USDEC’s Tom Suber on exporting challenges.

In late July, I gave a Congressional panel my perspective on what ails the dairy sector. At the exact same time, 600 miles away, a consulting firm was putting the finishing touches on a report on what globalization means to the U.S. industry.

The two events are not unrelated.

A House subcommittee took testimony this summer from nearly two dozen people on the economic conditions facing the dairy industry. While many of those invited to the Hill pointed out – rightly so – that a steep drop in exports led to oversupply in the domestic market, few acknowledged that it is in fact the industry’s systemic inability to deal with globalization that turned the situation into a full-blown crisis.

But that’s exactly what the Innovation Center for U.S. Dairy, supported by Bain & Co., concluded this summer.

Bain is an internationally recognized management consulting firm. It was hired by the Innovation Center for U.S. Dairy, a high-level forum where industry leaders from all segments come together to address big-picture industry issues, pre-competitively. The Innovation Center asked Bain to support a task force it formed to provide a deep understanding of the impact of globalization on markets for U.S. dairy products – both internal and external – and to outline strategic options to accommodate that impact.

With a recovering global economy, worldwide demand for dairy products will grow faster than available supply, driven primarily by emerging markets, the Innovation Center’s Globalization Task Force concluded. Further, traditional sources of supply (Oceania and the European Union) won’t be able to keep up.

While this may seem unsurprising to those who have championed exports for the last decade, it is a fundamentally important principle to have re-affirmed in light of the currently dismal international dairy prices.

The Globalization Task Force also said that globalization of the dairy industry will increase in the coming years, and the implications are significant for both domestic and international trade. Global imbalances will create increasingly volatile markets, as processors compete across borders for available supplies. This volatility effects everyone in the chain, exporter or not.

In short, the U.S. industry is not set up to accommodate a global market, the study concluded. Structural constraints simply get in the way. The price support program, which makes the government our fall-back customer, limits the industry’s commercial focus, distorts its investment profile and keeps its product portfolio from aligning with customer needs. Meanwhile, the federal order pricing system inhibits manufacturers from offering the kind of long-term level pricing that customers want so badly.

To keep doing what we’re doing or to retreat into a managed supply regime would likely result in a weakened U.S. dairy industry: less competitive, with greater vulnerability to imports, and slower or non-existent growth, according to the Globalization Task Force. The alternative – the strategic option that is, in fact, being pursued by the Task Force – is to address the structural constraints that prevent us from becoming a consistent exporter.

This fall, the Innovation Center’s board of directors will develop a work plan on how we, as an industry, might transition from a production-centric model to a customer-centric one. The plan will address how we might curb excessive volatility, reform pricing mechanisms and cultivate capacity to meet specific yet variable product needs.

The cynics will be apt to greet this initiative with a shrug: we’ve heard it before; you’ll never get everyone’s buy-in; there is too much entrenched interest to make significant changes.

However, it’s encouraging that this time the discussion has been elevated to a whole new level. The U.S. dairy industry of the next decade will look different from the one we see today. We will either proactively shape our direction or we will have our direction handed to us. Most everyone understands this and the Innovation Center approach ensures all aspects of the industry are accounted for and each participates in creating the new path forward.