“Import demand for dairy products will remain strong, driven by emerging markets,” says Brett Burgess, a manager with Bain & Company.
Window of opportunity grows wider for dairy exports
In 2009, Bain & Company issued a report projecting a 7-billion-pound gap between expected world milk production and demand by mid-decade. A lot has happened since then: a global recession, a tepid recovery and fear that the world will slip back into recession if Europe and the U.S. don’t clean up their fiscal fiascoes.
But does that 7-billion-pound gap exist? And if it does, can the U.S. dairy industry reform our domestic dairy policy to take advantage of it?
The U.S. Dairy Export Council (USDEC) and the Innovation Center for U.S. Dairy wondered the same thing and asked Bain analysts to revisit their 2009 work. The reanalysis, released this fall, is good news.
Bonus Content: More Details on Bain Study
"Import demand for dairy products will remain strong, driven by emerging markets," says Brett Burgess, a manager with Bain in Dallas. "The world supply-demand gap is wider than we originally anticipated, with the U.S. a likely source to fill it."
Mexico, China, the Middle East, India, Southeast Asia and Russia are expected to increase dairy imports over the next few years. All but India, with its borders closed to U.S. dairy products, are potential U.S. markets. Even India will create opportunities elsewhere as other exporting countries rush to meet its needs.
Mexico’s dairy consumption is still growing, albeit slowly, and is expected to continue with stable economic growth. The resolution of a trucking dispute might also help restore trade levels with the U.S., Burgess says.
"China’s demand gap by 2013 will be wider than we originally expected," he adds. "Even if there is a slowdown in the Chinese economy, a ‘slowdown’ in China means a 5% to 6% growth rate, which will continue to drive demand growth."
Burgess acknowledges that New Zealand’s Fonterra has been actively building dairies in China. And it has also increased dairy product exports to China. But even this won’t be able to satiate China’s appetite for more dairy products.
"Russia is expected to remain a major dairy importer despite government efforts to encourage domestic production and stricter documentation requirements, which effectively block U.S. and Ukrainian imports," Burgess says.
Like India, that demand will likely be filled by other exporters, opening up other markets that these exporters can’t fill.
As for competitors, Burgess expects New Zealand to continue to grow its export capacity at least through the end of this decade. Much of that increase will come from the conversion of sheep pasture to dairy. He expects that land conversion to peak by 2020.
After that, Kiwi dairy producers will have to rely on irrigation of marginal land and grain/silage feeding to increase milk yields. While they might be able to produce more milk using these methods, their cost of production will increase as well. "Despite this higher production, New Zealand will not produce enough milk to close the global latent demand gap," Burgess says.
In Europe, quotas are increasing 1% per year from 2009 through 2015. European Union milk production could increase 5% to 8% from 2009 to 2020. "After 2015, further growth will be constrained by environmental regulations and the steep incremental investments required to expand," Burgess says.
For the U.S., higher feed costs are probably the biggest constraint to expansion. Even so, increasing feed prices will likely not shift the relative position of the U.S. versus Europe and China. And New Zealand could see a doubling of feed costs later this decade after peak production is reached under its grazing model, Burgess says.
The other advantages the U.S. has is its large milk supply, the stability of that supply year-round with little seasonality (at least compared to many of its competitors) and its ability to expand that supply.
"The window of export
opportunity for the U.S. will remain open, but not indefinitely," Burgess says. "The U.S. has yet to make key policy reforms." These should include:
- Milk pricing systems to improve forward and futures pricing to better manage price volatility.
- Reform of the price support program so the U.S. is no longer the buyer of last resort, and the removal of disincentives for product innovation.
- Bringing U.S. standards of identity closer to global norms to meet customer needs.
"If the U.S. doesn’t make key reforms, we will miss out on sustainable volume and value growth; unmet demand will accelerate the expansion of other [global] producers; and the U.S. industry’s competitiveness will erode," Burgess says.
U.S. Falls Short
A survey of international dairy ingredient buyers says the U.S. is a "natural partner" with an abundant milk supply that doesn’t suffer the seasonal ebbs and flows of grass-based exporting countries.
Nevertheless, the U.S. must become a more reliable partner. "It’s hard to make the U.S. a supplier of strategic ingredients if I can’t count on them to be there when things are good and bad," says one buyer. "If the domestic U.S. market takes off, I worry that my export supply will disappear."
Adds another: "The U.S. is dead last by a lot on research and development."
- January 2012