The U.S. must defend its share of the world’s escalating dairy demand
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 says.
Vernon Crowder, a vice president with the Netherlands-based bank, says 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 opportunity, it also poses a threat if the interface is not managed properly. "The U.S. dairy industry needs to act in order to thrive in this new era," Crowder says. "Progress is being made, but more is needed."
Crowder and colleague Tim Hunt point out just how much U.S. dairy exports have soared recently. As a percentage of U.S. milk production, exports jumped to 8% in 2010, compared to just 2% in 1998.
"The U.S. has more than doubled its dairy exports in the last five years, surpassing Australia to become the world’s third largest dairy exporter," says Hunt, Rabobank’s global dairy strategist.
The jump in U.S. exports resulted from a sustained growth phase that coincided with increased U.S. competitiveness. An unprecedented boom in global commodity prices and a phasing out of Mexican tariffs under the North American Free Trade Agreement also contributed to increased U.S. dairy exports.
"The U.S. is not only exporting more, but what happens on the dairy export market influences the price of every dairy product sold in the domestic U.S. market," Hunt says.
Yet the U.S. dairy industry has failed to get export-ready, Crowder says. It has made the wrong products, used the wrong specifications, had weak customer relationships or none at all, and has proved to be an inconsistent supplier.
"There is a real cost to this," says Crowder, who works with Rabobank’s Food & Agribusiness Research and Advisory group. "U.S. commodities have 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 have received less for their milk than New Zealand farmers for most of the last 12 months. The New Zealand price was more than $22 per cwt. for the 2010–11 season and doesn’t include the year-end, value-added payment Fonterra makes to the country’s dairy producers. The farmer-owned global dairy marketing giant represents 90% of New Zealand’s dairy producers.
Hunt says it’s not surprising that the U.S. dairy industry has not yet perfected its export strategy. The export focus constitutes a massive shift. "It took countries like Australia and New Zealand decades to perfect their export marketing strategy," he says. "The U.S. spent decades operating in the profitable and largely isolated domestic market."
Being export-ready is not just about taking advantage of opportunities. "It’s about defending your position during market downturns," Hunt says.
In planning for a new global market era, U.S. processors must learn to readjust. "The solutions are straight-forward but they require application," Crowder says. "There are signs that progress is being made. But the U.S. market discount suggests the industry isn’t there yet."
In addition, he says, the nation’s dairy regulatory system is no longer appropriate. "It was designed for a domestic market era. The Dairy Export Incentive Program has little firepower
and the Commodity Credit Corpo-ration provides little protection."
Moreover, dairy producers must prepare for pricing instability. 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," Crowder says, "and robust enough to withstand what can’t be mitigated."
Rabobank Foresees Price Downturn—and Upside Influences
The first eight months of 2011 have delivered good prices to U.S. dairy producers, but the picture for the remaining months isn’t so rosy. In its September Dairy Quarterly, Rabobank projects that international dairy prices will fall as major economies slow and dairy product surpluses build on the world market.
The fourth quarter of 2011 "was always going to see the global dairy market loosen somewhat," the report notes. "Development in recent months will likely magnify that shift."
Deterioration in demand in the U.S. and the European Union (EU) during the third quarter, coupled with light imports from China and Russia, proved insufficient to mop up solid supply growth as dairy producers responded to what remained of attractive milk prices.
"We expect to see more supply looking for a home on the international market in the closing months of 2011," says Rabobank’s Tim Hunt. The Northern Hemisphere will seek to push more production to the international market, just as the Southern Hemisphere launches into a solid supply growth year.
Economic headwinds will slow demand to a crawl in the key U.S. and EU markets, the report says. The expansion of milk supply in these regions will also slow, "but given lagged price signals and low price elasticity, milk production growth will probably further overshoot domestic market requirements."
While Rabobank expects downward pressure on international market pricing through the fourth quarter, it also believes the price movement is likely to be limited. "Many buyers that have been squeezed out of the market by high pricing in 2011 are likely to re-enter the market as more product becomes affordable," the report notes. If expected strong buying by China doesn’t materialize, the downside looks greater.
On the upside, adverse weather conditions could reduce milk production in the Southern Hemisphere. With global grain stocks alarmingly low, limited forage in key parts of the U.S. and exposure to potential feed market shocks, dairy producers could cut production. That would further reduce supply.
"The world market will bring good and bad times, and it will be volatile," Hunt says. "But it will offer opportunity for the U.S. dairy industry."