Dairy technology and the quest for added value JOHN OWENS Director General, Dairy Trade Federation

Address given to members of the Society on 19 October 1981 at the Scientific Societies Lecture Theatre, 23 Savile Row, London WI, before the 38th Annual General Meeting.

My aim in this paper is to demonstrate the technical contri- bution that can be made in the future and, particularly, to persuade senior management that technical resources are every bit as important as marketing or financial skills. Firstly, I shall sketch briefly the changes that are taking place in our markets and in the structure of our industry. Secondly, I shall consider the expenditure that we make in research, and process and product development, and compare it with what is being spent by our competitors and by other sectors of United Kingdom industry. Thirdly, I shall consider the ways in which technology can add more value and improve our performance. Finally, I shall suggest how we should use our scarce technical resources.

These are complex issues, and you may well ask what qualifications I have to try to answer them. I should make it clear that the views I express are my own and have not been considered officially within the Dairy Trade Federation (DTF). As for qualifications, I have spent the last 25 years selling technical products throughout the world, running a marketing department of a chemical company, managing a company (with a research and development department) selling industrial raw materials, and, since we joined the EEC, running the DTF. The DTF, or Central Milk Distributive Council, as it was then called, was set up in 1933 to negotiate milk prices and quality on behalf of dairies with a monopoly supplier. We are now also an employers’ association negotiating the national wage settlement with the trade unions. We represent the industry to the UK Government and to European institutions.

From this central position it is possible to develop an independent view of the industry’s progress, particularly in responding to the pressures imposed upon it. I d o not expect to provide very many answers, but perhaps I may stimulate your interest by asking some of the questions.

CHANGES IN THE MARKET Figure 1 shows how the relative uses of milk in the UK have changed between 1970 and 1980, alongside a forecast for 1983. Total milk production has grown by as much as 23 per cent since 1970 though this is slower than in some other EEC countries. The changes in use are somewhat deceptive. The liquid milk market has indeed declined since 1970, but butter consumption has fallen to an even greater extent. Price increases accom- panying subsidy reductions since 1975 have been a major cause of the difficulties in both instances. The point is that, although we have always been and remain self-sufficient in liquid milk, we depended greatly on imports of butter and cheese in 1970, and our increased production has taken a growing share of these markets. Incidentally, it would take only a 24 per cent swing from whole milk to semiskimmed milk sales for us to become completely self-sufficient in packet butter by 1983. This would leave no room at all for New Zealand. To complete the picture, cheese consumption has been fairly static and is particularly disappointing when other countries consume two or three times as much cheese per capita. The cream market has been fairly strong until recently. The major new market growth area has &en yoghurts and fresh dairy desserts, and though they absorb r e l a t i d y small quantities of milk, they are typical of the higher added-value products on which we must concentrate in the future.

The other main feature of the 1970s was our integration into the EEC. Indeed, the dairy industry is now the largest exporter

1970 1980

BUTTER

Liauio

12,900 MILLION LITRES 15,900 MILLION LITRES

1983

16.500 MILLION LITRES (NED0 FORECAST)

Fig. 1. Relative uses of milk produced in the United Kingdom

in the food industry, with over €275 million of exports to the rest of the world in 1980. There is, however, intense competition in the world market, and this means that our marketing and technical resources have to be as good as those anywhere else for us to succeed.

Figure 2 illustrates the retail value of the major dairy markets in the UK. It also compares 1980 with 1970 and emphasizes the continuing importance of the liquid market. The future depends to a great extent on our ability to maintain the availability of regular doorstep deliveries to almost every house in the country. Doorstep delivery is a classic example of added value. It provides farmers with a higher return for milk. It provides direct employment for 60,000 people, with a further 72,000 employed in related agriculture, transport, glass bottle manufacture, and electric vehicle production. Above all it is based on a service that our customers find useful and want to be continued.

There is, however, a danger that if a small proportion of customers were to switch some of their purchases to shops, the unit cost of doorstep delivery would increase and parts of the service could rapidly become uneconomic. For this reason we should be aware of the significant changes that have been taking place in the retail sector. Six supermarket groups now supply more than 50 per cent of grocery sales in the UK. A food manufacturer has to get his product into three or four of the six groups otherwise it will fail. In Germany, supermarkets have

1 Journal of the Society of Dahy Technology, Vol. 35. No. 1. January 1982

E E MOM

LlRl lD HlLK CHEESE BUTTER

Fig. 2. Retail value of major dairy markets in the United Kingdom

refused to handle fresh pasteurized milk and insist on supplies of UHT milk. Large retailers can insist on discounts unrelated to cost savings achieved by their suppliers. In the United States, the Robinson-Patman Act prescribes that manufacturers must sell the same products at the same price and that price dif- ferentials must relate to actual cost savings. Our Government must maintain an environment which allows investment to be profitable, and one way of doing this would be to ensure that retailers cannot demand discounts unrelated to cost savings.

CHANGES IN THE STRUCTURE OF THE INDUSTRY Throughout the EEC dairies are getting larger (Fig. 3). In fact dairies in the UK are small in comparison with some of the largest on the continent. The chances are that there will tend to be fewer, bigger dairies in the future. The more milk is sold by shops, the more the market will be segmented into different types of milk and different unit sizes. The growth in demand for

1 127

100

50

0

194

8 L - Y

9 t. T a

low-fat milk means that dairies have to be able to handle the by-product, cream. This could force UK liquid processing plants to become manufacturing units capable of handling their own surplus, as is already the case elsewhere in the Community.

Another development in the EEC has been the growth of producer cosperatives. as in the United States. In the UK, the Milk Boards have also sought to move nearer to the market- place, and this has brought them into greater competition with their customers. Private dairy industry throughout the EEC justifies its role in the market-place because it can add more value to the raw material by international marketing expertise or by technical superiority and thus pay a higher price for milk than co-operatives. On the doorstep we are adding value because we provide a service that the customer wants. If, for any reason, that service were to become uneconomic, as a result of cut-price imports or for any other reason, then we would have to add more value to milk in other ways. The question that I want to pose is are we prepared to do this?

Increased competition is likely to reduce the difference between the various prices we pay for milk. You may ask whether a single milk buying price would act as a greater incentive to add value. While one could not claim that a differential pricing system has restricted innovation, it has caused some investment to be made elsewhere. I am thinking. as examples, of the alcohol from whey plant that was sited in Southern Ireland and the new chocolate crumb plant that was recently built in Scotland. It has not always been easy in the past for dairies to obtain extra milk for added-value products because of the priority given to the liquid market and because it could mean operating other capital-intensive plants at below their optimum capacity. With more milk available for manu- facture this situation is now changing.

Thus, from all I have said so far. the pressures on the industry to add more value to its raw material will increase in the future.

DO WE AS AN INDUSTRY POSSESS THE RESOURCES FOR RESEARCH, DEVELOPMENT,

AND ENGINEERING TO MEET CHANGES IN DEMAND?

Table 1 shows what we spend on research and development in relation to other UK industries. There is, not unnaturally, a wide variation within the dairy industry - some firms spend perhaps 0.5 per cent of turnover or more, while others spend nothing at all. Virtually nothing is spent on research and development for liquid milk, while dairy product manufacturers spend 0.2 to 0.3 per cent of turnover on average. In contrast, the manufacturers of soya protein isolates, which compete with milk protein, are spending some $10 million a year, which is 4 per cent of their sales turnover, more than ten times as much as us. Their sales in the EEC have increased three times in the last five years, and they are anticipating the same rate of growth in the next five years.

It could be argued that it has not been necessary for us to spend very much in the past, because of the predominance of our liquid market. Moreover, we had very tight margins and there was little incentive. There is no doubt that a great deal of effort has been put into keeping down our costs, and we have been able to process and distribute milk for a lower percentage of the retail price than many of our competitors abroad. Low

TABLE 1 Spending on research and development by United Kingdom industries

~

Industry Percentage of turnover

Dairv 0.1 I ~ Milk products Food Pharmaceutical Aircraft

0.24 0.34 8.55

18.67 Fig. 3. Average milk intake per dairy in EEC countries

2 Journal of the Society of Dairy Technology. Vol. 35. No. I , January 1982

margins, however, have not acted as a stimulus to research and development.

Another problem is that senior management is not technical; they have not needed to be. The industry is led by managers who d o not have enough technical knowledge to enable them to see opportunities from a technical viewpoint. They have maximized profits from existing products and made minor modifications, rather than develop entirely new products or methods of production. The industry is pulled by the marketing people and not pushed by the technical. This is true of much of British industry but it is in strict contrast to the situation in Japan. There, technical training at university has a far higher priority, and even then graduates start in industry doing relatively routine jobs. They do not expect to become managers overnight.

Let us now compare our expenditure on research and development with that in other EEC countries. Table 2 compares the income and expenditure of NIZO, the Dutch dairy research institute, with the combined expenditure of our own National Institute for Research in Dairying (NIRD) and the Hannah Research Institute (HRI) in Scotland. NIRD and the HRI are largely financed by Government money. NIZO receives no Government aid whatsoever; it is financed entirely by the milk producers, by profits from sales of products produced in its own plant, and from licence fees. In a nutshell, the Dutch spend €4.5 million a year on milk products and we spend no more than €2.8 million, despite our greater size and population.

TABLE 2 Spending on dairy research in United Kingdom and the Netherlands

€million in 1980

NIRDand NIZO Hannah

~

Income 6.85 4.48

Government 6.75 - Other 0.10 0.68 Expenditure 6.85 4.48 Staff 4.60 2.40

(numbers) (6w (181)

Milk producers - 2.40

Pilot plant revenue - I .40

Spending on milk products 2.80 4.48

Filling in the picture a little further, NIZO is controlled by an advisory board which is widely representative of the industry. There are contact groups of technical experts in each of the main areas, and their secretaries are provided by NIZO. Each autumn, research plans are prepared in close co-operation with the industry. These are discussed by the contact groups which make recommendations to the advisory board. There is a direct link between the input of funds and the output of results. Individual researchers are not allowed to work on a project because it happens to be their hobby. Normally 70 per cent of an individual worker’s time is spent on a fixed project, with 30 per cent left free to develop his own ideas. All the work at NIZO is regarded as confidential, unless the Director decides that it can be published. For contract research the customer

TABLE 3 Recent successes of Dutch dairy research institute (NIZO)

New cheese starter method preventing phage infection System for continuous drainage of curd Semihard cheese by ultrafiltration Full cream soft cheese New Emmenthal cheese variety Lactic butter with sweet buttermilk by-product Continuous stirred yoghurt production New quaternary ammonium compound

defines what is confidential and what is not. Some of NIZO’s successes are shown in Table 3.

The Dutch add more value to manufacturing milk than we d o and they are a major force in export markets. The question is to what extent this has depended upon their very fine research and development facilities. Figure 4 shows the Technological Hall of NIZO, which is considerably larger than all our facilities in the UK put together.

When one visits dairies in other EEC countries one is left with a very firm impression that our competitors have invested more in milk processing plants than the UK. Table 4 shows that we have benefited less from EEC investment grants than other countries. One large private German dairy company tells me

TABLE 4 United Kingdom dairy industry share of EEC capital investment grants:

average for 1978-80

UK agricultural value milk as % of total

UK grants from EEC milk as % of total

EEC milk to dairies UK % of total

EEC dairy grants UK % of total

22.2

16.4

16.3

11.2

that its average annual investment is between 3 per cent and 5 per cent of turnover. But the average profit on liquid milk processing and distribution in the UK is no more than 2.6 per cent of turnover. Since this has to cover interest on borrowed capital as well as dividends for shareholders, UK dairies are not in a position to invest in new plant a t a comparable rate.

THE TECHNICAL CONTRIBUTION FOR T H E FUTURE At every stage, from the production of raw milk to the dis- tribution of the finished product, technology has a major contribution to make. Work is clearly needed to continue t o improve the quality of our raw material and, in particular, its hygienic quality. The NIRD, using funds contributed by the Joint Committee of the Milk Marketing Board & Dairy Trade Federation, has made a major breakthrough in discovering and developing the DEFT test to carry out a rapid assessment of the bacteriological quality of raw milk. The fact that NIRDand Dr. Mabbitt were presented with the Prince Philip Award last year for this achievement gives me particulai pleasure, since I played some part in persuading the DTF to define this topic as having the highest research priority. What we now need is a speedy test for detecting the presence and quantity of antibiotics in milk. The present tests are so slow that the milk has already been processed by the time we know the results.

With the assistance of substantial grants from the Co- responsibility Levy and the co-operation of dairies whose own laboratories at present test all the milk, the Milk Marketing Board will be testing farm supplies in regional central laboratories from next year. Central testing will not achieve a n improvement in the quality of milk unless suitable standards are set and the penalties and premia are sufficient to motivate the milk producer.

Transport and processing costs can also be reduced by technical effort. Perhaps we could save costs by alternate-day collection, as in much of Europe, or by removing some of the water from the milk at the farm by reverse osmosis. How can we increase capacity for storing raw milk at processing plants without greatly increasing the cost? Could we use inert gas instead of refrigeration to stabilize milk’s bacteriological quality? Could we remove bacteria by ultrafiltration instead of killing them by pasteurization? Could we find new ways of fractionating milk into its various constituents? Could we save energy by finding a method to replace spray drying with its

Journal of the Society of Dairy Technology, Vol. 3.5. No. I , January 1982 3

Fig. 4. Technological Hall of NlZO

enormous capital costs? Or, better still, could we sell concen- trated skimmed milk as a liquid rather than as a powder? Sugars, by comparison, are now being sold in syrup form though they have the advantage of being completely inert a t high concentration.

Some companies have already madisignificant savings by installing microprocessors, and there is no doubt that the continuous processes of the dairy industry are particularly suitable for their use. Our task is to establish exactly what the optimum conditions are for running individual plants so that these methods of instrumentation and control can be used to their best advantage.

We have to find ways of increasing yield, too. If, for example, the conversion of milk to cheddar cheese were improved by 1 per cent it would save the industry overE3 million a year. In the case of soft cheeses, the application of ultrafiltration has already produced an increase in yields. It is more difficult to apply the same techniques to hard-pressed cheeses, but we must research the possibilities. The Germans have improved the yield of cheese by adding casein, which is subsidized by the EEC. If it is illegal to add casein to cheese, should we not find other ways of achieving an increase in yield? Would other additives have a similar effect? If these would be illegal under present legislation, perhaps we should change the law. After all, laws are made for man and they can be changed if we can show some benefit to the community as a whole.

We have got to reduce waste of all sorts. Reduction of waste produces cleaner effluent and saves money on effluent disposal. We have to achieve greater savings in the use of energy and devise new methods of conservation and re-use. Recent work has shown that the use of reverse osmosis on whey before evaporation is likely to reduce the total cost of concentrated whey significantly.

As we go for higher added value, so we increase the risks. The choice of process becomes increasingly important. I well remember from my ICI days that an acrylonitrile plant was built at Billingham at a cost of sevefal million pounds, but, before its construction was complete, Sohio in the United States had found a new, cheaper route to acrylonitrile, as a result of which the Billingham plant was never run. With such difficult technical investment decisions to make, is it any wonder that most of the members of the ICI main board were technically trained? We may not have such critical process choices to make

in the dairy industry, but as we add more value, so the choice will become more critical than it has been in the past.

The application of biotechnology will present new processes for the dairy industry. The manufacturers of cheese and alcohol already have a fundamental stake in this technology. Genetic manipulation may allow us to select the most desirable pro- perties in starter organisms and give us a better understanding of flavour development in cheese and fermented products. Enzyme manipulation will allow us to upgrade lactose and to modify the proteins in milk, to give products of different functional properties.

Lactose accounts for 40 per cent of the solids in milk but has a very low value unless it is sold to intervention in skimmed milk powder. We need to upgrade lactose to produce products of higher value. When ICI started cracking naptha to produce ethylene, the other olefines were sold as bottled gas. Then the butadiene was extracted to produce synthetic rubber, and Professor Natta developed polypropylene to the point that the propylene from the crackers acquired a higher value than fuel. We have to upgrade lactose in exactly the same way. The Milk Marketing Board is working on converting lactose to galactose/ glucose syrups by hydrolysis. The Express Dairy Company has developed a new process for fermenting lactose into potable alcohol. Perhaps we should be looking at the possibility of fermenting lactose to produce methane for use as fuel gas? Sucrose chemistry has produced a range of detergents. Could lactose be used in the same way?

Now let us turn to protein. Eighty-five per cent of the skimmed milk solids produced in the EEC is used for feeding animals a t great cost to the taxpayer, and therefore the industry must look at ways of upgrading skimmed milk solids so that they can command a higher value.

We must improve our understanding of the needs of food processors for functional ingredients and work back to satisfy those needs by producing tailor-made products. Milk proteins have considerable potential for replacing other more expensive animal proteins, provided that they have the necessary functional properties. The manufacturers of soya proteins have already developed a range of isolates with different properties related to end-use requirements. We need to produce a com- petitive range of whey products. We must employ staff with the technical expertise to sell raw materials to the food industry.

Finally, let us look at butterfat, which has hitherto been the

4 Journal of the Society of Dairy Technology, Vol. 35, No. I , January 1982

most valuable constituent of milk. As I have already suggested, we could see a rapid change in the whole dairy fat balance in the United Kingdom, if the demand for semi-skimmed milk were to take a significant share of the whole milk market. We need to find new products that will add value to butterfat. One way of doing this is to develop markets for whole milk yoghurts, full fat soft cheeses, and new dairy desserts.

In addition, we have t o add value for convenience, for quality, and for product differentiation. A good example of this is herb butter, the market for which has been developed in Germany by Meggle Milchindustrie. Packed in a sausage shape, it can be taken from the refrigerator and cut into slices for use on a steak bearnaise. It can also be used for cooking and is equally good in omelettes. It saves time and adds value. This is the sort of product development that should be done, in my view, by dairy companies and co-operatives themselves and is not suitable for the research institutes.

Another example of added value products is the yoghurt salad dressings now appearing in the supermarkets, but, so far as I know, no one is yet producing a Stilton cheese salad dressing - which I make a t home - and this is quite delicious. In the United States, 8 per cent of milk production is used for ice-cream manufacture. In this country, by contrast, the ice-cream industry is dominated by the vegetable fat manufacturers. There must be an opportunity for the dairy industry to exploit this area, and I hope that your symposium will make a useful contribution.

I have talked about the raw material, the process, and the product, but what about distribution? There is no doubt that technology could contribute to cost savings in this area as well. Computers are already replacing the traditional roundsbook, which could one day become a thing of the past. Cornfords Dairies in Sussex have introduced a computerized roundsbook on 10 rounds. Changes to standing orders are recorded in a small hand-held memory bank which is plugged into the com- puter at the end of the round and within seven minutes the roundsbook is updated and reconciled with goods returned. Shortages are identified immediately. Outstanding debts have been reduced by 40 per cent and consumer enquiries are now virtually nil. There is better statistical information, and relief roundsmen can take over a round at short notice. Sheates Farm Dairy, Melksham, have introduced computer-itemized receipts for the roundsmen to give to customers each week. In a few months the dairy hopes to be able to collect cash by direct debit through Lloyds Bank.

These types of development will certainly help to keep us on the doorstep. There are still 3,500 clerical staff handling the book-keeping for doorstep deliveries, and in wages alone this costs over €17 million a year. The erosion of doorstep deliveries would have the most profound adverse effects on milk producers and on dairies in the United Kingdom. Any technical contribution that will help us to reduce its cost should have the highest priority.

HOW CAN WE MEET THE CHALLENGE? What can we d o in a practical way to meet the technical challenge that I have described? In the first place we have to recruit good people, recognizing and rewarding technical merit. The supply of graduates is better than ever. Food science and food technology degrees have now taken over from purely dairying qualifications. Through the Dairy Industry Training and Education Committee we have an influence on the courses offered in colleges and can ensure that these conform with our needs. There is likely to be a greater need for special ‘top-up’ courses for those already in the industry, and some colleges are already offering eight-week residential courses for super- visors on advanced product technology.

We have got t o improve liaison within companies between research and marketing, product development and production. We have to encourage further co-operation between the research institutes and those involved in industry. One of the problems is communication. This is partly the result of too early specialization in schools. When I joined ICI, at the age of 23, with a degree in modern history and a commission in the Army, I did not know the formula for ammonia. I had to go to night school t o learn chemistry. Perhaps some of our non-technical managers need training in the language of chemistry and bacteriology? We should use our influence to ensure that schools provide a more broadly based general education up to the age of 18.

Furthermore, if managers d o not always understand scientific language, scientists too often talk in jargon and fail to explain in simple terms what a project will cost o r what potential benefits it will bring. If, in future, we start from what the market wants and work back t o find solutions in the research laboratories then I am confident that our research work will find a much more ready application and appreciation by industry. We have to make better use of our scarce resources, particularly in the public sector. We are lucky in having a large non-competitive area of common research needs in the dairy industry. We all need to know more about the basic properties of the con- stituents of milk and the relationship between the quality ofraw milk and the finished product, both hygienically and chemically. This is the primary area that should be covered by the research ir:stitutes. We need, however, to define more closely the work that will be carried out by NIRD and to differentiate it from the work being carried out a t the HRI, to ensure that their programmes are complementary and that there is no dupli- cation of effort.

The D T F contact groups have brought together, at working level, people from the research institutes, the Milk Marketing Boards, the dairy companies and co-operatives and have enormously improved our understanding of each other’s needs. These contact groups have produced lists of research projects, and it is the job of the DTF Research Policy Committee to allocate priorities and ensure that the work is done. I believe that the work of the contact groups would be even more fruitful if their members were prepared t o exchange more technical information and ideas.

The Joint Committee recently agreed to give the research institutes €100,000 over the next two years for new projects on raw milk quality and liquid milk processing, on the under- standing that the Government maintains its current support and that the results of the work will be kept confidential. I very much hope that the new processing hall needed by the HRI will be widely supported and that the equipment manufacturyrs will play their part in helping t o finance it. There is no doubt in my mind that the research institutes need far better technological facilities. I hope that, as the industry begins to see a flow of useful work, so it will be prepared to increase the supply of funds. The EEC Co-responsibility Levy has already acted as a useful catalyst to finance research work, and I shall certainly d o all that I can to persuade the Commission to spend part of these funds in future on technical research.

We need to identify our past successes and to build on them for the future. Outside the home delivery business we are dealing with a world market. The greater the value we add to the product, the wider its potential market. With soya isolates valued at €4,000 to €5,000 per tonne, is it any wonder that their suppliers can afford to air-freight them around the world? With added value products we are exposed to competition resulting from the research work of other countries. The successful dairies in the future will be those that combine marketing skills with technical innovation.

Journol of the Society of Dairy Technology. Vol. 35, No. I . January 1982 5