Global Mindset Goes with Being a Consistent Dairy Supplier

Rabobank Dairy Analyst Tim Hunt made an incisive observation during his presentation at USDEC’s April Board of Directors and Membership Meeting: The United States is more “exposed” to the level of dairy exports than it has been in the past, and specifically more exposed than the “boom” of 2007-2008. It is now imperative to protect volume and market share gains.

In previous years, the U.S. industry pulled back from world markets, directed product to domestic needs, displaced imports if possible, or put “surplus” in Commodity Credit Corp. warehouses. Now, as imports have increasingly dwindled and exports steadily grown, it would be difficult and damaging to the industry to find a local home for all the product we manufacture or to accumulate unsold product in warehouses.In other words, the U.S. dairy industry can no longer simply consider pursuing global opportunities—we must pursue them and protect volume and market share gains. We must be a consistent supplier to global markets.

A look at the numbers reinforces this.

In 2010, we shipped a record 13 percent of U.S.-produced milk solids overseas. Sixty-eight percent of U.S. lactose, 55 percent of U.S. whey proteins, 47 percent of U.S. nonfat dry milk/skim milk powder (NDM/SMP), 8 percent of our butterfat and nearly 4 percent of U.S. cheese went to buyers beyond our borders. Through the last six months of 2010, nearly 60 percent of U.S. NDM/SMP was sold outside the United States.

U.S. industry expansion is being led by rising dairy appetites in China, Mexico, the Middle East, Southeast Asia and elsewhere. Subtracting foreign demand would stunt growth, quickly build large cheese, butter and powder stockpiles, and send U.S. prices reeling.

Commitment to policies and corporate practices that help us become consistent global suppliers is more important than ever. And, fortunately, the industry has a roadmap on how to build global dairy market share and take advantage of rising world demand, much of it laid out by the Innovation Center for U.S. Dairy in its 2009 globalization report. (That report is now undergoing a “refresh,” due out in about six weeks to see if and how any key factor or conclusion requires revision. We will cover that refresh in a future column.)

Certainly commitment by U.S. suppliers is key, but the industry also needs the tools to compete and a level playing field on which to utilize them. Among the efforts that will help create such conditions are the following:

• Pursuing beneficial trade treaties, such as the pending deals with Colombia, Panama and South Korea, which after long delay, are moving tantalizingly close to a congressional vote.

• Reducing interference from non-scientific non-tariff trade barriers by creating a better U.S. system to address such issues and pursuing tougher international guidelines to minimize instances before they occur.

• Improving forward contracts, futures markets and risk management tools to allow the U.S. industry cope with the rising volatility that is inherent with a fine balance in global demand and supply.

• Reforming Federal Orders and price support programs to remove internal constraints to pursue global markets and position the U.S. industry to be as nimble and flexible as it needs to be to succeed.

The latter two have broad implications for the entire industry, but particularly impact the critically important NDM/SMP category.

The United States has historically been an “opportunistic” milk powder exporter, filling the gaps when other suppliers run short and world prices are higher than domestic, and abandoning overseas customers when prices dip below internal prices or are less conducive. This means U.S. NDM/SMP export volumes can vary sharply from year to year, particularly because overseas buyers often see the United States as backup to the primary sources in Oceania and Europe. This lack of reliability comes at a cost.

With its basis in the byzantine U.S. classified milk pricing system, price discovery methods for U.S. powder provide incomplete and often inaccurate information to U.S. suppliers. Plus, the numbers it does provide are slow to come, prohibiting producers and manufacturers from reacting in a timely manner to price signals.

We have in place futures markets to manage risk, however, the current pricing system makes hedging unworkable. The government support price, and its susceptibility to changes through political means, also undermines use of risk management tools.

History has shown that without adequate risk management tools, companies have incurred large losses in writing down inventory value when the global market declines.

The lack of a transparent and efficient price discovery system puts U.S. suppliers at a competitive disadvantage with magnified volatility risk at precisely the time the United States is positioning itself to be the world’s leading NDM/SMP supplier.

Global markets are an integral part of the business and to keep them growing, the industry must continue to adapt, which is not always an easy or smooth process. But the stakes are high and the prize worth the effort.     

(This article first appeared in Cheese Market News in May 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.