World of Change
August 1, 2007
THE GLOBAL MARKET
World of Change
by Lynn Petrak
Thanks mostly to strategic marketing efforts, global demand for dairy heats up.
When it comes to demand for U.S. dairy products, the winds of trade have gone from slightly breezy to downright gusty. During the past year, rapid and significant changes in the global market have enabled dairy manufacturers in this country to become more prominent in many parts of the world, in both established and emerging markets.
Still, it’s not as much a force that appeared out of nowhere than it is a system that has been building consistently over time. “It was not unanticipated, but the timing of it was always hard to call,” says Tom Suber, president of the U.S. Dairy Export Council (USDEC), Washington, D.C., of the convergence of several factors enabling the dynamic new climate. “We had long been pointing out that demand was increasing for a lot of structural reasons, especially increasing incomes in countries like China. Certain factors might accelerate the impact, such as if we had WTO (World Trade Organization) agreements and if for some reason there was a drought at some important supply point such as Australia, which did happen.”
To Suber’s point, unfavorable climate conditions Down Under, the removal of certain trade barriers, negotiations over bilateral and multi-lateral trade and a clampdown on export subsidies within Europe all were factors that combined to benefit American dairy producers and processors.
Helen Medina, manager of international and regulatory affairs for the Washington, D.C.-based International Dairy Foods Association (IDFA), agrees that exports have been “extraordinary,” and that occurrences like internal reform in Europe and drought in Australia resulted in a windfall for American manufacturers. “The market is less flooded than it used to be, and that makes room for the U.S.,” she says.
The simple fact that demand has been building due to the quality and innovation of U.S.-made dairy products is also one that is often emphasized by industry leaders and companies who have helped penetrate new markets for dairy and expand existing ones to record-breaking levels. Medina notes the strong growth in exports is even more remarkable given that 100 percent of U.S. dairy exports received no government subsidies last year, while 90 percent were unsubsidized the year before that. “Strong demand is one [key trend],” she says, “and the other is the fact that you don’t need subsidies to export.”
While the alignment of certain trends, events and agreements are spurring new opportunities in many corners of the world, there has also been a shift in the way U.S. dairy manufacturers and producers view markets outside of this country’s borders. Exports were once seen as a way to make use of surplus products, or products that did not command sufficient domestic sales.
These days, however, American dairy producers, processors and industry leaders increasingly recognize that it makes strategic sense to capitalize on burgeoning demand for dairy products in some targeted hot spots and spearhead efforts to create demand in other areas with potential for new inroads. As such, there has been a shift from simply determining how to unload certain products to how to employ certain tactics — and where — to become viable global providers for the world’s hunger and thirst for dairy products.
“I think you’re looking at it as markets now,” Medina says, citing the example of some larger dairy ingredient companies and manufactured product operations. “You have some companies with 40 percent of their sales or more as exports.”
By evaluating certain regions more strategically and moving them up the list of priorities, those who ship dairy products to foreign markets and those who represent U.S. dairy manufacturers also are seeking to understand the attributes of each market.
For example, according to Suber, demand in some countries and regions has been rising along with per capita incomes and the “Westernization” of their respective food cultures. He cites in particular the transformation occurring in countries like Russia, Algeria and Indonesia and in some parts of Mexico. “Oil-producing countries have contributed to the demand. No one could project oil prices at this level, and oil producers are rich with dollars and that keeps people consuming,” Suber explains. “As they get income, these populations want animal protein, and dairy is very much part of that.”
Others agree that as residents in certain parts of the world experience a boost in income — because of, or independent of, their own export of resources — they also typically boost their intake of dairy products. “It’s wealth,” Medina says, “and it’s also mobility of people.”
Statistics certainly support the trend that more people are consuming more U.S.-produced dairy foods and beverages. In many cases, in fact, the data for the most recent calendar year reflected record-breaking numbers.
Take overall dairy exports, for example. According to USDEC, dairy export volume surpassed 2.09 billion pounds in total milk solids last year, a healthy 15 percent jump from the previous year — and a new record level. Dollarwise, the value of those exports also exceeded all previous figures, coming in at $1.89 billion, a 13.7 percent increase. Moreover, those strong figures come on the heels of double-digit growth from 2005 to 2006. Looking back longer, exports have leapt 77 percent in value and 75 percent in volume since 2003.
Demand by Region
If total exports are displayed on a pie chart, one piece of the proverbial pie that has been getting a lot of attention is China. “The growth in China has been spectacular, especially in light of how fast their own production has grown,” Suber says. “The fact that they’re still importing shows how robust demand is.”
Other Asian countries are also showing steady demand, including Japan, which imports more lactose than any other country from the United States, South Korea and Taiwan.
Southeast Asia, which includes nations like Indonesia, Malaysia, the Philippines and Thailand, is another region that is has show enthusiasm for U.S. dairy products. As with last year, exports to nations in Southeast Asia went up, well into the double-digit percentage mark for several products.
The Middle East, meanwhile, may remain unsettled in geopolitical matters, but populations in certain nations in that region of the globe have an appetite for American dairy ingredients and products. In fact, the Middle East last year broadened its import volume of whey protein by 144 percent, cheese by 88 percent, skim milk powder by 45 percent and butter by 77 percent. “The region that is considered the Greater Gulf Council — Qatar, Bahrain and most of Saudi Arabia — that is where the biggest chunk of people are [who use or consume U.S. dairy products],” Suber says, adding that the negative image the United States has in the area doesn’t affect business. “We asked our members, ‘If we spend money in market development, will you be there?’ and they basically said yes, and did not disappoint.”
Consumers and manufacturers in Latin America, including those in Central America and South America, are also taking in more dairy products from U.S. producers, with the exception of skim milk powder. Mexican buyers, too, have upped their imports of a range of American dairy ingredients and products.
From a geographical and strategic perspective, Medina says, it makes sense for U.S processors to work with export markets that are close to them, whether it’s West Coast ingredient suppliers building relationships with Asian buyers or other domestic dairy manufacturers focusing efforts in this hemisphere. “I think Latin America is a great place for us, and will continue to be,” she says. “I’d like to encourage members to look at our back yard.”
Who’s Buying What
In another trend that bodes well for the U.S. dairy industry, as more countries buy products made stateside, they are purchasing a range of dairy foods, beverages and ingredients.
Volume-wise, whey protein is the most commonly exported item to various parts of the world, to the tune of 347,554 metric tons shipped last year alone. After whey protein, skim milk powder is the next most popular ingredient, weighing in at 292,424 metric tons, followed by lactose at 237,867 metric tons.
Beyond ingredients, the manufactured dairy products that move the most, in order, are cheese, ice cream, fluid milk, butter and yogurt.
Percentage wise, as with country-by-country figures, demand for virtually every type of dairy product is in the positive column. The biggest gainer — at a 90 percent increase over last year —is butter, though still at a relatively low volume. Butter exports to the Middle East/North Africa region rose 77 percent, while demand jumped in Mexico by 60 percent.
After butter, the next most dynamic category by growth is lactose, for which exports have risen 29 percent. According to Suber, that is the biggest percent increase in a decade and the largest volume increase recorded. Such strong sales for lactose can be tied to demand in markets like Southeast Asia, Mexico and South Korea.
Whey protein demand is close behind, with exports rising 26 percent for an all-time high of nearly 350,000 metric tons. Within whey protein, sweet whey product exports increased 19 percent, while highly valuable whey protein concentrate (WPC) and whey protein isolate (WPI) rose significantly.
Indeed, WPC is more in demand, in particular among Mexican buyers. Mexico, in fact, is the largest market for WPC produced in the United States. That said, Mexico slowed orders for WPI, a product that did pick up new customers in China, Denmark, the Netherlands, South Korea and Thailand.
U.S. yogurt makers also have found a market for their products, even though Europeans have had a corner on yogurt manufacturing for decades. Two regions helped boost the demand for yogurt: Mexico, where volume sales have grown 89 percent, and the Caribbean, where demand climbed 25 percent.
Cheese manufacturers that sell to foreign markets, meanwhile, rebounded strongly after a struggling previous year. The volume of exports surged 23 percent in 2006, much of the increase attributed to major promotional programs led by USDEC and various cheese manufacturers. Moreover, demand for U.S. cheese grew in several nations, including Mexico, the Caribbean, Central America and South Korea.
Even previously low-consuming markets are getting a taste for cheese. Sales to China/Hong Kong rose 72 percent, while those in the Middle East rose 121 percent. “Cheese has been exciting,” Suber says, “because the growth keeps on despite the price increases.”
Suber cites the Chinese market, in particular, as one to watch among U.S. cheese exporters. “The effect of Chinese demand for whole and skim milk powders and whey protein we have already seen. Yet that demand hasn’t been felt in cheese,” he says. “That is what is coming in the future — while their cheese imports are low and domestic production of cheese is low, imports are growing as Pizza Hut and Domino’s begin to expand there.”
Other categories have benefited from increases in sales to overseas and intercontinental markets, albeit not at as fast a clip. Fluid milk exports, for example, rose a total of 5 percent, with Mexico accounting for a big share of that, with a 50 percent increase in demand. Demand for ice cream in Canada, Mexico and South Korea spurred volume by 2 percent, which helped offset a sharp decline in Japan.
Finally, although skim milk powder sales inched up 1 percent, that single-digit number may be deceiving. After all, skim milk powder still accounts for nearly a third of dairy exports by value, and commercial sales of skim milk powder have been at record highs in recent times.
“The interesting thing about powder is that the demand for our nonfat dry milk powder is a little flat,” Suber says. “But where you see strong category demand is in whole milk powder, where the entire category is growing.”
One category is small but gaining a foothold: organic dairy. “That will be in very developed countries,” Suber says. “In Japan, for example, there is an interesting organic market, and most of the other focus is in Europe and South Korea.”
Behind the numbers of overall exports, with markets opening for more and different types of dairy ingredients and manufactured products, the pool of those that export dairy products is growing.
Companies that have long had an international presence are focused on meeting strong demand from global customers. Glanbia Nutritionals USA, Monroe, Wis., which markets powdered dairy ingredients, continues to grow its global customer base, as do Denver-based mozzarella cheese manufacturer and whey protein supplier Leprino Foods and WPC and dairy product solid supplier Agri-Mark. Inc., Lawrence, Mass.
Dairy Farmers of America, a producer-owned cooperative and food company with headquarters in Kansas City, Mo., has had a healthy international business for years and is working on a variety of new strategic marketing efforts. DFA currently exports 30 to 40 percent of its whey and WPC production, and also provides foreign markets with milk powder and shelf stable beverages.
“In the past three years, we have started to export cheese and butter,” says Gabriel Sevilla, DFA vice president of sales and marketing. “These exports will continue to increase as U.S. dairy products become more competitive in international markets.”
Companies with a strong brand presence in the United States are keeping their international offices busier than ever, too. Northfield, Ill.-based Kraft Foods, for example, continues to expand its business globally. In addition to its strong European and Latin America business that respond well to brands like Philadelphia cream cheese, Kraft has recently responded to interest in the Middle East by building a new cheese and beverage plant in Bahrain.
Likewise, Dallas-based Dean Foods also continues to penetrate new markets for some of its dairy products, including its line of Leche Celta products that have found a following in Spain and Portugal.
With ice cream exports growing, ice cream manufacturers are building new plants and distribution centers to capitalize on others’ cravings for the comfort food. For example, Oakland, Calif.-based Dreyer’s Grand Ice Cream, part of Swiss food giant Nestlé has responded to demand in parts of the world like Asia with greater production capability to meet demand.
Other dairy manufacturers that have a loyal following on a regional basis in this country have recognized the potential for exports. For example, Hilmar Cheese Co., Hilmar, Calif., in recent years has branched out to new parts of the world, especially to customers in Latin America. The company, which will soon open a second plant in Texas, also has marked its whey protein products to China and Eastern Europe.
Lynn Petrak is a freelance journalist based in the Chicago area.
The Negotiating Table
In 2006, the talk of global trade was the fact that the Doha round of World Trade Organization talks was tabled. As it stands now, the discussions are still stalled, although over the last year, U.S dairy leaders, including USDEC representatives, have worked diligently on negotiations to further their position that true market access and balance are needed.
Dairy leaders also have worked to remove other trade barriers on an individual country basis. Thanks to efforts by USDEC and others, for example, Mexico lifted its retaliatory tariffs on U.S. dairy blend exports in late 2006.
These and other trade agreement efforts across the board that seek to ensure a fair platform for U.S. exports seem to be effective in many aspects. “WTO and free trade agreements have considerably improved access for U.S. products in international markets by reducing subsidies, tariffs and non tariff trade barriers,” says Gabriel Sevilla, vice president of sales and marketing for Kansas City, Mo.-based Dairy Farmers of America. “SPS (sanitary and phytosanitary) agreements have helped reduce sanitary barriers, based on science fact, previously set up by agricultural ministries.”
Sevilla says there is always room for improvement in trade matters. “There are still some problems with export documents, labeling requirements, plant registration/inspection and some food additives,” he says.