Introduction

The California dairy industry produced approximately$5 billion in revenue in 2001. It is both the largest dairyindustry in the United States and the largest agriculturalenterprise in California measured by sales revenue. Thusresearch and development (R&D) affecting the dairyindustry has the potential to contribute significantly tothe agricultural economy in the state. Most agriculturalR&D has traditionally contributed on the supply side,for example, by improving farm productivity. However,R&D may also contribute on the demand side, forexample, by developing new uses for agricultural rawmaterials. This issues brief reports on the potentialeconomic contributions of one set of such innovations.

Specifically, we investigate the potential benefits of R&Dconducted at the Department of Food Science andTechnology at UC Davis. This research program isdeveloping new applications for edible films and coatingsmade from whey protein, a by-product of cheesemanufacture. In order to evaluate the economiccontribution of these innovations, we must evaluate theimpact on the supply and demand for milk and milkproducts. In order to specify the economic models wemust understand the new technology, the potentialadoption rates, and the potential size of the new market.This technological and market information is an inputfor the economic evaluation which then models how theincrease in demand for whey protein traces through milk

and dairy product markets to affect the prices and returnsto producers and the effects on consumers.

New uses for whey

Whey is the liquid remaining after removal of the curd,which is processed into cheese. In the recent past,commercial cheese manufacturers in the United Statestreated whey as sewage, or returned whey to farms to befed to pigs or spread on fields. However, due todevelopment of new refinement techniques, as well asincreasing awareness of the environmental and financialcosts of whey disposal, manufacturers have found itprofitable to process whey into high protein productsfor use as food ingredients. For example, whey proteinis used in bakery products, infant formulas and sportsbars. Products are available that span a range of proteincontents, including those with very high concentrationsof protein, whey protein isolate (WPI, greater than 90percent protein) and whey protein concentrate 80(WPC80, approximately 80 percent protein). Most wheyis processed into dry whey, a commodity product withrelatively low protein content. The whey market hasdeveloped rapidly in the United States and some cheeseprocessors still either do not have the technology toprocess whey, or do not have a market for the wheyproducts. Approximately 30 percent of the total amountof whey available as a result of cheese production is notsold. For the rest of the cheese industry, whey is actively

Potential Gains to Producers fromNew Uses for Whey

Fiona M. Hutchinson, Joseph V. Balagtas, John M. Krochta, Daniel A. Sumner1

1Fiona M. Hutchinson is a policy analyst in the New Zealand Ministry of Agriculture and Forestry; Joseph V. Balagtas isa post graduate researchers in the University of California Agricultural Issues Center; John M. Krochta is a professor inthe Department of Food and Science Technology, University of California, Davis; Daniel A. Sumner is the Frank H. Buck,Jr., Professor, Department of Agricultural and Resource Economics, University of California, Davis, and director, Universityof California Agricultural Issues Center.2The R & D leading to these new uses was conducted over several years at the Department of Food Science and Technology,University of California, Davis in the laboratory of Professor John Krochta.

Agricultural Issues Center

AIC Issues BriefUniversity of CaliforniaNumber 20F e b r u a r y2 0 0 3

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marketed and supplies about 11 percent of the revenuefor a modern cheese plant.

Whey protein has the ability to form intact films andcoatings on the surface of objects (see figure 1). Thisproperty has led to consideration of several differentapplications and the development of technology tofacilitate the four new uses considered here:

■ Oxygen-barrier coatings on foods

Coating foods that are prone to oxidation (rancidity)will prolong their shelf life. Only edible films andcoatings can be ingested with the food, thus eliminatingthe use of all synthetic plastics for these applications.There are many foods that could use this type ofcoating. Two specific potential applications areevaluated here: (1) coating snack peanuts, and (2)coating nuts used in confectionery. The coatingprevents the nuts from going rancid, and thus extendsthe shelf life of the snack nuts or confectionery.

■ Gloss coatings on confectionery

The most widely used glaze is shellac, also calledconfectioners glaze. Confectionery manufacturers arelooking for an alternative glaze that will not have thetight environmental regulations that accompany theuse of shellac. The specific application of glosscoatings on panned confectionery is evaluated here.

■ Oxygen-barrier coatings on plastics

Most plastics that are good moisture barriers are pooroxygen barriers. Thus, they are commonly coated toprovide a good oxygen barrier. Whey coatingsdeveloped by the UC Davis research may substitutefor current technologies that make plastic non-recyclable.

■ Grease-barrier coatings on paper and paperboard

These coatings are used on packaging forproductssuch as fast food and pet food. Whey coatingsmay substitute for current technologies that makepaper non-recyclable and non-biodegradable.

Three additional potential applications of whey are beinginvestigated at the UC Davis lab. These are coatings onfoods that can be used to prevent the movement ofmoisture from one component to another; anti-microbialcoatings on cheese; and industrial films and containersmade from whey. These potential applications of wheyare still in their early stages of development and are not

considered likely to be marketed commercially in the nearfuture. Their potential economic effects are not consideredhere.

For the four new uses described above, we have comparedthe costs of using whey protein to the current materialsand technology. This evaluation involved contactingindustry sources and gathering current and potential costinformation. Based on these cost comparisons, threespecific new uses—the oxygen-barrier coatings onplastics, gloss coatings on panned confectionery, andoxygen-barrier coatings on nuts for use inconfectionery—are considered likely to be adopted byindustry in the near future. Allowing time for finalrefinements in the lab and for developing capacity tocommercially produce and apply these new technologies,these three applications can feasibly be adopted byindustry by 2005.

The research program that developed these technologieshas been in operation since 1990. Through the potentialadoption date of 2005, the program will have cost apresent value of $4.9 million. Financial support has comefrom the dairy industry and consumers through producerand processor assessments. Support also comes fromtaxpayers through grants and overhead paid by theUniversity of California. The benefits discussed belowshould be considered in the context of this investment inR&D.

Potential size of the market and potentialuse of additional whey protein

The estimated increase in demand for whey protein fromthese three currently viable applications is shown inTable 1. The figures represent the additional quantity ofwhey protein demanded for a likely level of adoption inwhich 50 percent of the relevant markets adopt the newtechnology. The total increase in demand for whey proteinis 12.3 million pounds, which is equivalent to 3 percentof whey available as a by-product of U.S. cheeseproduction, or 14 percent of whey protein available fromCalifornia cheese production.

Since the actual level of adoption of the innovations isuncertain, it is important to consider a range of adoptionscenarios. A portion of our analysis, not presented inTable 1, measures the additional demand for whey proteinbased on 25 percent adoption of relevant markets, and75 percent adoption of relevant markets. Increaseddemand for whey protein is then between 6 and 18 millionpounds. This is equivalent to between 1 and 4 percent ofthe estimated current total whey protein available as a

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by-product of cheese manufacture nationwide, or between7 and 21 percent of whey protein available in California.

Economic effects of new whey applications

Successful marketing of these new whey applicationswould result in increased demand for whey. The effectson U.S. and California dairy industries of an R&D-induced demand shift for whey depend on the economicrelationships that comprise the markets for milk and dairyproducts.

Dairy product markets are complex. Raw milk is theprimary input in many processed dairy products,including several varieties of fluid milk, butter, nonfatdry milk, cheese, whey, ice cream, cultured products,etc. Thus, the price of raw milk is an importantdeterminant of the cost of all dairy products and animportant determinant of the supply of these products.

Increased demand for whey from new uses results in ahigher whey price, encouraging increased production ofwhey. Due to joint-production of cheese and whey, cheeseproduction must also increase, putting downwardpressure on cheese prices. Increased demand for milk bycheese and whey manufacturers drives up the price ofmilk, encouraging greater milk production. At the sametime, a higher milk price raises costs for manufacturersof butter, ice cream, and other dairy products, causingthem to use less milk and produce less, resulting in higherprices for these products.

In the United States and in California, milk prices aredetermined by a combination of market (supply anddemand) and regulatory forces. While there are manyelements of public policy in dairy, of immediateimportance to the whey issue considered here are themilk pricing policies of milk marketing orders. Federaland California marketing orders set minimum prices formilk used in various products and potentially affect thelinks between milk and dairy product markets. Marketingorders set milk prices based on formulae that take dairyproduct prices into account. The milk pricing formulaemay not respond to changes in all dairy product markets,or may respond with some delay. However, over time,milk and dairy product markets adjust so that milk pricesreflect dairy product prices.

Our simulation model of the U.S. dairy industryquantifies the expected effects of an R&D-inducedincrease in whey demand. The model requires parametersof relevant supply and demand curves, as well as dairymarket data. Demand for dairy products is characterizedby elasticity of demand—the percentage change in

quantity demanded for a 1 percent increase in price. U.S.demand elasticities of -0.5 for cheese (0.5 percentdecrease in quantity of cheese demanded in the U.S. fora 1 percent increase in cheese prices), -1.0 for whey, and-0.5 for all other dairy products are chosen based onestimates published in the agricultural economicsliterature. The responsiveness of the U.S. milk supply tochanges in milk prices is captured by the elasticity ofmilk supply—the percentage change in quantity of milksupplied for a 1 percent increase in milk price. For along-run time horizon that may apply to the spread ofthe market effects of new uses, a milk supply elasticityof 1.0 is used. Other key parameters are based on 2001dairy market data: the cost share of milk in cheese-wheymanufacture is 68 percent; the average cost share of milkin the manufacture of all other dairy products is 70percent; the share of a cheese plant’s revenue from wheyis 11 percent; and the share of U.S. milk productionallocated to cheese-whey production is 37 percent.

Effects of new uses of whey on milk pricesand gains to producers

Based on the calculations in Table 1, we find that thelikely increase in U.S. demand for whey from the newinnovations is 3 percent. We model the effects of increaseddemand on markets for dairy products and raw milk.The results are presented in Table 2.

Increased demand for whey results in higher whey pricesby 2.86 percent, accompanied by lower cheese prices by0.28 percent. The fall in cheese prices is due to the jointproduction of whey and cheese. As cheese manufacturersreceive more for whey, more cheese is produced andcheese prices fall. However, since whey is a relativelysmall share of cheese processors’ revenue, the impliedreduction in cheese prices is relatively small. Cheese andwhey quantities increase by 0.14 percent. Raw milk pricesand production each rise by 0.04 percent due to increaseddemand from cheese-whey processors. As higher milkprices drive up manufacturers costs, prices of dairyproducts other than cheese and whey rise by 0.03 percent,and quantities of these products fall by 0.01 percent.

The changes in prices and quantities in dairy marketsaffect revenue of the firms selling in those markets. Thepercentage change in U.S. whey revenue is 3.40.Percentage change in U.S. cheese revenue is -0.18. Basedon an average of 11 percent of cheese-whey plant revenuefrom whey, gross revenue for cheese and whey productionincreases by 0.22 percent, or approximately $29 million(2002 U.S. dollars). Annual dairy farm revenue rises by

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0.08 percent, or approximately $20 million for allU.S. dairy farms and $4 for California dairy farms.

The new uses for whey reduce the costs ofmanufacturing candies and plastic products. Thusthe innovations benefit these companies andconsumers of these products. Of particular interesthere however is the effect on incomes of milkproducers. Based on the market interactions andchanges in prices and quantities listed above, we maydetermine the implied benefits to producers.

Increased whey demand results in higher milk pricesand increased milk production, making dairy farmersas a group better off. The last two rows of Table 2report a measure of the annual benefit to producersin the United States as a whole, as well as the annualbenefit to producers in California. Gains to all U.S.producers due to increased whey demand are $10million per year (2002 U.S. dollars). California’sshare of producer benefits is $1.9 million. Projectingthese annual benefits out over an infinite time andassuming a discount rate of 8 percent, theapproximate of the capitalized value of the researchbenefits is $125 million (=$10/.08) for all U.S.producers and $24 million for California producers.

For determining the expected impacts of new usesfor whey, it is important to look at a variety ofsimulations because of lack of precision in knowledgeabout the market relationships. Additional analysisnot presented in detail here applies the same model

to consider the effects of a range ofadoption rates for the whey proteinapplications. Whey prices areprojected to increase between 0.95and 3.81 percent, raw milk pricesby between 0.01 and 0.06 percent.The annual benefit to U.S. milkproducers is between $2.5 millionand $14.9 million, and the annualbenefit to California producers isbetween $0.5 million and $2.8million. The capitalized value ofproducer benefits is between $31million and $186 million for all U.S.producers, and between $6 millionand $35 million for California.

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Implications

Ongoing research has generated new uses for whey.Successful marketing of the innovations can result inincreased demand for whey, with ripple effects throughoutthe U.S. and California dairy industries.

Adoption of the new whey uses would result in higherwhey prices and small changes in dairy product pricesand sales. One reason for the relatively small percentagechanges in milk and dairy product prices is the smallcontribution of whey to dairy manufacturers’ revenue.As a result, even a relatively large increase in wheydemand results in a small reallocation of milk towardswhey and cheese production.

The AIC Issues Brief is published by the University of California Agricultural Issues Center, 1 Shields Avenue, Davis,CA 95616-8514. The AIC Quarterly, AIC Issues Brief, publications, videos, events, and working papers are on ourwebsite at: www.aic.ucdavis.edu/.

We do not consider other benefits of new uses for whey,for example, increased returns to cheese-wheymanufacturers, or the benefit to producers and consumersin the markets for confectionery, nuts, and plasticsproducts. Yet even with our narrow measure of researchbenefits, considering the research cost of $4.9 million,the return on investment in research may be significantif the new technologies are adopted by industry for onlya few years. Continued R&D and development ofproduction capacity are required before the innovationscan be produced and marketed commercially, and thecost of further R&D and marketing of the new wheyapplications will be weighed against the potential benefitsmeasured and discussed here. ■