Dairy on the global stage is a buyers’ market saga.



This year, Jim Sullivan, president of Fenton, Mo.-based International Ingredient Corporation, is going out for Chinese food more often.

He enjoys the cuisine, sure, but he has an ulterior motive as well. He’s learning to handle the chopsticks.

China is one of the largest markets for IIC’s Dairylac 80, a proprietary dry whey permeate blend used in swine feed formulations. After market conditions turned in the second half of 2008, the company made a strategic decision to boost its emphasis on export sales in 2009.

“We increased our sales calls and our technical support trips this year,” Sullivan says. “We’ve made six trips to China. We’ve visited customers in South America, Mexico, Central America and throughout Asia. We don’t just go to Beijing and stay in the hotel. We want to show them special attention. We take a personalized approach to selling.

“One customer joked that I was a bit clumsy with chopsticks. So I’ve been practicing. When I visit him next month I hope to do better.”

Hands on

This sort of “hands-on” approach has been necessary in what has been one of the most challenging years U.S. exporters have ever seen. After overseas sales rose steadily for most of the decade – U.S. shipments increased six years in a row, skyrocketing from $1.0 billion in 2002 to $3.8 billion in 2008 – exports crumbled along with the global economy last fall.

The decline was attributed to a cascade of factors that contrasted sharply from the prior year.

Over a five-year stretch, higher incomes in developing countries led to surging demand for dairy, while supplies from Oceania and Europe couldn’t keep up. As a result, prices firmed. But when an unusual drought in New Zealand truly left buyers scrambling, historically high dairy prices joined the food and fuel inflation in 2007-08 and began to blunt consumer buying power. At the same time, global milk supplies came back, responding to high farmgate milk prices.

The situation snowballed. The global economic collapse turned what might have been a modest correction into an accelerated downturn. Then the China melamine crisis scared consumers and put another dent into Asian demand. The credit freeze meant companies weren’t able or willing to buy and hold inventory. As prices declined, buyers saw no need to purchase aggressively anyway. Orders slowed and manufacturer and government stocks mounted quickly.

By January 2009, world commodity prices were just half of what they were seven months earlier – bottoming out when they approached U.S. support prices. They languished at those low levels until mid-year. Where the United States had thrived in the higher-price environment of 2007 and 2008, U.S. suppliers had a tough time competing when international prices fell back again.

“Outside of the whey products segment and our cheese business to Mexico, the United States has historically been a residual supplier to the world market,” says Marc A.H. Beck, senior vice president of export marketing for the U.S. Dairy Export Council, Arlington, Va. “In the commodity nonfat dry milk markets, unlike in some other categories, that makes us the supplier of last resort. We did very well when supplies were tight and it was a sellers’ market. We struggled when it became a buyers’ market.”

U.S. exports decline in ‘09

In the first eight months of 2009, U.S. dairy exports were valued at $1.4 billion, just half of the figure registered in the first eight months of 2008. By volume, shipments of nonfat dry milk/skim milk powder were off 45%, while cheese was down 27%, butterfat was down 84% and whey proteins were down 5%, according to U.S. Department of Agriculture/Foreign Agricultural Service data.

As U.S. exports declined, New Zealand production recovered and their exports soared. Aggregate shipments of milk powder, cheese, butterfat and whey were up 36% in the first eight months of the year, according to Statistics New Zealand.

“Keep in mind two critical characteristics of New Zealand’s dairy industry: they export 94 percent of their production and they don’t have a government intervention program. So they have to find overseas sales for everything they make,” Beck explains. “In the 2008/09 marketing year, New Zealand milk production was up nearly 10 percent. They had to unload that surplus on the world market. When their commercial warehouses filled, they became very aggressive with their pricing to keep product moving. They simply priced us out of the market.”

In addition, European exporters were able to hang onto some of their markets with the benefit of export subsidies, which they reinstated in January, he adds.

Leavin' on a jet plane

U.S. suppliers, to their credit, did not abandon the export market when conditions became difficult. Most, like IIC, redoubled their commitment to export customers, even as volumes waned.

“Early this year, we surveyed our members and found that almost to a company, they remained engaged in the export market,” says Tom Suber, president of USDEC. “This would not have been the case five or six years ago.”

IIC’s Sullivan adds: “We made the decision to take a long-term approach to our export business and to remain as a supplier to our core customers. This was painful for us; we had to lower prices to be competitive. In addition, many feed companies greatly reduced the inclusion of dairy powders in their pig starter formulas in the first quarter of 2009 and volumes were down.

“But we decided to take a technical marketing approach,” he continues. “We increased our spending on travel. We met with end-users, nutritionist to nutritionist. There’s a well-documented economic benefit to feeding dairy powders to piglets. We worked directly with animal nutritionists to emphasize the importance of keeping dairy in their pig starter formulas, and to teach them the optimal inclusion rates for dairy. As 2009 unfolded, we gained, or regained, business as a result of being there.”

It was a common theme: U.S. dairy suppliers found themselves riding more airplanes this year in an effort to defend hard-earned market share.

“2009 was a different year,” says Dermot Carey, vice president of the ingredient division at Seattle-based Darigold Inc. “Buyers were very careful, so we spent more time with them. We had a lot more in-depth discussions with customers to understand their buying situation. This year we developed focused, quarterly plans with each customer to determine their needs and what we could supply.”

Agri-Mark Inc., Methuen, Mass., broke into two new countries in the past six months and renewed sales of whey proteins into countries where it had not sold product since 2005, says Peter Gutierrez, vice president of global ingredient sales.

“I visited some countries that weren’t what I would consider fun visits, but that yielded new customers in new countries. In the age of e-mails, one-on-one contacts are still vital to get that first order,” Gutierrez says.

Diversification

This year also proved the wisdom of not putting all your eggs in one basket, exporters say.

“The most effective tool in the type of markets we have been in is to have a diverse customer base, with wide geographic and cultural spans,” Gutierrez says. “That way you are able to move supply from one part of the world to another when one economic region struggles. During 2009 we will probably sell product into 30 to 35 different countries.”

Of course, the buyer-seller relationship changes in a softer market.

“Our core customers didn’t treat us differently,” Carey says. “But in a buyers’ market they were able to clearly delineate what they expect from us on both price and volume. In some cases they also asked for tighter specs [on characteristics like heat stability, spore counts, sediment and solubility]. When you go there and walk through their plant and see how the product is used you understand. It’s not that they’re squeezing us, they just need our ingredients to perform a certain way.”

Light at the end of the tunnel

Since summer, world dairy market conditions have improved, and exporters and market analysts are cautiously optimistic that 2010 will be a better year. In the third quarter, commodity prices were up 20 to 40% across the board.

“The international dairy market has reached a clear turning point, with economic recovery under way, end consumption improving and wholesalers looking to refill pipelines,” writes Rabobank International in its September 2009 Dairy Quarterly. “Market fundamentals are likely to continue to move in favor of sellers over the balance of 2009. However, the rate of improvement is expected to be modest – and stockpiles to be cleared in the Northern Hemisphere remain substantial.”

Milk production growth worldwide has slowed, but a major supply contraction worldwide has yet to be achieved, Rabobank notes. And those heavy inventories in both the United States and Europe – now the most since 2002-03 – will need to come down. In the EU, for instance, government stocks of skim milk powder and butter have topped 1 billion lbs., with no ready mechanism for disposal.

That will make market recovery in the year ahead “uneven,” Rabobank says, and another dramatic price run-up like 2007 is unlikely.

And as the U.S. industry continues to grapple with the ups and downs of its export performance, and the resulting price volatility that comes with it, U.S. suppliers have gotten better at sticking by their international customers.

“Overseas buyers still want to deal with us,” Carey says. “But they want committed, long-term suppliers. They don’t want to deal with those who walk away. They’re looking for a long-term commitment, but they are looking at other suppliers as well.”  


Alan Levitt is president of Levitt Communications, a Crystal-Lake, Ill.-based firm specializing in market analysis and marketing communications for the dairy industry. He has been providing commentary on the dairy industry for the last 24 years, including a stint on the Dairy Foods editorial staff from 1985 to 1990.

Anuga 2009 a Global Success

The 30th Anuga held Oct. 10 to 14 in Cologne, Germany, generated high-powered market momentum for the global food industry. “Anuga clearly demonstrated its leading role as a central trade hub and information platform for the international food industry,” says Gerald Böse, chief executive officer of Koelnmesse GmbH, the venue where Anuga is held every two years. 

Approximately 153,500 trade visitors from more than 180 countries came to the fair, with 61% from abroad. These figures were slightly lower than those for the previous event, but remained stable overall. The number of exhibitors - 6,522 suppliers from 97 countries - also remained unchanged at its previous high level.

“There was no sign of the economic crisis at Anuga,” says Dierk Frauen, president of the Federal Association of the German Retail Grocery Trade. “The trade fair has shown that the food sector remains stable even in difficult times. Whatever else is going on, people still have to eat.”

Jürgen Abraham, chairman of the Federation of German Food and Drink Industries (BVE), adds: “Anuga 2009 has confirmed its leading role for the international food sector. That is especially impressive in the midst of the current economic crisis.

“But in spite of this positive overall mood, the food industry in Germany is suffering from very fierce competition. German top quality wins points in international business, but at the national level the industry is dominated by price competition,” says Abraham. “Our objective in Germany must be to base competition on the best products rather than the lowest prices. The BVE has therefore challenged political decision makers to cooperate with the industry in launching a joint food quality offensive.

“Quality food with the ‘made in Germany’ label continues to be in strong demand around the world,” says Abraham.

Quality was also apparent with the type of visitor to Anuga. According to the preliminary visitor survey, nearly 70% of visitors described themselves as decision makers with regard to purchasing or as being involved in purchasing and procurement. An additional 18% said they played an advisory role in purchasing decisions. Visitor turnout from the Middle East was particularly high, having increased by more than 30%. The number of buyers from Asia rose by about 10% and from Africa by more than 20%. The number of visitors from the United States and Canada rose slightly.

“The even higher quality of the trade visitors is a decisive criterion for the success of the trade fair,” says Böse. “For the results-orientated presentation of the companies at Anuga, it is extremely important that supply and demand be brought together in a targeted manner. The Anuga concept of ‘10 specialized trade fairs under one roof’ does this with great precision.”

Anuga Dairy - one of the 10 fairs - and the largest, most international platform for milk and dairy products, had a total of 353 international exhibitors.

The next Anuga will take place Oct. 8 to 12, 2011. For more information, visit www.anuga.com.

Inside the Bavarian Milk & Dairy Center

Bavarian-based scientists and economists keep the German dairy industry efficient and competitive. 

Donna Berry, Product Development Editor

In the German state of Bavaria, known for rolling grasslands that stretch to the Alps and separate Germany from Austria, you will find most of the country’s dairy farming operations. In fact, the region of Allgäu in southwest Bavaria has become an end-of-summer tourist destination, as vacationers come to watch the herdsman guide hundreds of thousands of cows down from the Alps where they have spent the summer grazing on Mother Nature’s Alpine valley. One hears the continuous tinkling of cowbells during this more than week-long procession that leads the cows back to their homes in the villages around the city of Kempten.


Kempten: Dairy in action

For more than 2,000 years, Kempten has been recognized as the central point for most of Germany’s milk and dairy activities, including research and operations management. Here you will find the Bavarian Milk & Dairy Center, a state-of-the-art facility that investigates all aspects of dairy production -  from farm to fork.

The center is one of the few in the world that includes all aspects of the dairy business - cow breeding and feeding, milk production and processing, analytics, quality and sensory, as well as market analysis and a price structuring program. The latter is one of a number of institutions and associations collectively known as the House of Milk.

The House of Milk includes the South German Butter and Cheese Exchange. Members of this non-profit association provide weekly pricing specifics on cheese and butter in order to ensure fair pricing for cheese and butter bought and sold in Germany and elsewhere in the world.

“The purpose of the association is to collect reports from members about the amount and price paid the previous week for cheese and butter,” says Emmerich Heilinger, chairperson. “The association then summarizes these statistics to provide an official price quotation.  

“The commission of the European community uses our statistics and price quotations to decide about dairy policy, including intervention pricing and export refunds,” says Heilinger. “Bavarian farmer associations use the data for negotiations between farmers and dairy companies, with many dairy companies using the data to set their own selling prices. We can provide immediate information about price changes in the market so that dairies can respond and adjust.”

Another critical component of the Bavarian Milk & Dairy Center is Spitalhof Kempten, a teaching, testing and specialized center for dairy farming and grassland management. Instructors assist Bavarian farmers with identifying and growing the best feeding pasture, making and storing silage, breeding the most profitable cow and keeping her and her young healthy. Such knowledge and skills are essential to being competitive in the Bavarian agriculture and dairy food industries.

The dairy school, located nearby the teaching farm, is where German dairy processors send their technicians for formal training. This can range from single training sessions to multi-year certificate programs. The school has dairy processing and packaging equipment to handle the manufacture of all dairy products - fluid, powder, cultured, cheese, butter and ice cream, according to Johann Peschek, director.

The final facility located within the Bavarian Milk & Dairy Center is muva kempten, a laboratory and quality service institute. “An extensive range of chemical, physical and microbiological tests are performed here,” according to Thomas Westermair, head of muva kempten. “We also provide training and consult on a number of topics, including assistance for labeling and certification.”

Though the institute began as a dairy research and examination center - muva is an acronym, with the “m” standing for milch, the German equivalent of milk - it now handles all types of foods and beverages. Customers include global giants such as Kraft, Nestlé and Danone, as well as German food manufacturers like Müller and private label retailers such as Aldi and Lidl. Ministries and other governmental agencies also often rely on muva kempten for independent product analyses.  

Muva kempten’s capabilities include product composition analyses, packaging performance, microbiological quality assays and detection of contaminants, including allergens, pathogens, contaminants and residues. The analytical procedures in the institute include more than 300 accredited methods, with the ability to test more than 800 chemical, physical, microbiological and sensory variables. Technologists perform around 250,000 analyses every year on the more than 75,000 samples of dairy and other foods that the institute receives annually. This equates to about 1,000 tests conducted on an average work day.

The sensory department at muva kempten is much more than product evaluation. It includes sensory education, panel training, proficiency testing and reference materials. Proficiency testing is one of muva kempten’s greatest prides (see sidebar above).

Without a doubt, Kempten is Germany’s dairy heartland. As the dairy industry becomes more global, U.S. dairy processors will most likely do business with the Bavarian Milk & Dairy Center - and this will more likely be sooner than later. 


Proficiency Testing

The concept of proficiency testing, also often simply referred to as ring testing, is still rather “foreign” to the United States, but in the European Union, it is a critical component of most quality control programs.

“Ring tests are independent checks on the reliability of a food manufacturer’s quality program. This includes evaluation of chemical, microbiological and sensory tests,” says Ute Braun, food chemist and leader of the proficiency and reference materials division at muva kempten. Ring tests include a minimum of 10 participants, which is never a problem to reach. Participants receive a reference sample that they evaluate, using chemical, microbiological or sensory techniques. Evaluations are compared and scored.

Ring tests use the same standardized sample. Participants analyze the sample without any knowledge of what compounds are present, and/or what concentration to expect. Each lab sends its results to the organizer. The results are statistically processed and the overall results are distributed to the participants. Each participant also receives their individual results.

“Ring tests permit the detection and correction of failures in a company’s quality control program, among other benefits,” says Braun. “The investment is minimal, and the long-term benefit invaluable.”

For more information, visit www.muva.de.

Links