2012: Agenda Includes Free Trade Agreements

The New Year brings with it numerous reasons for dairy optimism, as well as thorny questions. What follows is a look at key issues the U.S. Dairy Export Council (USDEC) expects will dominate our discussions in 2012

• Free trade agreements (FTAs). The long-awaited deal with South Korea should go into effect in the first half of the year, followed by the Colombia pact and, soon after, the Panama FTA. Although the biggest immediate potential gains lie in South Korea (a top 10 U.S. dairy export market where U.S. sales were on pace to hit $240 million in 2011—more than five times their level just a decade earlier), U.S. dairy export sales to Panama have also grown more than five-fold since 2001, and Colombia’s increasingly urbanized and wealthier population (per capita GDP has been soaring since 2003 with the exception of 2009) is fueling dairy purchasing.

As detailed in my Nov. 11, 2011, Cheese Market News column, the three deals open significant market access opportunities for U.S. suppliers.

• China’s appetite. Yes, China’s dairy buying softened in the middle of 2011, but do not mistake that lull for a sign that the nation is going to reverse its long-term importing trend. Purchasing already picked up in November and analysts project an increase in its prodigious imports this year.
• Conditions—rising incomes, dietary shifts, insufficient domestic production and long-standing apprehension about the safety of the domestic milk supply—remain fertile ground for dairy imports.
• Consumer interest in whey protein and the U.S. market position. We in the dairy industry have been aware of the nutritional and functional benefits and versatility of whey proteins for quite some time, and although protein messages are resonating with consumers more than ever, the average Joe and Jane are only just acknowledging the benefits of dairy proteins in particular above soy, egg and other types. With U.S. whey capacity already behind global demand and global dairy processors embarking on an unprecedented whey capacity building streak (as noted by the December 9, 2011, Cheese Market News column by USDEC’s Marc Beck), questions remain on U.S. manufacturers’ ability to retain their top standing as the world’s whey protein supplier and service the booming market.
• The Trans-Pacific Partnership (TPP) FTA and its regulatory coherence measures. Current TPP participants set a target date of mid 2012 to finalize FTA details. But even if talks dragged out longer, they should advance substantially in 2012, with a key prize being a far stronger sanitary and phytosanitary pact (originally initiated by USDEC) that would serve as a template for all future trade deals, significantly reducing incidents of what has become one of the main threats to our dairy exports: non-tariff trade barriers.
• Butterfat. Will U.S. suppliers meet the butterfat challenge? U.S. butter volume posted solid growth last year, fueled by strong sales to Japan due to that nation’s butter shortage, as well as shortfalls in other regions such as Europe and South Korea. But despite strides made by U.S. companies to meet global butter specs, we remain a residual supplier with no clear market position, serving the global market in times of short supply. Without a strong supply imbalance this year, it remains to be seen what type of long-term role the United States can play in global butter markets.
• Risk-management tools. One of the seven recommendations to make the United States a consistent global supplier, as noted in the Innovation Center for U.S. Dairy’s Globalization Report (a strategic analysis of the world dairy landscape funded by the dairy checkoff through USDEC) is to develop better mechanisms for risk management and reduce the impact of market volatility.

Since that report was published in 2009, and its follow-up Globalization Refresh released last year, the U.S. dairy sector has made great strides in utilizing the tools made available. Use of dairy futures and options at the CME Group expanded dramatically in 2011, and NZX Dairy Futures in New Zealand and Europe’s Eurex futures for butter and skim milk powder also posted strong results.

The dairy industry is coming to accept that volatility is a fact of life in today’s global markets and that managing volatility is in large part up to individual farmers and companies. And that leads us to . . .

• The farm bill. A new farm bill could create structural changes aimed at improving U.S. global competitiveness. Another key recommendation from the Globalization Report and Refresh was to reform U.S. regulated milk pricing systems (federal and state) to improve the forward/futures market and manage volatility and to reform price support mechanisms. The reports contend that we must remove the government as a “last resort” buyer and eliminate disincentives for product innovation. How the farm bill will settle out is both the biggest unknown and potentially biggest game-changer of all.

(This article first appeared in Cheese Market News in January 2012.)

The U.S. Dairy Export Council represents dairy farmers, proprietary processors, cooperatives, ingredient suppliers and export traders. Its mission is to enhance U.S. competitiveness and increase global sales of U.S. dairy ingredients and products.