NEW YORK (AFX) - Got hormone-free milk?
Milk industry experts say that question is on the minds of milk producers and coffee shops alike now that Starbucks Corp. is planning to make lattes with milk free of the bovine growth hormone rBGH.
On Wednesday, the world's largest specialty coffee retailer said it dropped dairy products containing the artificial growth hormone at its coffeehouses in the West and New England, and is looking into doing the same nationwide. Starbucks has 5,668 stores in the U.S.
For producers that already manufacture and bottle the hormone-free milk, Starbucks' announcement could be a boon for sales and speed market growth.
'It's a good thing, a very good thing, for us,' said Pauline Mendez, spokeswoman for Dean Foods Co.'s Alta Dena division, which sells its own non-rBGH milk in 47 states.
But for retail competitors and non-organic dairy farmers, it could mean big headaches and even bigger costs.
The hormone -- administered to dairy cattle during the middle phase of lactation to boost milk production -- has sparked controversy since it was first approved by the Food and Drug Administration in 1993. Farmers can produce more milk per cow and thereby take in more revenue by using the hormone, which is made by Monsanto Co. and sold under the brand name Posilac. Monsanto says of 9 million dairy cows in the U.S., about one-third of them are in herds that have been given Posilac.
Monsanto maintains the hormone is safe for both cows and humans but advocacy groups have for years questioned its effects on humans, and have linked the hormone to an increased risk of cancer.
Those fears may be taking root with consumers, who are asking for non-rBGH milk in increasing numbers. Blair Thompson, spokesman for the Washington Dairy Products Commission, said research now shows 10 percent of all milk consumers want hormone-free milk.
Starbucks spokesman Brandon Borrman said that in response to customer requests, 37 percent of its liquid dairy products are free of the hormone as of this month, mostly at stand-alone stores in Washington, Oregon, Idaho, Alaska, Montana and New Mexico, along with Northern California and New England. Borrman said Starbucks is talking with milk producers to see if they can supply enough of the hormone-free milk to phase out rBGH at all of its stores nationwide.
The company has not disclosed its milk vendors but says they have several throughout the country serving different regions. Some already produce the non-rBGH milk while others would need to change their production process.
'We see it as an opportunity -- we don't see it as a negative -- to provide more choices to consumers,' said Dean Foods spokesman Marguerite Copel of the Starbucks move.
Dean Foods, the country's largest producer of both milk varieties, bottles hormone-free milk under its Horizon Organic brand and milk produced with rBGH under a number of other labels, including Borden, Pet and Country Fresh. The company distributes the milk to stores nationwide.
Dean Foods has benefitted from recent spike in demand for milk free of hormones. Copel said the Horizon brand alone has grown 20 percent a year since the company acquired Horizon Organic Dairy Corp. in 2004. In the third quarter ending Sept. 30, the company's WhiteWave Foods Co. -- the maker of Horizon Organic milk -- brought in $313.6 million in sales, an increase of 5 percent from the same period a year ago. Its dairy group, which makes its other milk brands, posted sales of $2.2 billion in the quarter, down 3 percent since the third quarter last year.
Organic and hormone-free milk now line the shelves of most major supermarkets. Even retailing giant Wal-Mart Stores Inc. has rolled out its own brand of organic milk in the past year.
Thompson said it's only a matter of time before all consumers drink it.
'All packaged fluid milk will, for all intents and purposes, be rBGH-free in the not-to-distant future,' Thompson said. 'You see that picture pretty much unfolding.'
When Wal-Mart announced it was branching into organics and doubling the amount of organic groceries on its shelves, industry watchers speculated that the increase in demand for the products would push suppliers to provide more offerings and in turn, reduce prices for the goods. If customer demand for hormone-free milk continues to grow, producers and farmers may be forced to make the switch to fill retailers' needs.
But not all customers are clamoring for organic milk. For restaurateurs and smaller retailers, a move to hormone-free milk is fraught with cost and supply chain questions.
Milk producers farm out their product to bottlers who in turn sell to retailers and restaurants. Given that hormone-free cows don't give as much milk, farm production costs increase and are passed along the supply chain. The retailer must either eat that higher cost or raise prices -- which a majority of Americans may not be willing to stomach.
William Blair and Co. analyst Sharon Zackfia said the added expense may prevent Starbucks' competitors from ultimately making the switch to hormone-free milk.
'There's potential for others to follow them but it's not a given,' she said.
Starbucks competitor Dunkin' Brands, which owns Dunkin' Donuts, has yet to make a decision about switching milk, saying it is continuing to 'monitor the issues' surrounding the use of rGBH.
Zackfia said Dunkin' Donuts may resist switching its supply since its customer base may not be all that interested. Like McDonald's Corp., which recently introduced its own specialty coffees, Dunkin' Donuts appeals to a more price-conscious demographic.
But Thompson said some smaller competitors are gearing up to make the switch despite the costs. Since Starbucks made the announcement, retailers have been calling the organization to ask where they can get the non-rBGH milk, he said.
That's not good news for St. Louis-based Monsanto. The company has already warned investors its sales may drop if there's any increase in demand for the hormone-free milk.
In a November filing with the Securities and Exchange Commission, Monsanto warned, 'We believe some processor requests for 'r-BST-free' milk, coupled with rising feed costs, could limit our future sales.'
Dean Foods, however, is hoping the Starbucks announcement will have the opposite effect on its topline.
Copel said the company is enthusiastic about the potential for its Horizon brand, though it may be too early to tell whether Starbucks' move will have a substantial effect on the company's sales and earnings.
'It's probably just too soon to tell,' she said.
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© 2007 AFX News
