Long-term trade prospects gathered a lion's share of the attention as marketers from across the U.S. and around the world joined in the conversation at IDFA's Dairy Forum.
by Hoard's Dairyman staff
While a wide variety of dairy topics filled discussions in meeting rooms and hallways at the International Dairy Foods Association's (IDFA) Dairy Forum, future dairy trade prospects took center stage. That tone was set at the opening session when keynote speaker Ron Kirk, the immediate past U.S. Trade Representative, talked global trade. Kirk is only the 16th person to hold that post as the U.S. President's chief negotiator on trade issues with countries around the world.
"You (the U.S. farmer) are spectacularly the most efficient agriculture machine in the world," stated Kirk. He then went on to explain to a packed audience that well-designed free trade agreements help the U.S. move ag products around the globe.
However, he shared that negotiating the agriculture portion of trade pacts is perhaps the toughest part of negotiations. "Remember, every country has a constituency that is a farmer. It makes trade deals quite difficult to negotiate."
On the flip side, "Many countries believe the quickest way to revive their economies is to link to the U.S. via trade agreements," said Kirk. "However, not only do we need to open new markets, but we need to hold current trading partners accountable to fair trade practices."
While Americans have been apprehensive about trade deals, the reality remains that 95 percent of the world's consumers live outside the U.S. And on the dairy side, while roughly 84 percent of our dairy products are consumed in households, 16 percent are now purchased by customers outside our borders. That is up 4.5 percentage points from just five years ago. (It would be up 6.5 percent in direct comparison with the 2009 economic downturn).
Why the need for more dairy?
"When diets are supplemented with meat, milk or eggs, learning and subsequent test scores improve among school children," said Dennis Schaffler, senior director of U.S. dairy operations for Elanco, as he went on to say that access to high-quality protein is a growing desire for many nations around the world. "If children don't have access to meat, milk and eggs, they are less likely to prosper and contribute to society, found a United Nations and Journal of Nutrition report," said Schaffler. That's not all.
"The world will welcome another 3 billion people to the middle class by 2024," expanded Schaffler, noting that the growing middle class would be an additional driver for purchases of dairy, meat and eggs. Coming back to exports, Schaffler added, "Trade increases food availability and affordability."
While that's the long-term forecast, what does the near-term hold on the export front?
"There is plenty of demand potential for dairy, but producing milk to meet the current demand is the issue," said Tim Hunt, global dairy strategist with Rabobank. "In fact, global milk production is proving devilishly difficult to expand," he said.
At the same time, demand is strong, especially in China, the world's leading dairy product importer. "It's like dedicating all of Ohio's 2013 milk production to China's additional demand," noted Hunt.
Why all the focus on China and New Zealand? At the moment, one represents the world's largest dairy importer, the other the largest exporter. Phil Plourd, president of Blimling and Associates, summarized this situation rather succinctly in his observation on forecasting dairy markets. "Is it raining in New Zealand, and what is China's dairy appetite? Those are the two main dairy drivers," he said.
While that may be the baseline, there is much more at play.
"Global dairy trade was up 60 percent from 2005 to 2012," said Hunt, noting that market development has expanded sales opportunities for countries that can produce milk profitably. "The U.S. dairy industry is now on the right side of the competitiveness ledger to benefit from freer and less distorted trade," he explained further.
And it comes at a good time. "The speed limit for New Zealand dairy supply growth is set to fall from 5 percent annually to around 2.5 percent in coming years," projected the economist, as he eluded to the fact that the U.S. would be in a good position to grow its export sales.
Hunt also noted that, "Asia is excited by recent U.S. investments in WMP (whole milk powder) plants further expanding the country's export orientation." It has been pegged by some industry economists that by year's end, the U.S. could be producing 10,000 metric tons of whole milk powder each month as three plants come online.
Product availability and price aren't the only factors the U.S. has going for it. "The U.S. is uniquely positioned geographically to serve the world's growing dairy markets," noted California Dairies' CEO Andrei Mikhalevsky, who previously worked in New Zealand for Fonterra. "We have a wonderful domestic market, but the opportunity is global. At 15 percent exports, there's no turning back," he went on to say.
"The risk is worth the reward on exports," concurred Plourd. "However, if 85 percent of our milk is here (U.S.), we can't take our eye off the domestic market," he added.
While the U.S. grows dairy markets, there is also a concern about price risk, down markets and building inventories. "We have to think about what if we have a backwash of products," noted Plourd, when the discussion turned toward potential price downturns and the risk for sluggish sales like in 2009.
Drawing back to his dairy product marketing days in New Zealand, Mikhalevsky countered, "We have a wonderful risk management tool in the U.S. It's the domestic market. New Zealand doesn't have that."
As far as export customers are concerned, Mikhalevsky truly believes we have changed perceptions in most countries. "I don't think there is any doubt that our customers around the globe think that we (the U.S.) are on board these days," he said. "We no longer look at export sales as a place to put excess product. We look at it as a market."
What has the U.S. done well up to this point on growing exports?
"I've gone from one of the biggest critics to one of the biggest cheerleaders on how the U.S. has approached exports," said Patty Stroup, who heads up procurement of global dairy products for Nestlé. "I don't think New Zealand and the European Union thought the U.S. could be a player a decade ago," she said. "Now, I think the U.S. could be the major player in the coming years."
"We have a flexible and dynamic system from the farm to the plant in the U.S.," noted Plourd. "That has allowed us to ramp up exports rather quickly."
To keep this momentum going, Mikhalevsky reminded the Dairy Forum audience, "We have to think of our customers and make tailored products that they want."