Editor’s note: Dairy Today editor Jim Dickrell gave the following presentation at AgConnect’s Dairy Forum Sunday in Atlanta.
The U.S. dairy industry has seen increasing price volatility over the past several decades, with highs and lows reaching ever greater peaks and troughs. In 2007 prices reached unprecedented highs and in 2009 they harkened back to the low levels of the 1970s. This price volatility has implications for all aspects of U.S. dairy production, ranging from animal identification to disease control to milk quality.
Much of this volatility is being driven by the United States’ entry into the global export dairy market. For example, in 2008 the United States exported nearly 11% of its total production on a solids basis. Export sales totaled $3.83 billion. This surge in exports came as a result of U.S. processors’ new willingness to meet specific overseas customers’ needs, a weak U.S. dollar and supply constraints in Australia and New Zealand.
Then, in late 2008 and early 2009, the global recession restricted credit, which forced importers to stop buying. Through the early part of 2009, export tonnage dropped 35%—the equivalent of nearly 3 billion pounds of production on an annual basis. For the year, U.S. export volumes dropped to 9.3% of total production and value dropped 39%. As a result, the U.S. All-Milk price crashed from $18.80/cwt. in 2008 to $12.81/cwt. in 2009.
Contrary to conventional wisdom, dairy imports into the United States are not to blame for this free fall in prices. Casein imports have declined 39% and are at their lowest level in five years. Milk protein concentrate imports have dropped 18% and are also at their lowest level in five years. Cheese imports were down 12% in 2009 and are down another 20% in 2010.
European Union Comes Calling
The European Union experienced a similar pressure on dairy prices in 2009, though its intervention policy required European governments to purchase large quantities of surplus dairy products. As a consequence, the EU had a huge financial incentive to limit imports. During the summer of 2009, EU auditors came to the United States to inspect dairy plants and ensure that U.S. manufacturers were complying with the requirement for export certificates.
They found that U.S. manufacturers were complying with the spirit of the regulation, but not the exact letter. U.S. manufacturers were meeting the 400,000 cells/ml somatic cell count requirement (based on a three-month rolling geometric mean) with commingled milk by tanker load or storage silo. But the manufacturers were not requiring individual farms to meet the 400,000 cells/ml requirement.
In 1997 the EU had lowered its regulatory cell count limit to 400,000 cells/ml for commingled milk. In 2004 the EU changed the regulation, requiring individual farms to meet the 400,000 cells/ml limit based on a three-month rolling geometric mean. USDA was given the new regulation, but U.S. officials did not pick up on the seemingly subtle language change. USDA continued to issue export certificates based on the 400,000 cells/ml limit for commingled milk.
So, in December 2009, EU officials notified USDA that U.S. plants were not in compliance with the export certificate requirement. On Jan. 20, 2010, USDA issued a “notice of intent” that plants would have to meet the new requirement on Feb. 1, 2010. Some Midwest processors, however, have 30% of their patrons exceeding 400,000 cells/ml at least sometime during the year. One large national cooperative has 5% of its Midwest patrons exceeding 400,000 cells/ml each month for the previous 12 months.
Most processors obviously could not meet the Feb. 1 deadline. USDA and the U.S. Food and Drug Administration negotiated an Oct. 1, 2010, deadline and, this past summer, extended it to Dec. 1, 2010. Even that deadline is soft, since EU officials have indicated they will not enforce the regulation until USDA and FDA can issue rules that spell out the exact testing requirement.
Some dairy producers and their organizations have argued that the United States should fight the regulation and/or retreat from global export markets. But with some 10% of U.S. milk solids now being exported, that would require the contraction of the U.S. dairy herd by nearly 1 million cows.
The Bain Report
Last year, the Innovation Center for U.S. Dairy commissioned a study by Bain & Company, a global management consulting firm, to examine global market demand for dairy products. The study was funded by the 32 companies within the U.S. Dairy Export Council and the National Milk Producers Federation.
By 2013, the Bain Report suggests, there will be a “latent demand gap” of 7 billion pounds of milk worldwide. In other words, as economies around the world recover, demand will resume its long-term trend of growing faster than milk supply. As the report’s authors see it, the U.S. dairy industry has a range of options: It could become an insular industry, much like Canada’s. It could go the New Zealand route, which is almost exclusively export-focused. Or it could maintain the status quo.
If the United States doesn’t change, it likely will give up potential export markets to emerging dairy powers such as the Ukraine and Brazil, both of which will become far more competitive as they develop their dairy infrastructure. Moreover, the right kind of change could allow U.S. companies to displace some U.S. imports, currently valued at $2.3 billion. “If U.S. suppliers improve capabilities to displace 70% of imported milk protein concentrates, 50% of imported casein and 10% of imported cheese, it will deliver about $600 million back to the U.S. industry,” the report concludes.
U.S. dairy producers may have little interest in worrying about dairy export opportunities three, five and 10 years down the road. But the decisions made over the next year will be critical. In fact, what’s decided in the 2012 farm bill will go a long way toward setting the tone for the future of U.S. dairy.
Proactive Policies—or Not?
The U.S. approach to national animal identification and control of diseases such as bovine tuberculosis, Johne’s and even mastitis will affect how the country can compete for and maintain export markets. In dairy, the clearest example is the EU’s 400,000 cells/ml export certification requirement. But the Chinese have also put the U.S. on notice that they are reconsidering their export certification of U.S. dairy products because of disease issues.
If the Bain Report is to be believed, it begs these questions:
• Can the U.S. afford to continue to be reactive on somatic cell counts, animal identification and disease tracking, and chronic bovine diseases?
• Isn’t the better approach to be proactive, anticipating these issues and growing export markets?
You decide. It’s your industry. It’s your future.