Parsing the Export Pricing Puzzle

On paper, based on published cheese, butter and powder prices, U.S. dairy suppliers currently have a huge edge over European Union (EU) and Oceania exporters. The casual observer may wonder why then U.S. overseas sales aren’t quickly ramping back up. In reality, the apparent pricing advantage isn’t always quite what it seems.

Comparing international dairy cost competitiveness, unfortunately, is not as easy as simply subtracting the Chicago Mercantile Exchange (CME) block cheddar price from the Dairy Market News survey price of cheddar from Oceania suppliers. Until you factor in all the variables—everything from demand to the timing of the sale to preferential tariff rates—you can’t get an accurate reading on the price differential.

Some of those variables can be quantified to a certain extent. For example, Oceania and EU quotations are FOB port; U.S. prices are ex-plant and do not include the costs and fees needed to get the product to port. In addition, suppliers need to factor in higher U.S. freight fees to markets like China, Japan, South Korea and Southeast Asia, where Oceania holds a geographic advantage, and the Middle East where Europe benefits from its proximity.

Depending on the product, oil prices, plant location and destination, logistics and shipping alone can add anywhere from 10 to 20 cents per lb. to U.S. published prices.

That’s a pretty straightforward calculation. The comparison grows increasingly complex as you factor in everything from product specs to intangibles such as market presence. In fact, the nature of the variables makes it virtually impossible to generate an apples-to-apples comparison between U.S. and EU, Australian or New Zealand butter, powder and, in particular, cheese.

Published cheese prices are spot prices, while Oceania suppliers operate with 3-6 month contracts for their bigger customers. Contract prices theoretically can be higher or lower than spot prices, but in any case can lock out U.S. business for significant portions of the year no matter the CME block cheddar price. When it’s time to renegotiate the contract, assuming the inventory is there, the Australian or Kiwi supplier can reduce its prices to ensure that it holds the customer.

Secondly, the CME and published Oceania prices in essence refer to different products. Since the vast majority of internationally traded bulk cheese is converted to processed cheese, overseas buyers expect white cheddar at standard Oceania moisture content (35-36 percent), rather than CME-spec yellow cheddar at 36.5-39 percent moisture.

Those differences are recognized in dollars, as Oceania suppliers discount off published prices for product used for processing (the primary use for U.S. block cheddar) to compensate for the discrepancy in solids content.

The spec differences go well beyond block cheddar. The United States simply does not routinely manufacture products preferred by the international market, and that always plays out in pricing.

U.S. suppliers rarely achieve top-end prices for nonfat dry milk/skim milk powder (NDM/SMP) because they produce a low-heat product. A far greater number of global buyers demand medium heat.

Many world buyers also utilize NDM/SMP for recombining, and therefore demand low spore content, something U.S. manufacturers as a rule don’t provide, or at least test sufficiently to guarantee.

Butter differences are also well known. We make 80 percent, salted butter. The EU and Oceania make 82 percent unsalted.

U.S. suppliers' resistance to manufacture to global demand as well as our reputation as “opportunistic” sellers often make us the supplier of last resort, earning us, as one trader puts it, “Johnny-come-lately pricing.”

Under such a scenario, just because the domestic cheese or powder price is attractive one day—or even one quarter—doesn’t mean people are going to line up immediately to buy or that we are necessarily going to generate huge amounts of overseas business.

U.S. suppliers can help their own cause though by demonstrating that they want to be in the market and not just play the market. We have developed the image as the supplier of last resort, which can generate business when conditions are favorable but not sustainable business. And, in practice, we have often become the last-in and first-out of market cycles.

The United States still has not adopted the global mindset required to evolve the business into a consistent international player. U.S. suppliers on the whole need to get out in front of overseas buyers more consistently, demonstrate better customer service and create products that better meet global buyer needs. That would minimize the effect of the variables in the pricing equation, put us on a more equal footing with our competitors and more regularly result in improved volumes and less volatility.

(This article first appeared in Cheese Market News in April 2010.) 

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.