Global Changes Drive Need For New Policy Paradigms

The United States dairy industry is rapidly becoming one of the largest (second only to the European Union), most efficient and lowest-cost producers of milk and dairy products in the world, with the added benefit of excellent quality. The United States Dairy Export Council expects the demand for globally traded dairy products will increase about 20 percent over the next five years, and the U.S. dairy industry is well positioned to fill the gap and become a major competitive force in the world.
To ensure that result, we will need new paradigms of thought. First, we need to drive all unnecessary costs out of the system and, as new policies are developed, we need to make sure U.S. products are more competitive globally. It must be foremost in our minds. As new programs are considered, they must be evaluated as to whether they will improve or hurt the competitiveness of U.S. dairy products not only with non-dairy food products but also with dairy products from other countries.
This new thought process must begin now. Over the next few years many major countries including China, Russia, Japan and several European countries are likely to be large net importers of dairy products. The U.S. industry needs to be ready to service these markets to avoid having to wrestle market share from others.
U.S. dairy exports grew by 35 percent in 2004 and another 15 percent in 2005, without export subsidies, and are likely to increase even more in 2006.
There are several forces that make the timing right for the U.S. to aggressively pursue growing the market for dairy products globally. Foremost are probable changes in international trade rules, such as the reduction and ultimate elimination of export subsidies, that will permit world market prices to rise, probably to U.S. levels; the growing demand for dairy products in underdeveloped and developing nations; and fewer barriers to imports.
Export subsidies have depressed world market prices of dairy products significantly for many years. Prices generally equal the next lowest priced available supplies. Subsidized exports of both the EU and the United States contributed to driving world prices below the levels they would have been without subsidies. However, once export subsidies are eliminated, world market prices are likely to be about equal to the lowest cost residual supplier, which is very likely to be the United States.
So why is the U.S. a likely supplier? Because U.S. dairy farmers and manufacturers have become very efficient and have lower costs than many competitors. Cost of producing milk by U.S. dairy farmers is probably the lowest in the world after Australia and New Zealand. Additionally, the U.S. dairy industry has several new mega plants that process large quantities of raw milk with the latest technologies.  
About one third of the raw milk supplies come from low-cost farms milking 1,000 or more cows and the market share of these large farms is growing very rapidly. As the trend toward larger dairy farms continues to increase, the average cost of farm milk production will decrease even more. Although operating costs on large dairy farms as compared to smaller farms are somewhat lower, the ownership costs on large dairy farms (more than 500 cows) are much lower. They are only about one-third the ownership costs of units with less than 100 cows and even about 50 percent less than those milking 200 to 500 cows.
Differing production costs, both regionally and as a result of size, are likely to be most troublesome in gaining consensus about policies that will contribute to making the U.S. dairy industry more competitive. According to the most recent USDA report, the highest milk cost production area is nearly 60 percent higher than that of the lowest. This suggests non-price transition assistance should be considered to help less efficient producers become more efficient.
Other policies to help mitigate the risk of volatile milk prices should be developed. Several insurance-based programs have been outlined and may be a part of the new paradigm for global competitiveness.  
Tip Tipton, chairman and chief executive officer of the Washington, D.C.-based Tipton Group, is the former CEO of the International Dairy Foods Association.
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How important is global trade to the U.S. dairy industry?
“International trade offers a broad procurement sourcing base … [and] will allow access to many dairy commodities. International trade offers great opportunity for the world in general.”