By Lynn Petrak
With both potential and pitfalls, world markets continue to open up to U.S. dairy products.
t’s been said for the better part of a decade that the world is shrinking. Beyond the hyperbole, though, the reality is that globalization is indeed a continuing trend that impacts demand for goods and services. Instant, integrated technology, greater wealth and increased travel are just some of the factors behind the melding of the marketplace that has resulted in consumer interest in products made beyond their borders.
How increased globalization shakes out for U.S. manufacturers, including dairy processors, is another question. Clamor for American-made products may exist, but so do trade barriers. Further, those who take advantage of global opportunities to sell their products also may face production and distribution challenges, along with the need to market their items in ways meaningful to non-American buyers. There is also the fact that many dairy products are inherently perishable and what works in the domestic U.S. doesn’t necessarily play well abroad.
Although many dairy processors in this country are focusing their efforts on domestic sales, they are keeping an eye on the international scene. To help them, groups such as the U.S. Dairy Export Council (USDEC), International Dairy Foods Association (IDFA) and other organizations on a national and state level continually provide assessments of around-the-world demand for dairy products.
Currently, assessments are cautiously optimistic. “Across the board we are seeing a continued and sustained demand for dairy globally and demand that is growing,” says Marc A.H. Beck, senior vice president of market development for the Arlington, Va.-based USDEC, adding that opportunities are not going unnoticed. “There is beginning to be recognition that there are business opportunities and growth outside our border that could provide profits through the vertical supply stream in the U.S., from the processor down to the dairy farmer.”
Clay Hough, senior vice president and general counsel for the Washington, D.C.-based IDFA, shares that world view. “For U.S. dairy processors, there is clearly an emphasis on opening new markets. In terms of current opportunities versus five to 10 years ago, we have ongoing, multilateral and bilateral trade negotiations happening or in the process of happening,” he says, noting that product development is just as key to worldwide customers as it is to those in the states. “The more value added we get, the more competitive we are.”
Such negotiations have most recently resulted in the U.S. Free Trade Agreement with the Dominican Republic and Central America (DR-CAFTA), which Congress approved by a narrow margin and President Bush recently signed into law. The deal is expected to open up new markets for dairy and other agricultural sectors by removing trade barriers with several Central American countries and the Dominican Republic.
“The DR-CAFTA region is an emerging market for dairy products, so we have strongly supported passage of this agreement,” says Connie Tipton, IDFA president and chief executive officer. “And, importantly, passage of DR-CAFTA helps keep the United States in a good position at the table for the larger World Trade Organization Doha Agricultural Round, which we are counting on to yield badly needed reform in agricultural trade.”
Last year alone, ice cream exports to the DR-CAFTA region grew by 100 percent, while whey exports grew 9 percent. Under the agreement, duties on many dairy products will be reduced in the first year and fully eliminated within 20 years. For example, upon implementation, the U.S. dairy industry will gain immediate duty-free and unlimited access for U.S. whey and lactose — growing categories in U.S. production and marketing. For cheese, DR-CAFTA sees the immediate increase of tariff-rate quotas; after 20 years, duties and quotas on cheese will be eliminated.
To be sure, many large dairy companies have been in the export game for years, promoting brands already popular in the United States as well as touting products known in certain countries. Other suppliers have entered the market in the past decade or so, as international dairy trade has become friendlier to American manufacturers.
Even processors who emphasize domestic business are monitoring international demand. One example is the Monroe, Wis.-based cheesemaker Roth Käse. Although the company focuses primarily on increasing demand for its authentic European-style cheeses among American buyers, it recently won a first-place award in an international cheese competition and has explored some overseas prospects. “As we all know, this is an ever-changing field,” says chief executive officer Fermo Jaeckle. “It’s better to be tied into it and watching what is going on than sitting on the side.”
The Daily Planet
For anyone looking to market products to the right international audience, it is important to take a look at the current global trade climate.
Starting with sheer numbers, this market is only growing. World population is hovering around 6.4 billion and is expected to close in on 7 billion by 2010.
Just as important as how much the population is growing is the question of where it is taking place. According to the Population Reference Bureau (PRB), most future population growth will be in countries that have large numbers of young people and that already have large families, such as western Asia and sub-Saharan Africa.
Meanwhile, according to projections from the Food and Agriculture Organization (FAO) arm of the United Nations (UN), the population of China is expected to top 1.37 billion by 2010, followed by India at an estimated 1.17 billion. Furthermore, the United States, with a predicted population of 315 million, is expected to continue its fourth-largest position, preceded by the European Union at a projected 383 million.
The PRB also predicts that in the near future, many of the world’s people will live in urban areas. Already, more than half of the world’s population is urban, compared to one third 40 years ago. That shift has invariably resulted in socioeconomic changes, with more educated, wealthy and hence discerning customers.
To reach these emerging customer bases, the United States remains a major exporter of goods and services. According to the U.S. Department of Commerce, total exports of goods and services increased $126.7 billion in 2004 to nearly $1,147 billion, with goods alone reaching $94.5 billion. Still, during the same time, imports grew twice as much as exports, resulting in a widened trade deficit.
As for the dairy-specific market, the news is more heartening: Total U.S. dairy exports increased almost 49 percent last year. “From 2003 to 2004, total dairy exports went up from $1 billion to about $1.5 billion,” Hough says. “Even in Washington, D.C., that is real money.”
Meanwhile, compared to deficits faced by other providers of goods, U.S. dairy imports increased 2 percent in 2004. That allowed the U.S. dairy trade surplus to grow to 634 million pounds of milk solids, up from 281 pounds in 2003.
In keeping with basic theories of economics, a discussion of demand is not complete without a look at supply. In 2004, world milk production rose to 1,286 billion pounds, according to the Organization for Economic Cooperation and Development (OECD), a Paris-based organization.
Production can be expected to ramp up even more. According to figures reported by USDEC, global dairy demand has been rising about two percent a year, as global milk production remains about one percent. That equation is a big one. “If you look over a longer period of time, you will see continued constraints in supply relative to demand growth, which in my view bodes well for growth,” Beck says.
Basic economic tenets also hold that with demand outpacing supply, prices are expected to remain at a higher level. “We’ve seen steadily increasing price levels. In ’04, it actually reached a new plateau,” Beck says. “It would have probably put a crimp on demand 10 years ago, but we haven’t seen that yet.”
To determine where U.S. dairy producers fit into the global picture, organizations like USDEC and IDFA regularly evaluate market trends, including overall global demand and competition from other dairy-supplying nations.
According to Beck, the population surge and shift to more urban locales can work to the advantage of domestically based dairy suppliers. “Talking about dairy in broad terms, there is a universal acceptance that once an economy grows and a country gets a larger middle class, there is a move toward looking at animal protein versus vegetable protein,” he observes. “As this demand growth continues, the U.S. is very well poised to be a significant beneficiary.”
Hough agrees urbanization bodes well for manufacturers. “Part of what is whetting our appetite is continued growth in certain areas of the world like Southeast Asia, and especially in China, which in terms fuels demand and makes markets more robust for marketers to get in there,” he says. “There is a greater ability, with burgeoning middle classes, to purchase well-known dairy products.”
Emerging hot spots with expanded purchasing power include countries in Asia, as well as others in Latin America and even in countries bordering the United States. “We like Canada, Japan and Mexico, and we are really looking at growth in China,” Hough says, adding that increased sales in those regions take on great significance when population is factored into the mix. “Even if you make an incremental increase, what that translates into actual people is mind-boggling — when you actually translate what 10 to 20 percent penetration in the Chinese market is, you are talking about a huge market.”
Dairy suppliers also have kept tabs on key regions. “Asia is the largest market, and there are emerging markets in Latin America and China,” says Steve Singer, vice president of sales for the nutritional ingredients group of Glanbia Foods Inc., Monroe, Wis., which sells its dairy-based ingredients all over the globe.
Jaeckle shares a similar outlook from his perspective as a cheesemaker. “Most of Europe is closed to us because of high tariff barriers,” he says. “There are some markets in the Far East that may be open, particularly Japan. That is one country that has purchasing power, with people that are well traveled and who have been introduced to a lot of products that they make look for in their home markets.”
It should come as no surprise, then, that the United States is not alone in pursuing a chunk of the business across all continents. USDEC, for its part, has identified competition from traditional suppliers like the European Union and Oceania, as well as “up and comers,” defined as nations like Argentina, Poland, the Ukraine and India.
The good news, according to USDEC, is that strong competitors Australia and New Zealand are facing challenges of their own. Australia’s drought has led its production to be scaled back to 1998 levels, while New Zealand’s double-digit growth has slowed. Although India has been talked about as a major milk producer, just over half of the production is buffalo milk and only 13 percent of the country’s milk production is collected and processed, according to information provided by USDEC.
That puts U.S. processors, who are equipped to boost efficiency to meet demand, in a good spot to meet steadily increased demand. “We have an excellent opportunity to expand our core business,” Beck asserts.
Tom Suber, president of USDEC, recently commented on the challenges and potential that the U.S. dairy industry faces in pursuing such opportunities. “First, the industry must continue to work with overseas buyers to meet their product and price stability needs,” Suber says. ”Further, it must work with government negotiators and Congress to achieve a result in the current Doha Round of WTO trade talks that permanently eliminates export subsidies and creates greater access to all dairy markets, especially the high consuming ones in Canada and Europe.”
Hough, too, highlights the fact that this is a pivotal time to capitalize on market factors that favor U.S. processors, requiring commitments from government and industry alike. “It underscores the importance at a macro level of an aggressive free trade agenda,” he says. “We see a huge upside in getting involved in investing money in working trade — we don’t want to miss that opportunity.”
Exports by Product
Opportunities exist across all spectrums of the dairy segment. Dairy ingredients have been exported for years, but have been the subject of even greater demand lately. “Lactose and whey have absolutely exploded,” Hough reports. “Our total whey, for example, has gone up 20 percent from ’03 to ’04, and that is in terms of value of U.S. dollars. Lactose is another booming area of growth.”
Whey, in fact, is the topic of an upcoming conference sponsored by the American Dairy Products Institute (ADPI), based in the Chicago area. “There is so much activity going on in the development of whey protein. What was once a waste product of the past is a nutritional powerhouse of the future,” says chief executive officer Jim Page, adding that particular overseas markets are ahead of American food manufacturers when it comes to whey applications. “Some cultures are further along in the development of their per capita consumption of nutritional beverages.”
Skim milk powder is another ingredient to watch for its global appeal. “That has been a phenomenal success and demonstrates that once you get a trade environment that is fair, that the U.S. can become a significant supplier in that sector. Sales contracts concluded in 2004 for skim milk powder were done so under full commercial transactions, not with subsidies,” Beck says. “That shows you can have a commercial environment and the U.S. can be a profitable and successful participant.”
Indeed, Hough says, the market for ingredients like milk powder, whey and lactose are not merely growing, but evolving as well. “This is not just a market to dump surplus,” he says. “Now it is a market to be cultivated and worked into business plans.”
For Glanbia, which sells 20 to 25 percent of its products to foreign markets, ingredients are unique in the dairy export world because of their very nature. “Dry ingredients are easy to sell and ship — there is no need for refrigeration in shipment and storage,” Singer says.
But just because one decides to enter the dairy ingredient trade, Singer says, success isn’t a given. “It requires a long-term commitment to the market. Technical resources are needed to assist distributors and end users in the application and sale of ingredient,” he advises.
Although ingredients are obviously easier to transport to markets outside the United States, perishable products are making the proverbial leap. Beck cites cheese as one example, with prices for U.S. cheeses close at an attractive level. “Really, the big demand driver for cheese is commodity type of cheeses, like block cheddar and mozzarella, although across all varieties we’ve seen healthy demand growth,” he says.
In addition to commodity-style cheeses and those marketed by major U.S. brands with an established overseas presence, the reputation of U.S.-made specialty cheeses is gaining as well. According to Beck, USDEC has encouraged participation of U.S. specialty cheesemakers in international cheese awards. “We are able to market and elevate the new innovative food culture, and small cheese producers are up to that,” he says. “There are some interesting opportunities today to try to leverage that.”
One example of a company with such leverage power is Roth Käse. The cheesemaker recently won a gold award for its Hispanic-style GranQueso at the World Cheese Awards in London, garnering positive buzz. Although Jaeckle says such competitions are not an exclusive means to expand trade, recognition is a boost all around. “We are in the high-end specialty trade and our major reason for entering in the international competition frankly is so we get measured up against products that actually originated in foreign countries,” he says. “That validates the fact that we make great cheese.”
Milk powder may be a popular export these days, but fluid milk is another matter. “Obviously, there are certain perishable dairy products that are never going to be, by their nature, the first choice for a weeklong trip on a transatlantic ocean liner,” Hough says.
That said, the door is open for products such extended shelf life (ESL) and aseptic milks. “Once again, ESL and shelf stable products are of a nature that could be exported,” Hough acknowledges.
Interestingly enough, some ice cream manufacturers have made inroads in markets beyond the 50 states. Although some players with a previous foothold in the international ice cream market, such as LeMars, Iowa-based Wells’ Dairy, have gotten out of the trade somewhat, others are jumping in. Dippin’ Dots, Paducah, Ky., has a new international division called Dippin’ Dots Global that is pursuing state-of-the-art production facilities for its flash-frozen ice cream beads in strategic locations of the world, including Asia, Latin America and Oceania.
Velvet Ice Cream Co., Utica, Ohio, has also gone long distance with its products, sending them via ship in special freezer containers to foodservice and retail customers on several Caribbean islands. “We came in touch with buyers from the islands who sampled our product and saw our package sizes and flavor lineups. They like to use products from the U.S.,” says Velvet president Joe Dager, citing the large tourist trade in those areas.
Although its products are marketed and packaged similar as those sold in American locations, Velvet Ice Cream has tweaked some things for its Caribbean clients. “For the islands, we have developed some tropical flavors,” Dager says. “Our sherbet line has done very well, for example, and we came out with a new mimosa flavor this year, with a champagne background flavor.”
To be sure, there are other examples of U.S. dairies that are invested in or at least looking at foreign markets. Even with tariff challenges and continuing competition from other regions, the possibilities remain open.
IDFA’s Hough, for his part, makes the often-cited comparison about going after a piece of a pie. “We need to think about an integrated and growing pie,” he says, “as opposed to having a knife fight about how big a slice may be of a static market.”
Lynn Petrak is a freelance journalist in the Chicago area.
Producers Buying In to Export Opportunities
Like dairy processors, dairy farmers realize that export opportunities could be a significant part of the future of the U.S. dairy industry. In fact, they have invested a significant amount of money to that end.
Through their 15-cent per hundredweight dairy promotion and research effort, dairy farmers provide about $7 million in funding for the U.S. Dairy Export Council (USDEC) each year. And several dairy-farmer owned cooperatives have representatives active in USDEC activities.
Dairy America is another export-related activity that involves dairy farmers. Dairy America was formed by several major milk powder-producing dairy cooperatives as a way to market powder efficiently and effectively. That group has aligned itself with Fonterra to take advantage of the giant New Zealand co-op’s expertise and presence in worldwide dairy markets.
Finally, some of the funds dairy farmers contribute to the Cooperatives Working Together (CWT) program have an export function. CWT funds are used to help dairy cooperatives export cheese and butter when cash prices fall to a certain level. In fact, CWT-assisted exports have accounted for a significant portion of cheese exports in recent years. – Hoard’s Dairyman
Based on data through April 2005, there has been significant growth in U.S. trade in dairy products this year — both in terms of exports and imports, as well as in quantity and value bases. Data from USDA’s Foreign Agricultural Service shows that tonnage of exports increased 38 percent, while their value is up 41percent; imports were up 16 percent in quantity and 29 percent in value.
In terms of total quantity, more than 349,000 metric tons (MT) of U.S. non-fluid milk products were exported to overseas markets in the first four months of this year, with most of the exports being nonfat dry milk (41 percent) or whey (11 percent). In addition, approximately 17 million pounds of fluid milk and cream left the country. Combined, this total is about 75 million MT more than the total of dairy products imported into the United States.
Specifically, growth in nonfat dry milk (NFDM) sales has been a major driver of total exports growth. More than 120,000 MT of NFDM have been shipped so far this year, compared to 48,000 MT a year ago — an increase of 150 percent. The total value of 2005 NFDM exports to date is $237 million, an increase of 171 percent over last year.
Whey is another important component of U.S export growth. Compared to one year ago, whey tonnage has grown from 60 million MT to 87 million MT; value increased from $45 million to $64 million, representing increases of 45 percent and 43 percent, respectively. Yogurts and other fermented products also saw a notable value increase of 71 percent, but in terms of quantity, this category currently represents a small portion of total exports.
While U.S. exports have higher quantities, U.S. imports have the greater dollar value. About $890 million worth of dairy products have come into the United States so far this year (through April). This compares to $575 million for U.S. exports. Imports to the United States are led by higher-end cheeses, which have raised the value of imports per metric ton due to this category’s generally higher price tag. Imported cheese represented 36 percent of the total value of U.S. imports through April, while representing just 25 percent of total import quantity.
SOURCE: John Rutherford, IDFA senior economic analyst
New Zealand: World Dairy Prices Tipped to Hold Up
There is nothing to suggest an immediate drop in dairy prices, says the ANZ Bank’s latest market focus. It said prices for dairy products had settled near a nine-year high, courtesy of a tight demand-supply balance. This situation has been reinforced by hot and dry conditions in Europe, expected to limit the extent of production surpluses in the EU in 2005.
The ASB Bank further reported that while many had been expecting a weakening in world dairy prices following adjustments in European government dairy policies, the market seems to be going the other direction. The strengthening of skim milk powder prices have spread to butter and whole milk powder, and prices for butter from Oceania (New Zealand and Australia) were reported up almost 5 percent from previous levels.
The long-term dairy projections to 2014 from the Paris-based Organization for Economic Cooperation and Development indicated that over the next decade, world demand for dairy products — butter, cheese and whole milk powder — would grow about 20 percent, but demand for skim-milk powder would fall 4 percent.
Product prices were expected to decline from their present levels but remain well above 1999-2003 averages. In 2014, butter prices would be about 40 percent higher than the five-year average, with cheese, whole milk and skim-milk powder prices 20 percent higher.
ANZ says the average peak-to-peak price cycle for dairying was about four years. “We are currently four years into the present cycle,” the report states. “Looking at directional gauges, the relationship between dairy prices and leading indicators of global growth highlight that at this stage in the dairy price cycle the risks are to the downside.”
But the report says the continuing theme in dairy markets in this part of the world was a tight demand-supply balance favoring exporters. “It may take a good start to the season towards peak production in mid-October,” it says, “to take significant heat out of international dairy prices.”
SOURCE: New Zealand Herald, July 14, 2005$OMN_arttitle="Trade Winds";?>