Changing consumer expectations pose one of the most dynamic challenges facing today's dairy industry. More and more, consumers seek organic products from smaller farms in pursuit of healthier food.

The irony? Newer, larger dairy farms and processing plants are more efficient and are better equipped to deliver "cleaner" products. So what do consumers really want? And how can dairy meet their needs? Ted, T3 and Anna discuss.

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. In this episode, we want to discuss whether the dairy industry has some catching up to do in terms of addressing consumers' attitudes about nutrition. We'll get to that in a few minutes. But first, let's discuss the recent spike in cheese prices over the last few weeks. T3, you've said that you think the rally is "hollow." What do you mean by that?

T3: Cheese inventories are still very high. There have been a couple of pieces of data who have indicated that maybe demand has picked up a little bit but when you're sitting on a large amount of inventory, it takes a long time to really change the supply and demand balance. Just because a couple of data points say, "Hey, things might be getting better," doesn't mean you've solved the problem. It just means that maybe if you stay on this course for another six to 12 months, you might get to a point where you've solved the problem. And everybody's reacting to it by saying, "Hallelujah, the cheese price can go up," and I can tell you as a someone who has to go sell cheese every day, in the last three weeks as we've gone from $1.45 cheese to $1.73, more and more buyers have backed off and said, "I don't need this cheese today. I don't need this cheese anymore. I've got more than enough in inventory."

I was just in Chicago in an industry meeting and the comment I heard from multiple converters of cheese was, "I'm pretty happy with where my inventory is right now." Because they saw the cheese market go from $1.45 to $1.73 and they're like, "Sweet, my inventory value just went way up." So, now what are they gonna do? They're gonna stop buying, they're gonna run their inventories down into the market. And so, we could easily go the other way. That's why it's hollow.

Ted: And I tend to agree with that. Although I do think that most of the cheese inventories are hedged so they really carry the inventory is of nominal concern to them. And that's a change that's occurred over the last few years that will change how quickly this can change. It used to be, all of a sudden you get to a point that like somebody has flipped the light switch and, boom, it would take off one way or the other. It seems like the cycle has flatted out and lengthened because of the risk management, because of the storage ability, because of the flattening of demand and also, it's probably flattened on the dairy side too, on the supply side. People are breeding for beef right now and not for milk.

T3: But that'll be—we won't feel the effects of that for another two years.

Ted: Well, that's my point. It's gonna be what? Once it turns around… I don't think it'll turn around this summer and go the other way. It may not go as fast as a lot of people like to see but it'll continue for a long time.

T3: It could.

Ted: That's what I'm sort of thinking it'll turn out to be, which will be a change from what we had before.

Anna: Let's move on. We talk about changing consumer expectations all the time. It comes up in pretty much every episode we do. Obviously, the food we buy and the reasons why we buy it always evolve over time. But right now, the dairy industry seems to be struggling with how to get people what they want. T3, start us off. In your opinion, what's going on?