A handful of Holsteins are gabbing in their pen on a bitter winter Wisconsin day.

" Did ya hear?" one cow asks, in a folksy Midwestern twang. "Sadie made a break for it. She's goin' to California."

Sadie—the star of a recent television commercial for the California Milk Advisory Board—has company. California overtook Wisconsin as the biggest milk-producing state in the early 1990s. And most industry observers predict it will outclass "America's Dairyland"—as Wisconsin calls itself—in cheese production within a few years.

No one knows this better than Lino Saputo Jr., the 37-year-old soon-to-be CEO of Montreal-based Saputo Inc. The Canadian food industry may be abuzz with talk of the company buying up the local remnants of Parmalat, the insolvent global dairy giant, but the same can't be said of the corridors at Saputo headquarters. The future of the family-controlled cheesemaker, already North America's fourth-biggest dairy company thanks in part to its seven Wisconsin cheese plants, points to sunny California.

" Without the raw material, all we have is stainless [steel equipment]. We have to be where the milk is," Saputo says. "And California is driving growth in the U.S. dairy industry. So, from a manufacturing perspective, we definitely have to consider growing there."

This is, after all, a company that has grown—spectacularly—by acquisition. Saputo has been especially aggressive in recent years, sweeping up American dairy player Stella Foods Inc. in 1997, Quebec snack-cake specialist Culinar Inc. in 1999 and the Canadian dairy Agrifoods International Co-operative Ltd. in 2002. Net result: It's the biggest player in Canadian dairy products, and a growing force in the United States. So now, while inviting possibilities in Canada, Europe and South America may beckon, it's on to California.

Accounting for 21% of U.S. milk production, compared with Wisconsin's 13% share, California is already home to two Saputo plants acquired with the Stella Foods purchase. The deal propelled Saputo into second place among the world's mozzarella producers, behind privately held Leprino Foods Co. of Denver. Now Saputo wants to be No. 1.

There are several attractive targets in California and elsewhere in the United States that would help Saputo reach its goal—from the modern cheese operations of the Minnesota co-operative Land O'Lakes Inc. to Sorrento Lactalis Inc., the U.S. cheese unit of French dairy king Groupe Lactalis SA, or Leprino itself, which last year opened the world's largest mozzarella plant in Lemoore, Calif.

Given Saputo's strong balance sheet and the rapid pace of consolidation in the U.S. dairy industry, the possibilities don't end with that shortlist. "Anybody who is in the cheese business [in the U.S.] that has a product that would complement our product range would be someone we'd like to sit down with," Saputo says squarely.

Then again, he'd also be happy to talk to the trustees of Parmalat Finanziaria SpA. As part of the cleanup, the trustees will probably sell the beleaguered Goliath's lucrative Canadian operations—eventually. Saputo, which already has 35% of the Canadian natural cheese market, might not be interested in Parmalat's cheese business. Competition authorities in Ottawa would frown on it. But Saputo would surely love to get its hands on Parmalat's fluid milk operations, which have a 22% national market share, concentrated in Ontario and Quebec. Saputo already dominates Western Canada's milk market, thanks to the acquisition of Agrifoods International Co-operative and its Dairyworld brand. Saputo's national market share in milk is about 20%.

" This is not at all related to Parmalat," Saputo says, "but we think there are some great opportunities to grow our fluid milk sales in Ontario and Quebec, where we represent maybe 2% to 5% of the market."

Investors would clearly like to see Saputo decide what it will buy next. The company's shares jumped 15% in late 2003 as speculation mounted about Parmalat's fate, only to slide back into a holding pattern when it appeared that asset sales by the Italian company were not a near-term likelihood.

" The market is waiting for Saputo's next big acquisition," says Philippe Leblanc, president of Saint-Bruno, Que.-based money management firm Cote 100 Inc. "This company throws off a lot of cash. In fact, it's a cash cow. And since they bought Dairyworld, they've brought down their debt a lot."

With those kind of fundamentals, Saputo could easily handle a $1-billion purchase—big money in the dairy business, considering that Stella and Dairyworld together cost less than that. But Lino Jr. is in no rush. "We're fiscally responsible. We will not acquire just to acquire," he insists. "That means that sometimes we have to pass up on deals because either the price isn't right or the strategic fit isn't right."

The next deal, when it comes, will be a test for Lino Jr. Since 1997, the 50-year-old company has had an extraordinary string of successes—a hot initial public offering, a bold entry into the hyper-competitive U.S. market and a sevenfold increase in revenues. But that was all under the savvy stewardship of Lino Sr.

If it's any comfort to investors, Lino Jr., who will take over as CEO as soon as August, is not likely to stray from the family knitting ^ la Edgar Bronfman Jr. He is the antithesis of the prodigal son. Lino Jr. has spent his life engrossed in the family business—washing vats as a teenager, hauling blocks of mozzarella on his back to Montreal pizzerias as a university student and managing plants as a young executive.

What's more, despite the family's wealth—the Saputos' 58% stake in the company alone is worth about $1.8 billion—and his personal penchant for flashy sports cars, Lino Jr. is no playboy. Married for 15 years and the doting father of two young sons, the lanky garage-league goalie is the antithesis of silver-spoon arrogance. His biggest challenge as CEO may be to prove that "nice" works.

aving built itself up from a single Montreal shop opened in 1954, Saputo was at a crossroads in the mid-1990s. It had reached the limits of mozzarella growth in the Canadian market, with total annual sales of about $450 million. The Saputos set their sights on Toronto-based Ault Foods Ltd., Ontario's biggest dairy, with a $28-a-share offer. They lost out to Parmalat, which bid $34 a share, or $415 million. Only months earlier, Parmalat had bought Central Canada's other big dairy, Beatrice Foods Inc.

In a way, the loss to Parmalat was a blessing for Saputo. It forced the company to turn its sights to the United States, where in a very short time, it has shown itself to be one of the most adept operators in the world's most competitive market. In the late 1980s, the company had taken baby steps into the market with the purchase of two cheese plants in Vermont and Maryland. But in late 1997, on the heels of its $160-million IPO, Saputo surprised observers with its bellicose acquisition of Lincolnshire, Ill.-based Stella from Texas billionaire Robert Bass's Specialty Foods Corp. Subsequent add-on acquisitions in the U.S., and the Dairyworld purchase for $407 million, turned Saputo almost overnight into the continent's fourth-biggest dairy company, with annual sales of about $3.4 billion, 46 plants and 7,850 employees.

The move into the United States was aptly timed. Per-capita annual cheese consumption in Canada has been flat for years at around 10 kilograms. South of the border, it rose from about 12 kg in 1992 to 14 kg in 2002. The Department of Agriculture projects that U.S. consumption will rise to about 15 kg by 2012.

" Americans seem to like a slice of cheese on just about anything," notes Jerry Dryer, a Chicago-based consultant to the dairy industry and editor of Dairy & Food Market Analyst. "The pizza business alone has driven a lot of growth, as has the increased consumption of Mexican food. And we now do everything possible to drive cheese sales at the retail level—we slice it, we shred it, we cube it."

Over all, Saputo's cheese sales are split between the retail (46%), restaurant (37%) and frozen-food (17%) industries. In the U.S., the segmentation is different: 28-39-33. The split, Lino Jr. says, provides a nice cushion against market fluctuations, as in the post-Sept. 11 period: Restaurants saw a big drop in sales as cocooning Americans opted for supermarket-bought frozen pizzas.

Will Saputo's stateside growth be in cheese or in other segments of the dairy industry, such as fluid milk, ice cream or yogurt? Dryer's view: "They should just diversify into other cheese varieties. The dairy industry is very segmented in this country. Cheesemakers usually just make cheese."

While Saputo is best known for mozzarella, considered a commodity product largely sold to restaurants and frozen-food manufacturers, it has heightened its U.S. retail presence with its Frigo, Dragone and Stella brands of various other cheeses. Last year, it purchased the Treasure Cave and Nauvoo brands from ConAgra Foods Inc., becoming the biggest seller of blue cheese at the U.S. retail level.

That move was consonant with Dryer's prescription. And, as Dryer says, segmentation is a principal characteristic of the U.S. market (Saputo's share in cheese is just 6%), alongside intense competition. Unlike Canada, milk prices are not regulated, and supply growth is not hampered by a quota system. As a result, milk prices are not only much lower in the United States but also much more volatile, with large seasonal fluctuations. The price of cheese is even more mercurial, since it is a function of the price of milk, and also of block cheddar trading on the Chicago Mercantile Exchange.

That Saputo has thrived in this open market when its background is in a protected one owes something to its focus on lean operations. Despite its reputation as a generous employer—it throws huge Christmas bashes at all its factories for workers and their children—the company has not shied away from rationalizing its manufacturing operations on both sides of the border, closing, merging or modernizing plants at a dizzying pace. Since early 2000 alone, it has closed 11 plants. "They acquired some plants that were, let's say, technologically disadvantaged," Dryer notes. "They sure fixed those problems."

Another element in Saputo's American success is its keen sense for promotions, which in this industry account for about one-third of retail sales. Frigo Cheese Heads, the market leader in the fast-growing category of children's string-cheese snacks, signs up lots of promotional tie-ins, including the recent one with the Warner Bros. film Looney Toons: Back in Action. Last fall, Frigo promoted its line of ricotta through a "Better Lasagna Guarantee," distributing an estimated 60 million inserts in newspapers.

Of course, the king of this business is Kraft Foods Inc., which went after the Cheese Heads market last year by launching a string-cheese product shaped like characters from another animated film, Monsters Inc. But, unlike Saputo, Kraft is not primarily a manufacturer. Rather, it mostly packages and distributes the cheeses made by other companies. Saputo is unique in knowing how to make and market its products well.

" They've really seemed to move ahead of some of our domestic companies, which are more production- than market-focused," says Robert Cropp, an economist at the University of Wisconsin who specializes in the dairy industry.

Those domestic companies are largely agricultural co-operatives, which in 2003 collectively still accounted for about half of total American cheese production, which weighs in at four billion kilograms. One of the biggest players, Land O'Lakes, has been struggling under heavy debt, leading to speculation that it could sell its cheese assets to raise cash. Those assets include a large, ultramodern—but money-losing—mozzarella factory in California.

" We're finding the co-ops are strapped for capital," says Cropp. "They're forming more joint ventures and strategic alliances as a result." In the case of Land O'Lakes, this means building a $40-million (U.S.) mozzarella plant in South Dakota in partnership with Davisco Foods International Inc. The co-op has also signed a marketing agreement with Dean Foods Co., the largest player by a country mile in the U.S. dairy industry, that allows Dean to use the Land O'Lakes name on many of its products. But industry watchers think the co-op may be forced to take more drastic measures—such as outright asset sales—to cut its debt.

That is where Saputo comes in. "Our analysis suggests Saputo could buy Land O'Lakes' entire U.S. cheese business if it was available," Raymond Lai, a Vancouver-based stock analyst with Raymond James Ltd., concluded in a research note last fall. At the very least, Lai added, it could easily swallow strategic assets such as Land O'Lakes' Tulare County, Calif., mozzarella plant.

Tulare is the heart of the California dairy industry, the source of more milk than any other county in the United States. Saputo has a plant there that makes mozzarella and other Italian cheeses. But it's not enough.

" Saputo needs capacity in the West," says Dryer. "Its competitors are there. Leprino has two large plants in California. Land O'Lakes has one too. It makes sense for Saputo to grow there."

But there are other options besides the United States and its leading dairy state—such as Europe and Latin America, which, because of the regulated nature of Canada's dairy industry, are yoked together in Saputo's future.

" We are recognized in Europe for our mozzarella product," says Lino Jr. "We used to sell there. What's impeding us now is Canada's regulatory environment." Specifically, milk prices. Canada actually afforded the likes of Saputo a measure of relief from its high-price market by allowing some milk to be sold to dairy-products manufacturers such as Saputo at world (which is to say, lower) prices. Saputo used that milk to make cheese for export to Europe. But in 2002, a World Trade Organization decision closed that escape hatch.

The roadblock inspired Saputo's $50.8-million (U.S.) purchase last year of Argentina's Molfino Hermanos SA. Partly through add-on acquisitions, Saputo intends to develop Molfino, Argentina's third-largest dairy, into an export powerhouse pointed at Europe. (Exporting from the U.S. is out of the question because of European quotas and tariffs on American cheese.)

There's one more acquisition scenario, albeit a less likely one: that Saputo's next move will be bulking up not in dairy but in its bakery division, Quebec snack-cake maker Culinar. Saputo recently reviewed the operations of the bakery, inventor of the still ultra-popular (in Quebec) Jos. Louis. Should it sell Culinar, along with Saputo's 21% stake in cookiemaker Dare Foods Ltd.? The decision was announced in February: Keep the bakery growing.

So, Lino Jr., consider the options. Parmalat's milk operations would be nice to own. But do you really want to deal with Canada's rigid regulatory system and cries from farmers—they've already started—that you're hogging the milk market? Conquering Europe via South America would be a feather in your cap. But shouldn't you give the Argentine acquisition a couple of years to prove its worth first? As for the bakery, is it smart to focus on your secondary business?

It's clear, Lino Jr., where your best bet for the future lies. Go west, young man.