Demand for dairy products will accelerate in 2011, but lack of preparedness could hinder U.S.
The U.S. dairy industry has entered a global market era, which has important implications all along the U.S. supply chain, a Rabobank agricultural economist told a group of California dairy producers this week.
Vernon Crowder, a vice president with the Dutch-based bank, said the U.S. is now strongly linked to the international market and will almost certainly remain so for at least the medium term.
While the global market represents an opportunity, Crowder added, it also poses a threat if the interface is not managed properly. "The U.S. dairy industry needs to act to thrive in this new era," he said. "Progress is being made, but more is needed."
Speaking at a dairy financing conference in Visalia, Calif., Crowder pointed out just how much U.S. dairy exports had soared in recent years. Exports as a percentage of U.S. milk production jumped to 8% in 2010, compared to just 2% in 1998. "That’s a big deal," Crowder said. "The tail is now wagging the dog."
Yet the U.S. dairy industry has failed to be export-ready, he said. It’s made the wrong products, used the wrong specifications, had weak or no customer relationships, and has been an inconsistent supplier.
"There is a real cost to this," said Crowder. "U.S. commodities have been sold at a discount compared to other countries. Industry-funded subsidies have been used in a boom environment. U.S. milk prices are lower than they could be because of our ineffectual role in the global market."
In fact, U.S. dairy producers are receiving less for their milk than New Zealand farmers, he added.
In planning for a new global market era, U.S. processors must readjust. "The solutions are straightforward but they require application," said Crowder. "There are signs progress is being made. But the U.S. market discount suggests the industry isn’t there yet."
In addition, the nation’s dairy regulatory system is no longer appropriate. "It was designed for a domestic market era," he said. "The DEIP (Dairy Export Incentive Program) system has little firepower and the CCC (Commodity Credit Corp.) provides little protection."
Moreover, dairy producers must be prepared. While the global market opens up opportunities for greater expansion, the new era will likely be characterized by volatility. "Businesses need to be well-managed to minimize that," he said, "and robust enough to withstand what can’t be mitigated."
Discussing the market outlook, Crowder said he expects global dairy commodity prices to remain extremely high in 2011. Global consumption is improving and the world economy continues to recover. Robust dairy sales growth is being seen in Southeast Asia, Latin America and China.
"China is buying huge quantities post-melamine," he said, referring to the tainted milk powder scandal that killed or sickened thousands of infants in China in 2008. "Russia has also been forced to cover its needs post-drought."
A second price boom is under way, Crowder said, as vigorous importing has proved more than adequate to soak up the rising export supply. "The market is extremely tight and buyers are nervous," he said. "International prices have been pushed back to extreme highs."
Farmers are responding to improved milk prices, Crowder said. The U.S. and the EU are showing particularly strong milk supply. In New Zealand and Australia, however, adverse weather has slowed milk production momentum.
Despite expectations for strong milk prices in 2011, Crowder said he was concerned about the fourth quarter of the year. "There is a saying that the quickest cure for high prices is high prices," he said.