Dairy export opportunities abound
The U.S. dairy industry has a window of opportunity and must act quickly to take advantage of export opportunities that are developing in the world.
That was the message of Leprino Foods Sue Taylor at the annual business conference of Wisconsin's Dairy Business Association in Madison Tuesday (Nov. 29,) While China will continue to build its own dairy industry to fill its needs for fluid milk, Taylor is convinced that nation will still need vast amounts of other dairy products to feed its people - especially whole milk powder.
One of the reasons for her prediction is that while China has a huge land mass, its amount of arable land per person is the lowest in the world. "They are already importing corn and soybeans, and because their cost to produce milk is higher I see them continuing to be a major importer," said the keynote speaker.
China now accounts for over 26 percent of the milk powder exports from New Zealand, a country whose economy is largely built on the dairy industry. New Zealand has "almost abandoned" other markets in its effort to focus on China, she added.
"They see a viable long-term market in their own neighborhood." This has led New Zealand to reduce its focus on cheese exports and concentrate heavily on making whole milk powder for the China market. Both the China market that New Zealand's Fonterra dairy group has focused on and the markets they have abandoned provide opportunities for the U.S. dairy industry.
Taylor, who is vice president of dairy policy and procurement for Leprino, is a member of the globalization task force of the Innovation Center for U.S. Dairy. That group sponsored a study on global opportunities in 2009, which was produced by Bain Consulting - paid for by dairy producer and processor money.
Bain analysts concluded that demand for U.S. dairy products would continue to grow driven by emerging markets, but that there was a window during which the U.S. dairy industry could capture its share of that market. The study warned that countries like Brazil and Ukraine could gear up and steal those markets if the United States didn't build its relationships in those markets.
Countries that often compete against us for dairy markets have issues that may affect their dairy business. Australia has serious and continuing drought problems and New Zealand, which has traditionally been a grazing-based country, is finding its cost of production rising as land prices skyrocket. According to a Rabobank report, the cost of production there will rise 10 to 20 percent and put the cost of production on a par with California. "That gives Wisconsin an advantage," she said.
Other global facts will enter into the dairy export picture. Dairy farmers in the European Union will lose their production quotas by 2015 and while that will allow some countries to grow their production, the potential isn't there for huge growth. Argentina, which has the potential to become a huge player in international dairy trade, always seems to have some political or economic conditions that prevent them from capitalizing on exports.
The Bain report cited Brazil and Ukraine as the world's emerging low-cost producers, noting that they could be ramped up in 10 to 15 years. "We've got a window of opportunity but we need to move into products that are customized to the needs of our customers," Taylor said.
But obviously a lot of things have changed since 2009 - U.S. farmers have lost several generations' worth of equity on their operations and world trade has stagnated under a global economic crisis. Those conditions prompted the Innovation Center for U.S. Dairy to commission Bain Consulting for another take on the globalization study "to convince the doubters about the viability of long-term demand" Taylor said.
That 2011 report showed that if anything, the opportunity is greater and the window is longer as the economies continue to stagnate in those countries that were predicted as competitors of the U.S. dairy industry. Those low-cost dairy producing countries like Ukraine and Brazil will continue to develop, but progress has been slow there. Companies wanting to build operations in Brazil to process milk must invest dollars at the farm level, she noted.
The study found that the long-term demand for dairy products will remain strong.
As part of the new look at globalization in the dairy industry, surveys of buyers found that the United States is well positioned but will need to improve growth in non-fluid dairy products. Seventy-five percent of the new dairy consumptions will come in a handful of regions, with India and China leading the pack, followed by Southeast Asian countries.
New Zealand is hard at work on a free-trade agreement with India. For now, that market is closed to U.S. dairy products, she said, because India won't accept milk from cows that are fed anything other than a vegetarian diet for religious and cultural reasons. As long as U.S. dairy farmers feed rations that include things like blood meal, that huge India market will be closed.
"Producers may have to adjust some production practices to access certain markets like India. They may have to be open to alternatives," she said.
Taylor noted that it is often easier for a small country like New Zealand to forge a free trade agreement with a giant like India or China. Basically New Zealand wants to be able to sell its dairy products there and doesn't care how many of its trade partners' products come into its economy. There is a different picture when it comes to the U.S. economy where issues like intellectual properties issues loom large.
"New Zealand really has a leg up on use in terms of negotiating free trade agreements. The United States is a political hot potato in other countries,"
But continuing to pursue trade agreements is one of the items cited by the Bain report as a way to capture this global demand. Also listed were reforming the U.S. system of milk pricing and finding ways to reduce the volatility through risk management at the farm level.
The United States will also need to become a player in the international system of setting standards for dairy products - like our own domestic standards of identity program here.
Taylor also believes that producers must develop effective margin risk management strategies or the U.S. dairy industry will continue to have worsening milk price volatility - much of it led by feed stocks. Forty-six percent of the U.S. soybean crop is now exported along with 14 percent of our corn crop. Hay exports are also surging, she said, and buffer stocks of these crops are insufficient to dampen this volatility. While this situation continues, milk prices will continue to be volatile.
