in milk consumption. Actual milk consumption declined 8.5 percent during that period (2). Research by the author estimated that milk consumption declines by 5.2 percent for a 10 percent increase in the median age of the population. The median age has been increasing since 1972. Forecasting milk consumption, holding median age constant at 1972 level, results in an estimate of 1983 milk consumption that is 4.8 percent higher than the actual level (4). This result falls within the range of previous research and confirms that changes in the age structure of the population have been a significant determinant of the decline in fluid milk consumption. Race Another demographic factor related to decline in milk consumption is the changing racial structure of the population. Many studies of household consumption of dairy products have shown that black household consume significantly less fluid milk than white households. Cultural differences and inability to digest milk protein has been given as reasons for the differences in consumption. Blaylock and Smallwood estimated that black households consume 28.7 percent less fluid milk than their white counterparts; 12 percent less whole milk and 49 percent less other milk. No significant difference in total fluid milk consumption was found between white and non-black-non white households, though the later consumed 39 percent more whole milk and 80 percent less other milk (1). These results imply that the percentage of blacks in the population should influence milk consumption. The percentage of blacks in the population has risen from 10.5 percent in 1960 to 12 percent in 1983.

-5- However, attempts to quantify the impact of this change have concluded the impact has been negligible. Boehm found that a 10% increase in the number of blacks per 1000 population resulted in a 1.5% percent decline in milk consumption (2). Extrapolated over the estimation period of 1966 to 1975, this implies that increasing number of blacks in the population resulted in a 1 percent decline in fluid milk consumption. Salathe found a similar result of less than one percent decline in fluid milk consumption due to changes in racial structure (8). Health Concerns One of the main reasons cited for declining milk consumption, especially among adults, is the concern over saturated fat and calories. The major evidence of this concern is the shift from whole to low-fat milk. Industry leaders speculate that if it had not been for the increased availability of milk with 1 and 2 fat content, total sales would have declined further. Specific surveys provide further evidence. Results from 1980 survey by the Economic Research Service indicate that 28 percent of households making dietary changes for reasons of health wanted to ' reduce fat intake. They did so by shifting to lean beef and poultry and substituting low-fat milk for milk with higher fat content (7). A more recent survey reported in Dairy Field magazine revealed that the majority of low-fat milk drinkers (54 percent) drank low-fat milk for diet or health reasons. Price differential or taste were not influential factors. (Results were: concerns about fat 27%; calorie reduction 54%; preference 16%; price 7%) (6). Competition Among Beverages Further evidence of shifts in preference can be seen when milk consumption is compared with that of other beverages. Total per capita beverage consumption in the U.S. has increased 22.9 percent since 1960, from 110.5 gallons per capita to 135.9 gallons in 1983. What is of particular interest is the shift in relative importance among specific beverages. In 1960, coffee ranked as the number one beverage, with 37.4 gallons per capita per year, followed by milk at 33.9 gallons, followed by soft drinks, and beer. By 1983 these positions were reversed with soft drinks consumption far ahead at 40 gallon per capita and milk, coffee and beer consumption 27.1, 26.2, and 24.3 gallons, respectively. When beer, wine and distilled spirits are summed, more alcoholic beverages were consumed in 1983 than milk (3,12). Price does not appear to be a significant factor in this switch among beverages. Only coffee consumption seems to be affected by price increases over the last two decades, especially during the Brazillian coffee freeze during the late 1970's. The shift between milk and soft drinks does not appear to be influenced by price. The price of soft drinks rose over 300 percent between 1960 and 1983, while fresh whole milk price increased about half as much at 146 percent. Yet per capita

-6- consumption of soft drinks soared 146 percent over this period, while milk consumption declined 20 percent. It is clear that some of the increase in soft drink consumption has come at the expense of milk. Whereas according to the NFCS consumption of milk has decreased in every age group, soft drink consumption has increased. Among adults 23 to fifty years of age, soft drink consumption has exceeded milk consumption in the 1977 survey. Though teenage boys were still drinking more milk than soft drinks in 1977, for teenage girls the opposite,was true: with 9.3 ounces of soft drinks were consumed per day compared to 8.6 ounces of milk (10,11). Milk has not Kept Pace in the Changing Market -- Soft drink and beer manufacturers have sucessfully capitalized on major lifestyle changes. Increased physical activity and time spent outdoors have helped boost soft drink and beer popularity. Accordingly, manufacturers of these products have geared their advertising to leisure activities. In 1982, they spent $660 million on media advertising promoting their products, compared to $28 million spent on dairy advertising. In addition, many soft drink and beer manufacturers sponsored rock concerts, sporting events, and activities on college campuses (3). Another area where milk consumption has not kept pace is in the expanding food-away-from-home market. According to an Economic Research Survey of Food Service Operations, soft drink use by separate eating places more than doubled between 1969 and 1979, while the amount of milk received increased by only 15 percent (13). Milk consumption away from home is primarily in full service restaurants and institutional market. Soft drinks, on the other hand, have a strong identity in fast food establishments, one of the fastest growing sectors in the away-from-home market in the past 10 years. Milk Consumption Prospects Despite declines in sales and shifting preferences the prospects for future increases in milk consumption look hopeful. The decline in whole milk consumption has leveled off in the last 3 years and the consumption of total fluid milk for 1983 was 1.4 percent higher than the previous year. Prospects for increased consumption due to changes in the age structure of the population are limited in the long run. In the next decade, the 1945-60 "baby boom generation" will move into the lowest consuming group, although the effects of this shift should be partly offset by their children. The current increase in the birth rate may lead to short run increases in total fluid consumption. However, the percentage of the population under 5 years of age continues to decline, and the recent increases in the birth rate will not have much impact on per capita consumption levels.

-7- Some of the factors that have influenced the decline in consumption are turning in favor of milk. The population is becoming increasingly sophisticated in their nutrition knowledge. Despite concerns over saturated fat, milk--particularly lowfat-is percieved as a wholesome, nutritious product. The proliferation of milks with different fat content has helped change public perception of the level of fat in milk, as well as increasing the selection fluid products. Increasing concern about osteoporosis in women and the importance of calcium should also lead to increased milk consumption, especially among older women. Advertising by the National Dairy Promotion Board is an attempt to enhance the consumer perception of the nutritious qualities of milk with the objective of increasing consumption. This new promotion effort and increasing attention given to the problems faced in marketing fluid milk products signal that the dairy industry is taking serious action to reverse the downward trend in fluid milk consumption.

References 1. Blaylock, James R. and David M. Smallwood. Effects of Household Socio Economic Features on Dairy Purchases. U.S. Department of Agriculture, Economic Research Service, Technical Bulletin No. 1686, August 1983. 2. Boehm, William T. The Household Demand for Fluid Milk in the United States with Regional Consumption Projections through 1990. Virginia Polytechnic Institute and State University, Research Division Bulletin 120, December 1976. 3. Bunch, Karen and Julie Kurland. "How America Quenches It's Thirst," National Food Review, U.S. Department of Agriculture, Economic Research Service. NFR-27, October 1984. 4. Bunch, Karen unpublished research, December 1984. 5. 6. 7. 8. 9. 10. 11. 12. 13. Haidacher, Richard, C., and others. Consumer Demand for Red Meats, Poultry, and Fish, U.S. Department of Agriculture, Economic Research Service, AGES 820818, September 1982. Palmer, Michelle, "Fluid Milk Plays Transitional Role," Dairy Field, June 1984 pp. 26-30. Putnam, Judy J., Health and Nutrition Influence the Daily Diet: and the Food Industry Reacts. U.S. Department of Agriculture, Economic Research Service, forthcoming. Sa1athe, Larry. "The Effects of Changes in Population Characterictics On U.S. Consumption of Selected Foods," Amer. J. Agr. Econ. 61(1979): 1036-45. Thraen, Carmen, Jerome Hammond and Boyd M. Buxton. "An Analysis of Household Consumption of Dairy Products," University of Minnesota Agr. Exp. Sta. Bull. 515, June 1976. U.S. Department of Agriculture. Food and Nutrient Intakes of Individuals in the United States: Spring 1965. Household Food Consumption Survey, 1965-66, Report No. 11, Agricultural Research Service, 1972. U.S. Department of Agriculture. Food Intakes: Individuals in 48 States, Year 1977-78. Nationwide Food Consumption Survey 1977-78m Report No. II, Human Nutrition Information Service, Consumer Nutrition Division. August 1983. U.S. Department of Agriculture. Food Consumption, Prices, and Ex,enditures 1963-83. Economics Research Service, Statistical Bulletin No. 13, November 1984. Van Dress, Michael G. The Foodservice Industry: Structure, Organization, and Use of Food, Equipment, and Supplies. U.S. Department of Agriculture, Economic Research Service, Statistical Bulletin No. 690, September 1982.