Making sense and cents of dairy exports

By Andrew M. Novakovic, The E.V. Baker professor of agricultural economics emeritus, Cornell University

Has the investment in expanding dairy exports been successful? How do we measure success — pounds of dairy products sold, share of U.S. milk supply, gross dollar value of sales, dollars of profit earned, increases in the farm price of milk? Great question. 

We often hear folks talk about what’s happening to exports and getting excited about higher sales or what percentage of the U.S. milk supply exports represent. We can track quantities pretty easily.  The gross dollar value of sales is another easy number that represents a slightly different way of looking at total dairy exports, as opposed to milk equivalent or total solids.

How about estimates of the extra profits for the processor, including cooperatives, or what it translates to in the farmer’s bottom line? Positive returns for processors and farmers are not at all an unreasonable expectation, but estimating what that is does not come from a search on a U.S. Department of Agriculture or U.S. Dairy Export Council database. Selling more of something sounds like a good thing, but it is a top-line measure. How does it translate to the bottom line? Does investing in U.S. exports make sense? Does it make cents?

Export strategies

Fourteen years after the U.S. opened its doors to international trade in dairy products, in 2009, DMI-affiliated organizations, representing cooperatives and other processors of dairy products, commissioned Bain & Co., a multinational consulting firm, to help it think about the U.S. potential as a dairy exporter and appropriate strategies. 

The so-called Bain Report reviewed the global competitive environment for traded products and discussed opportunities and challenges. It concluded by offering four business strategies pertaining to the industry as a whole:

1. Fortress USA: focus entirely on U.S. markets
2. Status Quo: a reactive approach, sell to foreign customers as opportunities arise
3. Consistent Supplier: cultivate an international market and build a reputation as a global supplier, but recognize that the domestic market is our base
4. Global Dairy Player: put more eggs in the international basket, an export focus to build the overall U.S. market opportunity

Interestingly, in the original report Bain did in 2009 and in its so-called “refresh” review in 2011, the focus was on the ability of U.S. processors to increase export sales. It was taken as a given that doing so would be a good thing for “the industry.” There was no explicit discussion of what the potential bottom-line effects would be for a) dairy exporters, b) dairy processors who did not export, c) dairy farmers or d) dairy product customers in the U.S.

Strategies 1 and 4 were throwaway options. The Goldilocks question was where in the range from strategies 2 and 3 we would aim. Bain encouraged us to embrace the Consistent Supplier option, No. 3.  Frankly, a big chunk of the dairy processing community, including cooperatives, probably were more comfortable with the Status Quo, No. 2. 

At the time, answers to the question hinged on several factors, including our relative inexperience in making foreign sales, unfamiliarity with the product and service expectations of foreign buyers and consumers, and differences in packaging and formulation between U.S. products and standards and what was considered normal in other countries. 

But, at the end of the day, for dairy processors this boiled down pretty simply to estimating how much exports would contribute to their bottom line. Increasing volume through a plant might reduce average production costs and certainly would increase gross sales, but what about the costs of exporting and maybe necessary investments to put products in metric sized packages or to change a formulation?

Opportunistic sales

Although we have certainly moved in the direction of the consistent supplier strategy, a lot of our export sales remain opportunistic. Clearly, a number of U.S. players have invested a lot of energy and money in cultivating foreign markets and buyers.  The export council exists to support this strategy. But I think it is fair to say that as an industry we have been transitioning from Nos. 2 to 3 over the last 10-15 years. We would probably agree that world markets are very important to us and represent a growing and increasingly important outlet for U.S. dairy production, but we also remain a bit reserved in our enthusiasm for relying on export markets for all our growth. 

A lot of the range of opinion on the value of dairy exports and the merits of cultivating them are specific to product sectors.  Except for selling to Canada or Mexico, fluid products are practically non-tradable because they are too perishable and bulky. Sales to Canada remain restricted by our trade agreements and inspection requirements, and sales to Mexico are limited by the ability of Mexican buyers to afford fresh fluid milk and its industry’s desire to retain that valuable market. So, trade in fluid milk, or Class I products, is negligible. 

Similarly, trade in Class II products is also limited. Those products are also highly perishable, require refrigeration and even freezing, and tend to be bulky, which means they are expensive to transport. 

Trade in milk and whey powders is the easiest from a logistics and marketing standpoint, but these tend to be commodity products where a lot of buyers expect certain minimum quality standards, but after that it’s about price.

Although we sell the majority of our milk and whey powders, we rank well behind the European Union and New Zealand. Since about 2011, more than half of our milk powders have been exported. Most recently the share has been about two-thirds. About 50 percent of whey powders produced in the U.S. are exported. Maybe it’s a bit strong, but I would say that these exports were developed more to minimize market losses than to achieve outstanding profits. It wasn’t that long ago that whey was a waste product.

Cheese and butter are certainly exportable, and some versions fall into the commodity category, but a lot of those products are valued-added and ones where the value of the U.S. versions is still being tested in world markets. We have had some success with higher-valued manufactured products, but growth has been fairly slow and the volumes or share of total sales are still small, about 5 percent give or take.

According to recent USDA statistics, the U.S. is about the fifth largest importer of cheese in the world while also being about the second largest exporter of cheese, behind the EU, which is a collection of 27 countries. Prior to 2008, we were a net importer of cheeses.  Since 2010, we have been unequivocally a net exporter. Since 2012, exports have been 6-8 percent of our total utilization of cheese each year. This coincides no doubt with the increasing production of home-grown specialty cheeses that compete very well with European products. Thus, we are making steady progress, but trade remains a relatively small factor in U.S. cheese markets.

After 1995, butter exports declined precipitously from highs in the 1980s and 1990s to about 2-3 percent of our total use. However, exports have been highly variable. Every once in a while we have a great opportunity to sell because our domestic prices are close to world prices, but there are more years when our exports evaporate because our domestic prices put us out of reach. One recent development has been the rapid increase in market share by European-style butters, with the Irish industry export brand Kerrygold now ranking second among branded butters. The U.S. became a net importer of butter from 1998 to 2005 after the world door first opened. But, after a period of modest net exports, we slipped into being a net importer again in 2015.

Total dollar value

Another way to represent trade is to look at total dollar value, which also makes it easier to add up the apples and oranges of dairy products traded. Hence, we find industry leaders talking about volume vs. value in measuring our trade performance. That’s OK, but value in this case simply means selling price times quantity or gross revenue. It is not a measure of earnings, and it certainly doesn’t tell us anything about price that you wouldn’t already know from looking at your milk check. Frankly, I think dollar sales can be confusing. An increase in value can be entirely a reflection of higher prices. On the one hand that is a good thing for the seller, but with the volatility we have in prices, I’m not sure it means much in terms of evaluating long-term success.

Lacking any direct measure or estimate of profits, the best available indicator of the impact of exports on net returns to the dairy sector probably comes from our product mix.  A lot of our export sales are commodities that we are able to sell at world market prices. These may not be highly profitable sales for the manufacturer, but we must be realistic when we ask the question of what we would do if we didn’t have that outlet for one out of every seven days of milk production. Without those markets, domestic prices would have to fall quite a bit to clear that much production. Keep in mind, these are mostly nonfat products. Milkfat values would be more protected but even protein values would likely be eroded as skim solids values declined generally. Eventually lower farm prices would slow if not erase production growth as milk price fell. Farms would have to go out of business at an even faster rate.

Our ability to build markets for higher-value products offers a greater potential for improving the bottom line of those manufacturers that engage in exporting as well as giving some lift to the farm price of milk. Cheese is the most likely to be a value-added product where we can build some margin; not that this is all that easy either. The fact that we have become the single largest cheese exporting country in no small part reflects the fact that we are a huge dairy country. But the more important aspect is that we are gaining ground on the long-standing reputation of European cheesemakers and staying ahead of the Kiwis and Aussies who produce products very similar to ours with very competitive costs.

It is also well to keep in mind that selling more of anything, but higher-value products in particular, depends on continued economic growth in the buying countries. In the case of dairy products, this isn’t likely to be developed countries in Europe, Canada or New Zealand, countries that have a very well-developed dairy industry. Rather we are talking about East and Southeast Asia, Western Asia and North Africa, sub-Saharan Africa and the tropical countries of Latin America. Economic policies far outside of dairy that encourage economic development in those countries gives us more customers to grow our industry.