A growing world demand for dairy products spells a bright future for dairy producers and processors according to a panel of three experts who spoke during the Professional Dairy Producers of Wisconsin (PDPW) annual business conference in Madison last week.
The growing wealth of people in developing countries, coupled with an overall growth in world population means that people will increasingly seek out dairy products to add to their diets, said Christopher Herlache with Schreiber Foods in Green Bay.
As this global dairy demand grows, the United States will need to grow its supplies to meet the demand.
Westernized diets in the developing world mean more dairy consumption, he said, but supply and demand don’t grow at simultaneous rates so volatility will continue to be a part of the dairy industry.
Herlache crunched the numbers on per-capita consumption and world population growth and concluded that by 2025 dairy production will need to grow by as much as what U.S. production was two years ago.
"That’s a huge amount of milk."
Southeast Asia is a good market for dairy with 68-69 kilograms consumed per person. In China consumption is about 28 kilograms per person but the large population there means a lot of opportunity.
"If they grow their per-capita consumption just a little bit, that means a lot of dairy consumption."
Herlache noted that wealth and population are both growing quickly in India and China and that is where notable growth can come.
While New Zealand is a large supplier to the world’s dairy consumers, it is a land-locked country with limited growth potential. Its neighbor, Australia, had been a big player in the dairy export business, but has had a lot of problems with drought.
The industry there is down 25 percent from what it was seven to 10 years ago, he said, based on the ongoing drought conditions.
In China, there is a lack of trust in the domestic dairy supply, as consumers there remember how baby formula was tainted with melamine, an industrial plastic, resulting in the deaths of children.
As a result of that deliberate contamination, "their industry has gotten pulled back substantially."
India is the world’s largest milk producing nation, taking a large amount of its milk from water buffalo. But Herlache noted that farmers there have only a few, low-producing cows per farm. "It is a very, very different industry."
Because of the cultural and religious feelings about cows there, the potential for Indians to have the kinds of dairies we have is very small.
Herlache believes the global picture points to U.S. producers as the potential producers to fill these growing global markets. They have land and the infrastructure to boost production.
Alan Levitt, with the U.S. Dairy Export Council, explained that his organization, headquartered in Arlington, VA, with eight overseas offices, works to bring together international buyers and sellers of dairy products.
The funding for the USDEC programs comes largely from checkoff funds from U.S. dairy farmers. That makes up 72 percent of his budget; 23 percent comes for the Foreign Agricultural Service at USDA and 4 percent comes from member dues.
Levitt said one cent per hundredweight from the dairy checkoff goes to support export market development.
Some of their projects aim to minimize the cost or the risk of export for domestic dairy processors. Today 13 percent of U.S. milk goes into export channels compared to New Zealand, where 95 percent of production goes for export.
In the United States, more than half of the new milk produced in the last decade has gone to overseas markets, he said.
Dairy farmers in the United States have increased milk production 23 billion pounds since 2005, which is as much as the European Union and New Zealand put together, Levitt said.
His organization points to several things the U.S. dairy industry needs to do. One is to broaden the portfolio of products from niche ingredients all the way up to major commodity products.
In the past, U.S. dairy processors have made their products without concern for what products were being demanded by the global marketplace. Skim milk powder is an example.
Many world markets demand whole milk powder, but "we’ve not been there," Levitt said.
Now, for the first time, many dairy processors are building new plants specifically to produce products for overseas markets, he said. "It’s really significant."
Levit said increasingly U.S. processors must also tighten specifications for products that will be exported. One example is spore level – which he explained as a kind of seed of bacteria.
Competitors in the international dairy market monitor this closely and maintain low levels. This is an issue USDEC has been involved in addressing, he said.
Increasingly for international buyers, food safety through traceability is also important.
"We take it for granted but multi-national buyers need to know that they can trace every ingredient back to where it came from."
The ongoing process of "food safety modernization" being conducted by the U.S. government also plays into this.
Levitt said the Innovation Center for U.S. Dairy, another check-off funded program, has an initiative to improve on the traceability of U.S. dairy products. "The industry is trying to be proactive."
Price volatility is always a concern but for cheese and butter, there are ways to hedge and decrease this problem, he said. When it comes to milk powder there is no meaningful trade at the Chicago Mercantile Exchange (CME) and the price is more complex.
Price surveys don’t capture all the data and nobody really knows the price at any given time. "There’s a huge basis risk for hedgers and it affects products across the chain."
If the industry could find a solution to this, it would be a huge advantage, he said.
Another thing the United States could do to improve its dairy export picture would be catching up on Free Trade Agreements. Since January 2007 there have been 80 FTAs hammered out across the international marketplace, but the United States has only been involved in a couple of them, he said.
"Our competitors have been aggressive in securing Free Trade Agreements and that undermines our export opportunities."
Levitt said the U.S. dairy industry also needs to reform its pricing structures and whatever the outcome is, it needs to have flexible milk pricing that allows milk to flow to its greatest use.
Levitt said dairy is a growth industry. The market was flat from World War II through the 1970s but after that it took off with the expansion of the fast food industry as pizza and other foods began to use massive amounts of cheese.
"The demand story for the next 30-40 years will be beyond our borders."
Anand Rao, with Fonterra USA, agreed that there are a number of macro drivers changing the dynamics of the dairy market. The rise of the emerging markets of China and India are among them.
As people there demand dairy nutrition, he said, prices will increase but so will volatility.
There is an increase in demand for high-quality infant formula and also a demand among older people who are looking for high-quality nutrition as a means to healthy aging. "Protein benefits are increasingly recognized for healthy aging and the demand for dairy protein is growing."
Dairy consumption, he said, is highly correlated with economic development. "The richest countries consume quite a bit of dairy."
In India and China, which have growing economies, the industry expects them to follow the growth rate of Western countries. "This is a huge pull for dairy products. There has been an explosion in dairy imports in China."
China imported $5 billion worth (stated in terms of U.S. dollars) of dairy ingredients, he said, but only $500 million of that came from the United States.
The United States will play a bigger role in that export market at time goes on, he added.
"Dairy has moved from a highly regulated supply-driven market to a demand-led dynamic."
In some developing nations, where they have never gotten to taste dairy, he said, market development will be slower than in countries like India and China.