Global markets may provide dairy its next 'golden goose'

by Erica Maedke, managing director of consultancy and intelligence for Blimling and Associates, Inc.

Maybe it’s time to find a new goose. For decades, the U.S. dairy industry has treated fluid milk sales as the goose laying golden eggs. The Federal Milk Marketing Orders system prices Class I at a premium because consumers need milk and will pay for it. Economically speaking, this price discrimination returns more money to dairy producers. But in case you missed the news, last year marked the first time more U.S. milk was devoted to export sales than fluid consumption. Fluid milk only accounted for 20.5 percent of U.S. milk production, down from nearly 35 percent 20 years ago. The golden goose is laying fewer eggs.

Meanwhile, exports are growing. By the numbers, cheese exports rose 6.9 percent through the first eight months of the year, with large volumes to Mexico and South Korea. Butterfat exports are another big story, with butter jumping a whopping 127 percent and anhydrous milkfat gaining 84 percent during the same period, with strong sales to Canada and China. U.S. nonfat dry milk and skim milk powder exports increased 13 percent, including a large share shipped to Mexico.

Today, disappointing milk production in many parts of the globe is providing opportunities for U.S. product. Year-to-date through August, output in the EU-28 rose just 0.6 percent over prior-year levels. And recent reports indicate a continued slowdown in France and Germany, the region’s largest producing two countries. A cold, wet and late start to New Zealand’s pasture season resulted in third quarter volumes falling 3.8 percent year-over-year. Amid tight global conditions, U.S. dairy producers are poised to be a bright spot for milk supplies.

Most U.S. dairy products exported this year are standard, low-return commodities like low-heat nonfat dry milk, 80 percent salted butter and barrel cheese. And because the U.S. is in and out of the global market opportunistically, international buyers often view the U.S. as a lower-tier vendor — a place to get cheap product if you don’t care when it arrives. Is that where we want to be long-term? For your own bottom line, I hope that you answer no.

Looking to the future, U.S. milk production is growing at a faster rate than domestic consumption, with USDA forecasting an 11 percent (+25-billion-pound) gain in output between now and 2030. That means producers’ ability to grow will be increasingly tied to opportunities to sell product internationally. With global tightness in milk supplies this year, the U.S. is successfully moving product into world markets and producers are benefiting. Yet, we all know the highs don’t last forever.

Can we move up the value chain for more consistent and reliable sales that provide greater revenue? As an industry, we must provide what our customers want: a reliable supply of high-quality dairy products with predictable delivery. While the dairy industry may not be in control of the ports, we can provide the right product. For example, the international butter standard is 82 percent with lactic acid, not a specification most U.S. butter makers produce regularly. Should our standard of identity for butter match the world’s? Many international manufacturers want skim milk powder — nonfat dry milk with protein standardized to 34 percent — because of its consistency in their formulations. Wouldn’t U.S. buyers also find value in product consistency while producers don’t give protein away free?

Some are making steps down the value-added path to provide customers with products that deliver and delight. Fonterra’s recent partnership with VitaKey, a Massachusetts-based probiotic company, will assist Fonterra develop new products and provide more value for New Zealand’s milk supply. Meanwhile, Darigold’s announcement of a new milk processing plant in Port au Pasco, Washington, will produce protein and butterfat products with a strong focus on export markets.

We can remain tied to thinking that Class I is where the money is. But one day – sooner than we’d like to think – that goose’s eggs won’t be golden anymore. Our global competitors are already moving down the value-added path. Can US dairy producers afford to stay a commodity player? Given the growing importance of export sales, we think not.