USDEC board meeting: Current challenges belie strong long-term outlook
We are in a remarkable period of human history where, for the last 25 years, income has been growing more rapidly than population growth, Oxford Professor Ian Goldin told attendees at the USDEC spring Board of Directors and Membership Meeting this week in Chicago. “This is why the number of poor people in the world is going down more rapidly than ever. This is why you have this sweet spot in your markets at this time and will continue to have it,” he said.
Speaker after speaker echoed similar themes: Although curren market conditions are challenging, the long-term fundamentals that have driven U.S. dairy export growth over the past two decades remain as strong as ever. Emerging market economic growth will continue to expand the world’s middle class, evolving diets and driving demand for safe, nutritious dairy products. Dairy industries in most nations will be unable to grow quickly or efficiently enough to meet that demand. The United States is uniquely positioned as a year-round, efficient milk producer ready to grow its share of world dairy trade.
Goldin expects emerging markets to expand at 3-5 times the rates of older advanced economies and sees corresponding gains in per capita incomes across the globe. That equates to about 3.5 billion new middle class consumers over the next 15 years.
“These are the people that are moving away from basic nutrition to consuming dairy products,” Goldin said.
“Almost everywhere we operate in the world, particularly China, Africa and Latin America, this new emerging middle class has increasing disposable income,” Scott Price, president and CEO of Walmart Asia, noted in the day’s closing session. “In more and more of those developing markets, imported products at a low or reasonable price give individuals confidence that they truly are entering the middle class.”
Price sees “exponential” demand growth in the Asia-Pacific region over the next few decades, driving retail opportunity and dairy as part of it.
“We see enormous opportunity to continue to introduce U.S. brands to our customers overseas,” he said. “There is an appetite for foreign products in all these markets.”
Health and aging
While every nation has its own preferences and needs, emerging market consumers exhibit some common interests. Consumers across cultures are more conscious about their health than ever before, for example—a trait that will only grow as the world’s population starts to show its age.
In 10 years, there will be 700 million people over age 65 in Asia alone, and that’s just the beginning. Life expectancy will rise “dramatically” leading to “astounding sizes of elderly populations” in the years ahead, said Goldin.
That means opportunities for foods tailored to healthy aging, but more generally foods that consumers believe will provide overall life benefits.
Price said that Walmart was seeing a rise in consumer awareness of the effect that food and food ingredients have on their health. That bleeds over to awareness of food allergies, ingredient intolerances and a belief in organic products as somehow “better.”
Walmart’s global sourcing team sees “a huge opportunity” around flavored milk products, particularly those that satisfy health, nutrition and beauty needs. It has already had success with cream cheese and ice cream under its Great Value brand and is seeking more innovative dairy products for the label, such as UHT yogurt.
The trend dovetails with an overall heightened focus on product safety.
“Foreign suppliers have a clear advantage in places like China where consumers simply don’t trust aspects of their domestic supply chains. Customers truly do search out trusted and safe products and they are willing to pay a premium,” said Price.
U.S. advantage
One reason the United States is well positioned for global growth is its milk production advantage. Joel Mergler, VP international development for Select Sires, provided a nation-by-nation look at milk production around the world, illustrating the wide variety of dairy farm progress from country to country. Mergler’s presentation highlighted some countries with export potential, but also the lead that U.S. farms have on much of the world.
“Even the newer farms in China have so far to go to reach the U.S. level of efficiency,” said Mike McCloskey, co-founder and CEO Select Milk Producers, and chairman of Fair Oaks Farms. “All these relationships that we understand today—productivity and the land, and where the our dairies should be vs. our markets and our plants—many people [in other countries] have not even connected those dots.”
Some of the newer facilities in China and other nations might look great and produce milk, but the cost of production is significantly higher. The handful of efficient low-cost producers are not growing as fast as latent demand is growing.
“[Milk producers] in the United States are a very stable, mature, incredibly efficient organization. As they try to work their way to that level of efficiency, their costs will continue to increase,” said McCloskey, who believes U.S. costs will continue to improve as U.S. farmers uncover greater efficiencies.
All acknowledged, however, that the future is not without risk. The interconnectivity and globalization that brought about growth also brought new problems, said Goldin, including rising inequality within societies, pandemics, terrorist attacks, and the unintended consequences of our success like climate change and obesity. Volatility, corruption and geopolitical disagreements don’t help.
While many risks are beyond a company’s control, Goldin offered this advice to have the best chance of success: “Invest in being best in class because best in class will always win.”
Most of the presentations have been posted to the USDEC website. To download, click here.
Welcome new members!
The USDEC board officially welcomed eight new members at this Board of Directors and Membership Meeting: Cheese Merchants of America, Bartlett, Ill.; Red Apple Cheese, Watertown, Conn.; Steuben Foods, Elma, N.Y.; Burt Lewis Ingredients, Chicago; Alpura International, Sante Fe, N.M.; Idaho State Department of Agriculture, Boise; Mead Johnson Nutrition, Glenview, Ill.; and World Grocer, Turlock, Calif. New board members are as follows: Scott Jaffe, COO of Cheese Merchants (sjaffe@cheesemerchants.com); Kevin DiStasio, international sales development at Red Apple (kevind@redapplecheese.com); Darius Schwartz, VP at Steuben Foods (dschwartz@steubenfoods.com); Vincent Curtin, president at Burt Lewis (vcurtin@burtlewisingredients.com); Humberto Mayorga Spinola, Alpura’s general director (hmayorga@alpura.com); Laura Johnson, bureau chief, market development division, Idaho Ag Department (laura.johnson@agri.idaho.gov); Audrae Erickson, VP, external and public affairs, at Mead Johnson (audrae.erickson@mjn.com); and Don Day-Gomes, VP sales and business development, World Grocer (don@worldgrocer.com).
MARKET CONDITIONS
GDT plunges 10.8 percent
The GlobalDairyTrade (GDT) Price Index plummeted 10.8 percent to an average winning price of US$2,746/ton at the April 1 auction. The past two auctions have nearly wiped out the gains made over the first two months of 2015.
Fonterra’s improved milk production forecast (see Global Dairy eBrief, 4/3/15) and addition of 6,230 tons of WMP to GDT auctions over the next three months, plus concerns over the start of quota-less milk production in the EU on April 1 helped drive down prices.
Declines were across the board. WMP fell 13.3 percent to an average winning price of US$2,538/ton; SMP dropped 9.9 percent to US$2,467/ton.
Cheddar decreased 10.5 percent to US$2,787/ton, butter fell 7.6 percent to US$3,259/ton; AMF slipped 5.3 percent to US$3,663/ton; casein dropped 8 percent to US$6,980/ton; and buttermilk powder plunged 25.1 percent to US$2,130/ton. (USDEC staff; GDT; Dairy Trader, 4/1/15)
Euronext plans futures launch this month
Euronext plans to launch its new dairy derivatives complex on April 13. The exchange is starting with futures contracts for butter, SMP and whey powder, but plans to eventually offer a full suite of dairy futures and options. Contracts call for physical delivery, with June 2015 as the first delivery position available for trading. Euronext is offering an 18-months trading horizon and waiving fees until June 30. (Euronext; Reuters, 3/31/15)
EU dairy farmers cheer, protest quota removal
Removal of EU milk production quotas on April 1 received a mixed reaction from the bloc’s dairy sector. Farmers in Ireland, Germany, Netherlands, Denmark and Poland cheered the landmark policy shift, while those from 16 nations protested in Brussels, holding a vigil outside the European Parliament, lighting a “warning fire” and conducting a funeral march.
“Chronic price collapses are inevitable [without quotas], the next crisis is on its way,” said Romuald Schaber, president of the European Milk Board.
EU Farm Commissioner Phil Hogan touted quota removal as an opportunity for dairy suppliers to serve international markets and grow sales and jobs, but also cautioned that “volatility will surely accompany them along the road.”
Poland’s ag minister said the nation has set its sights on becoming the third largest milk producer in the bloc within two years. It is currently No. 4, about 1 million tons behind the UK.
USDEC has published an executive brief, “Five Data-based Forecasts about the End of EU Milk Quotas,” which provides key takeaways distilled from recent USDEC research. Members can get the brief as a “thank you” for subscribing to the U.S. Dairy Exporter Blog, our new vehicle for bringing market analysis, research and news directly to your inbox. Click here to subscribe (and to receive the brief). (Reuters, 4/1/15; Farmers Weekly Interactive, 4/1/15; Radio Poland, 4/1/15; AP, 3/31/15)
COMPANY NEWS
Mergers and acquisitions
Mondelez International, which owns the Philadelphia cream cheese brand everywhere except the United States, Canada and the Caribbean, is reportedly looking to sell the business to the merged Kraft Heinz operation. The price tag is estimated at $3 billion . . . Glanbia sold its 50 percent stake in Nigerian milk powder and evaporated milk joint venture Nutricima to its partner in the business PZ Cussons. Cussons paid Glanbia $31 million . . . Saudi Arabia’s Almarai is reportedly planning to invest $400 million to expand existing facilities in Egypt, as well as purchase Egyptian milk producer and processor Dina Farms and confectioner Rashidi El-Mizan . . . Chicago-based private equity firm Wind Point Partners purchased cheese sauce, pudding and yogurt maker Gehl Foods, Germantown, Wis. (The Telegraph, 4/1/15; Financial Post, 3/30/15; Trade Arabia, 3/29/15; Milwaukee Business Journal, 3/27/15)
Company news briefs
UK-processor Graham’s The Family Dairy is building a new $30 million fluid milk, cheese and butter plant and R&D center in Craigforth, Scotland . . . FrieslandCampina and Liaoning Huishan Dairy obtained approval from Chinese regulatory authorities, clearing the way for their joint venture formula operation Friesland Huishan Dairy. Huishan will supply the milk to the joint venture facility near Shenyang. Products (due for launch in 2016) will be branded using a yet-to-be-determined label from Friesland’s stable of global brands. (USDEC China office; Company reports; BBC News, 3/30/15)
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