Economic Recovery Bodes Well for Dairy Consumption

Signs of global economic recovery have been slowly, but steadily emerging for the past six months. Certainly no one would say we are safely out of the woods—the recent Greek financial crisis being the latest threat to stability. But on a world scale, news reports of GDP growth are encouraging.

Rarely provided by general media, however, is how this nascent rebound is manifesting itself in consumer spending, consumer confidence and, ultimately, demand for dairy.

The U.S. Dairy Export Council (USDEC) asked its 13 overseas offices for an insider’s view of the state of some of the highest potential U.S. dairy export markets. The reports they gave varied by region but unanimously indicated that the global economic recovery is already playing out in renewed dairy buying. And—barring a disaster like a double-dip recession—regions and nations that have not already returned to pre-crisis consumption growth patterns should do so by the end of 2010.

In assessing the downturn of 2009, the overseas offices confirmed that world dairy consumption had already turned for the worse before the recession “officially” began, as buyers and consumers cut back after sharp price hikes in 2007 and 2008.

In South Korea, for example, overall dairy consumption declined about 2 percent in 2008, with butter use off nearly 30 percent. In Southeast Asia, lactose and skim milk powder (SMP) demand fell in 2008 as food manufacturers sought alternative, less expensive ingredients for food and beverage applications. In Japan, the falloff started in late 2007. In China, it was less rising prices and economic decline that ate into dairy buying than the melamine scandal that broke in September 2008.

Conversely, in many areas, economic conditions (and dairy appetites) already began to recover even before the New Year’s ball dropped on December 31, 2009. With the Western world still fighting through recession, Asia began to pull out. Food manufacturers in Southeast Asia, China and elsewhere began refilling pipelines, and consumers, who never really left the category completely, began buying with renewed vigor.

South Korean dairy consumption grew 2.5 percent in 2009, with all categories except cheese rebounding (although cheese consumption declined only 1 percent after a 3 percent fall in 2008). In Japan and China both, demand began to recover in the second half of 2009.

Through the first quarter of this year, vibrant Chinese demand has been a key driver in the international market and, consequently, of world prices. It’s a position the nation held prior to the dawn of the melamine scandal and recession—and one to which it quickly reverted.

All signs are that China will be heavily import dependent and actively buying for quite some time, particularly whole milk powder but also cheese and other dairy products to service its booming foodservice sector.

Southeast Asia was even further ahead of the economic crisis curve. In 2009, the region’s cheese imports rose 4 percent, while whey, lactose and SMP recorded double-digit gains. Major new infant formula and beverage manufacturing capacity that came on line late last year should further boost dairy demand in the months and years ahead.

Growth is by no means universal. U.S. suppliers strongly felt the drop-off in Middle Eastern dairy demand in 2009. But as the Gulf continues to diversify its economy away from oil, signs point to a rebound this year, and consumers are cautious but hopeful about economic recovery in the region.

Consumer sentiment—a critical benchmark—is in fact one of the bright spots in many nations. Americans might still express uncertainty about U.S. economic prospects, but emerging dairy buyers in the Middle East, South Korea and elsewhere are growing more confident while not being Pollyannaish.

That measured confidence translates to greater dairy buying—to consumers and manufacturers getting back to the growth trend they were riding before recession and an overheated dairy market halted expansion.

One of the things we learned from last year was that the world has reached a new floor in dairy consumption. When times got tough many cut back, but they did not eliminate dairy, as they might have done a decade ago when cheese, milk and ingredients were initially making their way into everyday diets.

Dairy consumption has reached a new plateau in many regions, moving beyond basic commodity products. In China, for example, not only is dairy consumption building, but demand is rising for higher value items, including yogurt, dairy beverages with health claims, and premium, fortified infant formula.

Analysts at the height of the recession were calling the recent slip in demand a blip on the overall upward trend of global gains in per capita consumption. The initial signs are bearing them out.

U.S. exports rose 46 percent in the first quarter of this year. That’s in comparison to a weak start in 2009, but is positive nonetheless. If the world can sustain the economic recovery, there appears to be no question that dairy demand growth will return to a pace that outstrips supply and provides an increasingly attractive opportunity to the U.S. industry.

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