Surging demand for dairy fats is tightening supply of the cream used to make frozen treats such as ice cream and driving costs higher during the peak summer season.
After decades of eating less ice cream, U.S. consumers are no longer shying away from higher-fat dairy products, pushing wholesale prices up even as the cost of skim milk declines.
"Americans are finally falling in love with dairy fat again," said Ted Galloway, vice president at Galloway Co., a producer of frozen dairy mixes in Neenah, Wis., which is seeing double-digit volume growth this year. The company is the largest U.S. producer of sweetened condensed milk.
While some ice cream-makers are seeing profit margins erode on higher costs, improved demand for cones and cups is driving growth for retailers such as Baskin-Robbins, which runs the biggest franchise of ice cream shops.
Chocolate Shoppe Ice Cream, with four stores and a manufacturing plant in Madison, Wis., will see sales volume jump as much as 20 percent this year to a record, even after increasing prices to its wholesale customers by 10 percent, said Dave Deadman, the chief executive officer.
Each day, the company makes as many as 1,500 cartons of superpremium ice cream with 14 percent fat. The 3-gallon tubs are sold to several hundred ice cream stores throughout the Midwest, many of which are seeing record business, Deadman said. Each one fetches as much as $34, up from $31 two years ago, he said.
Most of the cost gains reflect tighter cream supplies. Average wholesale cream for the Midwest and Northeast reached $2.81 a pound in July, the second highest for the month in U.S. Department of Agriculture data going back to 1998.
While those costs are eroding profit margins at Bassetts Ice Cream, a Philadelphia producer that has been in business for more than a century, sales are growing especially at independent shops, said Michael Strange, the owner.
"It's been a great year," Strange said. "Volume is up quite a bit."
Dairy fats are no longer considered health villains, and people are re-embracing foods such as whole milk and butter rather than skim milk and margarine, said Dave Kurzawski, a Chicago-based senior broker at INTL FCStone Inc.'s dairy division.
During the 12 months through July 12, sales of butter -- which is around 80 percent fat -- rose 17 percent, whole milk gained 3 percent and ice cream advanced 2.7 percent, according to Chicago-based market researcher IRI. Over the same period, skim milk fell 5.2 percent.
"Ice cream is becoming cool again," said Jennifer Bartashus, a retail analyst at Bloomberg Intelligence. "It doesn't have crazy additives, and people understand what the ingredients are. If you're going to splurge, people are interested in splurging on something they understand."
For example, Blue Bunny vanilla ice cream contains only milk, cream, sugar, egg yolks and vanilla.
Americans have been eating less ice cream for decades, and there still are plenty of people who consider it an unhealthy option. In 2011, consumption was just 12.8 pounds per person, down 16 percent over a decade and the lowest since 1940, USDA data show.
The value of ice cream and frozen novelties sold at retail gained 10 percent from 2010 to 2015, which represents zero growth when adjusted for inflation, according to Mintel, a London-based market researcher.
In surveys, 19 percent of consumers say they're buying less because they consider ice cream unhealthy, Mintel said.
Some Americans are more concerned about carbohydrates and added sugar than fat, and many "don't care as much" about reduced-fat products, said Sherry Frey, senior vice president of the perishables group at Nielsen in Chicago.
Dairy fats may not be directly associated with obesity and heart disease, and there are even benefits in that it makes people feel fuller and eat less, said Sonya Angelone, a spokesman for the Academy of Nutrition and Dietetics. High-fat foods can be part of a healthy diet as long as portions are controlled, she said.
Business on 08/15/2015