Milk without a moo

The real threat to New Zealand dairy is from alternatives in the business-to-business ingredients industry, the very same market NZ dairy thrives in. By Elaine Fisher.

Alternative dairy, especially produced from precision fermentation, represents a significant risk to the New Zealand dairy industry and should not be overlooked, believes Anna Benny, a South Otago dairy farmer and food technologist.

“I truly believe our dairy industry has the strength to weather this disruption, but to do so successfully requires a shift in mindset and strategy from multiple angles, the scale of which will be hugely challenging to most. It’s a shift that is mostly being overlooked,” she writes in her Kellogg Rural Leadership report “Milk Without a Moo. What’s the Risk to the New Zealand Dairy Industry?”

Anna believes the threat does not come from plant-based alternative milk products such as oat and soya milk.

“New Zealand only exports a small amount of liquid milk. The real threat is from alternatives aiming to disrupt the business-to-business ingredients industry, the very same market that New Zealand dairy currently thrives in.”

Alternative protein, sometimes called lab-grown, cultured or synthetic food is the threat.

“It would be easy to dismiss as a phenomenon that will happen elsewhere, and won’t affect pasture raised, free-range, high-quality products from New Zealand. Having researched this topic for a year, I do not believe this is the case.”

Among the reasons for that belief, Anna told Dairy Exporter, is that commodity products which are the core business for the NZ dairy industry, are also those most easy to replicate, using precision fermentation technology.

“Advanced economies that New Zealand tends to compare itself with are moving rapidly, investing in research via partnerships between government, research institutions and industry. New Zealand risks being left behind.”

Unlike the threats to the meat industry from plant protein, driven largely by consumer demand, the move to create alternative dairy ingredients is mainly industry or government-led.

“When dairy products become ingredients in processed food items, they are treated as commodities, comparable with the same product specification (ie: milk powder) made all over the world and competing only on price. They lose their origin story which is what New Zealand prides itself on.

“It’s not consumers who buy the 25kg bags of Fonterra milk powder and they don’t value the fact that the milk powder in their processed food such as a chocolate bar is made with New Zealand milk powder, so any competitive story associated with New Zealand is lost.”

Financial backing for the development of advanced precision fermentation by governments concerned about food security, including China, and large multi-nationals, takes away the usual market forces of success or failure, meaning, Anna believes, the new technology is likely to be commercially viable and at scale, within 10 years.

While NZ dairy farmers pride themselves on producing high-quality, low-carbon milk from pasture-fed cows, most of their milk ends up as milk powder or anhydrous milk fat products for the manufacturing industry. It was her work as a food technologist that took Anna to large dairy factories and the realisation of exactly what the milk farmers so proudly produce, ends up as.

“New Zealand dairy exports are mostly used as ingredients in other foods. New Zealand is the largest dairy exporter in the world, growing from $2 billion of exports to $20 billion in just 30 years.

“A large proportion of New Zealand dairy products are used as ingredients in processed food. In 2021, Fonterra made 74% of the milk they processed into ingredients. New Zealand provides 60% of the world’s whole milk powder exports, with a large proportion going to China to supplement their domestic milk production.”

Products with the functional properties of animal ingredients are being reverse engineered from plants. Individual proteins (whey and casein) are the initial targets for precision fermentation technology. Perfect Day is producing whey commercially, and others are set to launch in the next two years.

“Cellular agriculture companies are developing technology to produce human breast milk for babies. Could this replace infant formula made from cow milk?”

Precision fermentation technology uses a tank of microbes consuming sugar to produce exactly the same molecules as milk.

“If they were assessed under a microscope, it would be impossible to tell whether they were from a cow or a fermentation tank. This technology has existed commercially for well over 40 years, producing components which used to be harvested from animals (insulin, rennet). It is now being leveraged at a far greater scale to produce components of milk, starting with protein.”

And the process is rapidly becoming economic. Anna says precision fermentation produced protein is predicted to reach price parity with traditional dairy within the next eight to ten years.

“The cost and waste involved in milking cows is far greater than simply fermenting a sugar feedstock. 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 (vegetarians and vegans). This will be the tipping point, where alternatives can displace traditional dairy.”

Anna is worried that if the New Zealand dairy industry does not react quickly enough to the threats to its core business, the future for the industry and in fact the whole country, will be bleak.

The industry, she says, needs to acknowledge the risk and react. “And that’s probably already happening. I think Fonterra is doing more than we are aware of. I’m increasingly confident that a lot is going on under the radar at the moment and I hope there will be some exciting revelations in the not-too-distant future.”

Among the answers to the threat is to play a part in this emerging industry.

“New Zealand has significant expertise in key areas required for alternatives to scale up. Leveraging this will ensure New Zealand dairy will continue to be profitable in the long term and provide capital to invest in the infrastructure required to make milk into money in different ways.

“It’s imperative that dairy companies identify the elements of their product portfolio which are at risk of disruption and pivot milk towards future-proofed products.

“Researching this report from our dairy farm in South Otago, watching the cows leave the shed after milking, I felt both a sense of unease and urgency about the changes required to future-proof the industry,” says Anna who loves the passion of Kiwi dairy farmers, and the pride they have in the industry.”