The U.S. Dairy Exporter Blog: Market Analysis, Research & News
  • A New Paradigm for Global Dairy Business

    By Marc A.H. Beck January 10, 2011

    Media reports about global food inflation have come fast and furious in recent weeks. And while there certainly are reasons to be concerned that continued price hikes will cause budding dairy consumers in emerging markets to temper their buying habits, there is also evidence that the developing world has come to accept that dairy in the diet doesn’t come on the cheap.

    There has in fact been a series of structural shifts that suggest the global dairy business has, in the words of Rabobank, “entered a new market era” marked by sustainable higher average commodity prices.

    This new paradigm is built around rising incomes in developing nations.

    Dairy would still be trying to become a fledgling business in emerging markets were consumers unable to afford to spend more on food, and specifically animal proteins, than they were in the past.

    Among those markets, China has assumed primacy. Chinese import buying has exploded, underpinned by demand growth and encouraged by the after-effects of the melamine scandal. Population, income and urbanization trends continue to suggest massive growth lies ahead.

    Look closely at China’s domestic dairy sector, and you will also see that the country has reached a point where future rapid milk production gains will be more dependent on boosting efficiency than simply expanding herds, which means slower, more expensive growth. Together, the indicators imply China will be a strong dairy buyer on world markets for years to come, helping fuel the entire global sector.

    New Zealand, which has gained significantly from China’s whole milk powder (WMP) appetite, will benefit of course, but things have also changed for the world’s No. 1 dairy exporter.

    New Zealand’s position as a “low-cost” producer is eroding. The Kiwi dollar has appreciated significantly, and although currency markets are notoriously difficult to forecast, there are few indications it will depreciate to levels seen earlier in the decade. In addition, farm costs have risen and New Zealand farmers are highly leveraged, generally more so than their counterparts in the United States. New Zealand producers need higher commodity prices to maintain profitability.

    And prices are indeed complying. Over the past couple years, we have seen international commodity prices reach plateaus well above the historical averages of the previous decade, without hindering demand (discounting the extraordinary spike of 2007). Using WMP as a benchmark, prices have gone from roughly $1,300-$2,300 in 1996-2006 to $3,500-$4,500 in 2008-2010.

    Commodity prices have, again in Rabobank’s words, “shifted to a higher average trading range.”

    WMP should be in the $3,500-$4,500 range. Milk production both in the United States and abroad demands it to sustain the industry, and buyers have shown they are willing and able to pay.

    For U.S. dairy suppliers, that is a very good thing.

    We are now in a situation where the United States should be very competitive, barring our own overleveraging or too-high feed costs.

    That is a radical shift. To some extent, the United States has been a residual benefactor of rising demand and constrained supply. We are now in a world of real competition—competition to sell and sell profitably, to get the best customers and to maximize returns. We need, therefore, to become much savvier sellers. This is the time to do it. U.S. milk output is expanding and needs to be moved overseas.

    Globalization has laid out an opportunity, and some segments of the industry have capitalized.

    We have become a world exporter of cheese: 160,000-170,000 metric tons (where U.S. export shipments were tracking for 2010) don’t get sold as an afterthought.

    Much of the overseas growth in cheese is processed, where the United States excels. We can and should be in world markets in this scenario.

    We now need to sustain and build robust cheese sales, but also diversify to demonstrate consistency in the marketplace and earn the business of the best customers around the world. That means selling powder strategically to the segments that we want to sell to, not to whomever will buy it as a last resort. And it means that we need to think of a broader product portfolio for milkfat.

    Under the new paradigm, the markets are there and are for real. The question is do we want the business and do we know how to get it?

    (This article first appeared in Cheese Market News in January 2011.)

    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.


    Global Marketing China New Zealand Market Conditions
subscribe to blog1

10 Most Recent Posts

Most Popular Posts in Past Year

Index of Posts by Topic

Index of Posts by Date, Author

Archives (by date)

+ more archives