Dairy's global opportunity, domestic challenges

by Keith Nunes
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The dairy processors who made their way to Palm Springs, Calif., for the International Dairy Foods Association’s 2008 Dairy Forum were interested in more than just getting away from the freezing temperatures that enveloped the country Jan. 20-23. After a year defined by rapid growth in international markets for U.S. dairy components, as well as volatile input costs, visitors were seeking a better understanding of what is happening in the fluid milk and processed dairy product markets. What became clear is there were more questions than answers.

"Commercial demand for U.S.-produced dairy products continues to grow in developing markets around the globe," said Connie Tipton, president and chief executive officer of the I.D.F.A., in her keynote address. "Increasing global demand for dairy components that are part of our rigid price formulas has fundamentally disadvantaged companies competing primarily in domestic markets. But, ready or not, U.S. dairy is now part of the global economy in fundamental and irreversible ways."

In 2007, U.S. exports of dairy products increased 22% over 2006. Their value went from $1.6 billion to $2.3 billion, a 44% increase. For the first time in 15 years, the export value edged past the total value of imports.

From a global perspective, Andrew Ferrier, chief executive officer of Fonterra Co-operative Group, Auckland, New Zealand, called 2007 an "eye opening year."

"We have never seen quite a bull market as this one," he said.

In its North American Food & Agribusiness Outlook, released in late December, Rabobank N.A., New York, said the importance of the U.S. as a dairy exporter has increased, with its share of the world export market increasing from 5% in 2002 to 8.7% in 2006. Originally, the increase was driven by stock liquidation, but, more recently, by positive commercial metrics.

Exports for the first half of 2007 increased by 148,000 tonnes year-over-year and increased from 9% to 11% of total production, according to Rabobank. While U.S. exports of all dairy products have increased, skim milk powder and whey benefited from the strong world market and accounted for 47% by volume and 49% by value of total U.S. dairy exports during the period.

Supporting the increased international demand was a devalued U.S. dollar, tight global stocks and increased domestic milk production. Bob Yonkers, I.D.F.A.’s chief economist, said preliminary data for 2007 indicated U.S. total farm milk production rose 2.1%, reaching a record level of 185.6 billion lbs. The

increase marks the third straight year with growth of 2% or more, and the first time since the early 1980s production growth has topped 2% each year for three consecutive years.

The question for dairy processors is will production continue to keep pace with demand? Processors would like to see dairy producers continue to produce more milk, but high feed and energy costs may put a brake on 2008 production.

Mark Voorbergen, Rabobank International’s global dairy industry specialist, also said in a presentation at the Dairy Forum there are several factors around the world that may limit dairy export growth, starting with high feed prices around the world. He also noted the U.S. industry remains internally focused; various local markets around the world may soak up additional milk supply; irrigation water remains scarce in regions experiencing drought, such as Australia; and government intervention in agriculture markets, such as what has happened in Argentina, may also interfere.

Modernizing milk pricing

To food manufacturers outside the dairy segment, milk pricing and the Federal Milk Marketing Orders that govern the market may appear to be arcane formulas for price determination, but their existence has survived the test of time.

"I think it’s safe to say that no one in the industry is really happy with the status of federal order pricing," Ms. Tipton said. "Markets have changed and changed dramatically. But we’re stuck with a system that doesn’t reflect those changes.

"It’s locked in the past and with each passing year it becomes less reliable and functions less efficiently. It’s rigid and can’t adjust to change. And when it does, it’s so slow that any changes are usually too little to late."

In the next farm bill, the I.D.F.A. has set modest goals for reform in an effort to begin modernizing how dairy raw materials are priced.

"On dairy, we suggested fundamental program reforms, but basically staked out some modest goals to try to help markets work better and lessen regulatory burdens," Ms. Tipton said. "We want to unleash the energy of the market. We don’t want to be tied down by a thousand different regulations like an enormous Gulliver or have new ideas strangled by miles of bureaucratic red tape."

For the most part, I.D.F.A.’s voice appears to have been heard by the authors of the farm bill. In both the House and Senate version of the bill, language exists for the creation of a forward contracting mechanism for the different classes of dairy products.

"This simple mechanism enables voluntary contracts between buyers and sellers," Ms. Tipton said.

Language also has been inserted into the bills to create a Blue Ribbon Commission review how the Federal Milk Marketing Order program may be designed to work better for the entire dairy industry.

"Some have said we don’t need the commission because industry is already working in that direction, but I disagree," Ms. Tipton said. "During previous attempts to legislate federal order details, Congress has often made matters worse. The commission provides a framework we need to prioritize and strategize, to get reform off the drawing board and into a more public forum."

The association’s hopes for passage of the farm bill were dimmed when acting Secretary of Agriculture Chuck Conner addressed the group on Jan. 22. Sounding familiar themes, he told those gathered that the versions of the farm bill passed by the House and the Senate are not workable.

"We are not on a road to successful passage" of the new farm bill, he said. While he noted 90% of the items included in the U.S. House- and Senate-passed versions — such as conservation efforts, renewable energy, rural development and forward contracting — had broad support and agreement, Mr. Conner expressed the administration’s concern that real reform is missing from the remaining 10%.

Delivering a frank message, Mr. Conner said he and other senior advisers will recommend that President Bush veto the bill as it stands.

"To get the job done, we simply need to bring courage and common sense to the bargaining table," he said.

Add sustainability to the equation

With global markets in flux, presenting dairy processors with new opportunities, and a domestic push to modernize milk pricing in an effort to make U.S. processors more competitive, Dairy Forum attendees also heard about the growing additional challenge of environmental sustainability and its importance to consumers.

"We must focus on sustainability, ensuring our products are produced in an efficient and environmentally-conscious manner," Ms. Tipton said. "This is an issue that looms large on the horizon with major retailers such as Wal-Mart demanding not only awareness but change.

"You have to look at what it means for society and the environment, but you also have to focus on what it brings to your company’s bottom line."

Mr. Ferrier of Fonterra concurred with Ms. Tipton’s comments and said consumer concern about environmental sustainability will ensure his company continues to invest in evaluating its carbon footprint, from the grass which his cooperative’s dairy cattle feed to the end product package.

This article can also be found in the digital edition of Food Business News, February 5, 2008, starting on Page 31. Click here to search that archive.

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