Anna Benny, technical account manager at The Kellogg Rural Leadership Scheme, said in a recent paper that the dairy industry was ripe for disruption because it was over reliant on exports of whole milk powder.
Whole milk powder could be replaced by proteins produced from precision fermentation, that in future would be cheaper and more climate friendly.
In the paper Benny showed that in 2020 exports of whole milk powder contributed nearly $7.57 billion to the economy, with that figure steadily rising. New Zealand supplied 60% of global whole milk powder exports, most going to China to be used as ingredients in an array of products.
Whole milk powder
Whole milk powder was sold as a commodity, and acted as an ingredient in everything from Kit Kats, yoghurt drinks, sports drinks, whey sold at the gym, and was also an ingredient in many pharmaceutical products, Benny said.
Buyers across the world saw it only as an ingredient, she said.
Benny, who said she loved the industry as she lived on a South Otago dairy farm with her dairy farmer husband, believed the New Zealand dairy story, that was seen as a selling point, did not travel with local products.
“Fonterra’s biggest customer is Nestle. When last did you see a Nestle product that talked about low carbon milk from New Zealand or the fact that our cows are pasture raised? Or our clean green milk?
“I think many farmers are disconnected from what happens inside the processing plant. We make a lovely natural product, but in a plant it is carefully controlled to make mostly powders. There is no romance to it at all,” Benny says.
In a process similar to beer brewing, precision fermentation used microbial cells as factories to grow proteins, fats, enzymes or vitamins. To produce nature-identical molecules the process only needed energy, water, microbes, a feedstock such as sugar and a controlled environment, she said.
This was in contrast to milking cows.
“It’s an intensive process to produce a tonne of milk powder. You need to grow a cow. You can’t milk her for the first two years until she’s had a calf. Once she’s in the milking herd, she needs enough food and water to stay alive, walk to the milking shed twice a day and produce milk.
“If there’s enough grass in the paddock this will form the majority of her diet, it’ll normally be topped up with supplementary feed such as hay or palm kernel expeller (PKE). The milk will be collected, driven to another location where the water (87% of milk) will be removed via spray drying, leaving just the 13% solids available to sell,” Benny said.
Precision fermentation technology bypassed this process. If assessed under a microscope proteins grown using fermentation would be impossible to differentiate from those produced by a cow. It is also nutritionally the same, she said.
“If manufacturers can buy the same product, or one that is even more consistent, safer, priced lower, that has the same purpose in the food they are making, then why would they buy it from New Zealand dairy?
“It’s a real bulk commodity and ends up in warehouses and looks exactly like products from anywhere else in the world, and looks like the alternative proteins that are coming for us,” she said.
Milk consisted of two proteins, caseins and whey. Whey was already manufactured commercially with one United States company manufacturing caseins, she said.
Feedstock for microbes used in precision fermentation could be from almost any product.
“These microbes can digest anything into simple sugars and express it as proteins. At the moment sugar is used as it is the simplest thing to train the microbes to consume. Eventually any form of carbohydrate, like some vegetables, could be used, Benny said.
In New Zealand there were research projects that investigated the use of left-overs from the timber industry and digesting it into simple sugars to be used as feedstock.”
The retail market for milk powder was small when compared to the demand for drinking yoghurt, shelf stable milk and flavoured milk drinks, which were most likely what Chinese food manufacturers produced with milk powder they bought from New Zealand, she said.
“When dairy products become ingredients in processed food items, they are treated as commodities, comparable with the same product specification made all over the world and competed only on price.”
Benny said she felt that this challenge was much bigger than the industry believed it to be and that more people than just her should take the possible future scenario seriously.
“That tipping point will happen so quickly and will damage so many people’s livelihoods,” she said.
When is the tipping point
To pose a threat to New Zealand dairy products, alternatives would need to be high quality, available in bulk, and consumers would need to approve of its taste and of the way it was grown, Benny said.
Nestle was aiming to increase its plant-based product range and was already reformulating recipes for products like Kit Kat, Milo and Nescafe coffee, to create dairy-free versions. Big food companies committed to adding to their plant-based portfolios would increase demand, she said.
“There will be very few people needed to make these changes. It will be the CEO’s of big food companies who are driven by corporate sustainability, profits and the need to make sure their food appeals to the maximum number of people. This will swing the books in favour of something that can do the job of dairy, for a lot less and with a lot less greenhouse gases,” Benny says.
There was still speculation around when price parity between precision fermentation products and whole milk powder would be reached. Predictions ranged between one and 10 years, she said.
However, the road to significant market change was still bumpy.
The cost to produce insulin by precision fermentation was about $110,000 a kilogram, compared to the milk price of $9.90/kg. But multinational companies were attempting to build scale, with breweries like AB InBev increasing fermentation capacity for food grade precision fermentation. This would drive down costs, Benny said.
“Most milk does not cross international borders and will be consumed in the country of origin. But only 4% of local milk is consumed locally.
“It puts us in a difficult position as ingredients in the lower end of the market are going to be the first to be disrupted by new technologies, particularly if the ingredient is expensive, and it is easier to reach price parity,” she said.
“Once price parity is reached, food manufacturers who currently value New Zealand dairy ingredients for their high quality, consistent, cost-effective attributes will have another option.
“In applications where dairy is anonymously used as a functional ingredient, it’s highly likely these will move to the cheaper option which will have the additional benefit of helping meet sustainability goals and appealing to a wider variety of consumers,” Benny said.