2009 taught us 'globalization is here to stay'

Dairy farmers may feel like jilted suitors these days. They had gotten comfortable selling much of their product to China, Mexico and other countries, only to have the pipeline severely restricted.

Plummeting exports were one of the reasons why 2009 turned out to be such a bad year.

So, why should we take another chance on courting these countries with our products?

Tom Suber, president of the U.S. Dairy Export Council, understands the frustration. "It"s hard to tell people who are coming out of a beating that the guy who just beat them up isn"t going to return," he says.

Exports are a qualified bet, he adds. "Can we believe that this type of never-before-seen-in-our-lifetime situation (involving a deep global economic recession) is going to happen again in 10 years or 15 years?"

Chances are, we won"t see a repeat of the 2008-2009 recession anytime soon and the world will once again offer opportunities for U.S. dairy farmers.

Globalization a fact of life

We could retreat back to the days when the dairy economy centered pretty much exclusively on the United States. But that is unrealistic, given the linkages between the United States" economy and the world economy.  

A recession hurts dairy demand in the U.S. just as surely as it does demand abroad. When people have less money to eat out in restaurants, it hurts cheese demand, since upwards of 40 percent of the cheese sold in this country is through foodservice outlets. It may even cause people to cut back on fluid-milk purchases.

Some say the United States is already a mature market for dairy products. According to U.S. Department of Agriculture figures, per-capita fluid milk sales have declined pretty much every year since 1970. Per-capita cheese consumption has leveled off and even showed a decline in 2008 relative to 2007.

The real opportunity for increased demand isn"t necessarily in the United States, but rather in places like China, India and Mexico, trade analyst Clinton Anderson told those attending the joint annual meeting of the National Milk Producers Federation and Dairy Management Inc. in early November.

To ignore the export market would be to ignore some tremendous sales opportunities.

But it will take new approaches.

Globalization is here to stay

During the past year, a think-tank group known as the Innovation Center for U.S. Dairy, working with a global-management consulting firm known as Bain & Co., prepared a strategic analysis of the global dairy landscape. Results of the study were released in October.

"In broadest terms," the study said, "globalization"s impact is pervasive enough to affect all domestic dairy companies throughout the value chain whether or not they choose to directly participate in international dairy trade. Clearly, as the dairy economy of the past two years demonstrates, world economic factors will affect dairy pricing in the U.S."

There"s no way to prevent a world economic crisis, like the one we have experienced over the past two years, Suber says. But we can try to understand how to best handle the pressures and seize the opportunities that a globalized market brings, he adds.

Globalization is here to stay, points out Anderson, a partner at Bain & Co. And, the globalization will affect the dairy industry even more profoundly in the years ahead. 

It carries both risk and opportunity.

On the opportunity side, Anderson said global demand for dairy products will grow faster than available supply.

There could be 800 million more middle-class consumers, worldwide, by the year 2030, he said. "As people become wealthier, their diets change. They begin to increase the quality of their diets by increasing the consumption of animal proteins," he adds.

Changes needed

To capture those opportunities, some changes are needed.

The Innovation"s Center study made it pretty clear that the U.S. needs to take a more customer-focused approach to dairy exports. People who supply foreign markets need to identify and deliver upon the exact specifications of foreign buyers rather than simply trying to satisfy those buyers with bulk commodities.

For example, with skim milk powder, manufacturers can"t just deliver an agreed-upon level of protein. They must also address bacteria counts, since this is an important consideration for infant milk formula. Nitrate levels and spore counts are also important. Foreign buyers call these contaminants, and while the contaminants don"t necessarily indicate an unsafe product, their presence may be odds with the buyers" exact specifications.

"You have to know your customer," Suber says. "It"s not a phone call, it"s not an e-mail," he adds. You have to get to know them and understand their needs.

Traditional dairy exporters New Zealand and Australia are already seen as higher-quality suppliers than the U.S. because they have adopted this consumer-focused mentality, Anderson says. It"s not that the raw milk in one country is better than other. Rather, it"s taking the raw milk and developing it into value-added products that meet the customer"s exact specifications, he adds.

But New Zealand and Australia are facing challenges of their own. New Zealand is running out of available land to increase production. Australia is facing water issues following some bad droughts.

The United States is better positioned than most anyone else in the world to expand production in order to meet increasing global demand — for now, at least. Two other countries, Brazil and Ukraine, could rise up and challenge the United States five to 10 years from now. So, the U.S. now has a window of opportunity to establish itself as a consistent, reliable supplier of high-quality dairy products before some of these other countries assert themselves.

Much of the sentiment at National Milk Producers Federation/Dairy Management Inc. joint annual meeting in early November was that the international market is there for the taking if we choose to go out and get it.

Exports plummeted earlier this year

Dairy exports hit the floor during the dark days of the global recession.

Peaking at 68,287 metric tons in May 2008, exports of milk powder, cheese and butterfat fell to 23,229 metric tons per month in the depths of the recession last February.

"As bad as it was, it could have been worse" Tom Suber, president of the U.S. Dairy Export Council, told those attending the National Milk Producers/Dairy Management Inc. joint annual meeting in early November. Given the depth of the global economic recession, the trough that exports fell into in February might have been extended further into a U-shaped recovery rather than V-shaped recovery. But dairy exports began to pick up again in March and have been rising since. 

It now looks like exports will account for 8.6 percent to 8.7 percent of U.S. milk production (on a milk-solids basis) this year — down just two percentage points from last year"s 10.8 percent.



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