International Dairy Profile
By Madeline Schultz, content specialist, AgMRC, Iowa State University, email@example.com.
Profile revised June 2011 by Malinda Geisler, AgMRC, Iowa State University.
Profile revised October 2012 by Marin Bozic, assistant professor in dairy foods marketing economics in the Department of Applied Economics, University of Minnesota. firstname.lastname@example.org
Over the last decade, the United States went from being a net importer to net exporter of dairy products. In 2012, dairy exports have reached a level that one might say that each week, one day’s worth of milk production is dedicated to exports. Expected growth in world demand for dairy, along with natural constraints on expansion from traditional dairy export countries, has presented the United States with a unique opportunity to become a major world player in dairy exports.
Trade Data Overview
In 2011, the value of U.S. dairy exports reached $4.82 billion, up 29 percent from 2010. In the first seven months of 2012, export value was up 16 percent over the same period in 2011. The increase reported in 2011 and first half of 2012 is not coincidental. In fact, exports have increased 21 percent annually over the last eight years. The fastest growing markets in the first seven months of 2012 were China, with growth rate of 43 percent, South America at 52 percent and Oceania at 70 percent. While China and South America may be easily explained by a rise in population, income and increase in U.S. dairy industry competitiveness, the reason for growth of exports to Oceania (New Zealand) is due to usage of lactose exported from the United States for standardization of milk powder products New Zealand exports further.
These high growth rates, sustained over the past half-decade, reversed the U.S. dairy trade status from net importer to net exporter. The U.S. dairy trade surplus was first recorded in 2007, and has reached $2.4 billion in 2011. Major dairy import commodities include European specialty cheeses, and commodity products dominated by milk protein concentrate, casein and caseinates, with New Zealand as a major supplier. On the other hand, U.S. dairy exports are dominated by commodity products; skim milk powder, whey and lactose and commodity cheese. U.S. Dairy Export Council summary data for 2011 reveals that 13.3 percent of U.S. milk production was processed into export products. In particular, 55 percent of all whey, 49 percent of skim/nonfat milk powder, as well as 7.6 percent of butterfat and 4.7 percent of all cheese produced in 2011 were exported. In terms of value, skim (nonfat) milk powder accounts for 30.1 percent of U.S. dairy export value, followed by whey and lactose (26.2 percent), and cheese (19.9 percent).
Main exports markets for U.S. dairy products are Mexico (24.1 percent), Canada (10.3 percent), followed by China (7.5 percent), Philippines (5.8 percent), Japan (5.7 percent) and South Korea (4.6 percent).
The short-term export outlook is likely going to reflect tight milk supplies due to drought impacts in the United States and Europe. In addition, important factors impacting U.S. dairy trade are USD/EUR exchange rate, GDP growth rate in major export markets. Weak Euro has already reduced volume, if not value of U.S. dairy exports in 2012. However, corrective actions by the European Central Bank have recently arrested further dollar appreciation against Euro.
U.S. Policy Affecting Dairy Trade
After Uruguay Round of free trade negotiations, the United States switched from using explicit product quotas to tariff rate quotas (TRQ) as a tool for protecting domestic industry. Under TRQ, imports are allowed at low tariffs until predetermined amount, and all additional imports are subject to high tariffs. Milk protein concentrates; casein and caseinates are imported to U.S. with negligible tariffs, which used to present a major source of discontent for U.S. dairy farmers. In spring 2012, a free trade agreement was signed between the United States and South Korea. Given importance of Korea for U.S. dairy exports, this was hailed as a major boost to export prospects. The agreement stipulates zero tariff access for whey for feed use, and duty-free access for substantial amounts of cheese, milk powders and whey for food use. Most of Korea’s remaining tariffs will be phased out in 5-10 years.
Aside from legislation explicitly targeting imports and exports, U.S. federal dairy policy has historically played a major role in reducing global competitiveness of U.S. dairy industry. The foremost policy instrument that contributed to that cause is the dairy products price support program that set the floor price for nonfat milk powder. Not only were floor prices too high to induce domestic players to pursue international powder markets, but powder specification that U.S. government was requesting (nonfat dry milk) did not match the main powder product traded internationally – skim milk powder. The difference between NFDM and SMP comes from the fact that protein level in SMP is standardized by addition of lactose, while in NFDM no standardization is allowed. The 2012 Farm Bill envisions shift from milk price support to income over feed price support, which will remove some of the disincentives present in the system.
Globalization and the U.S. Dairy Industry
In 2009, the Innovation Center for U.S. Dairy, with assistance from Dairy Management Inc. (DMI) and the U.S. Dairy Export Council (USDEC) commissioned a study from Bain & Company on the impact of globalization on the U.S. dairy industry. Eight key themes that emerged from the study are:
- Globalization of the dairy industry will increase in the coming years, with significant impact on domestic and international trade
- Demand for dairy products will grow faster than available supply, driven disproportionately by economic growth in emerging markets
- Traditional sources of supply will struggle to keep pace with growing dairy demand, creating a latent demand gap
- Global imbalances will create increasingly volatile dairy markets, as processors will need to compete across borders for milk supplies
- Shortage of global supply creates internal and external growth opportunities for the United States
- To capture this opportunity, the U.S. dairy industry will need to leverage existing capabilities and invest in strengthening specific competitive weaknesses
- Inaction, in the face of global change, will lead to a less competitive U.S. industry and will limit growth opportunities across all elements of the value chain
- Longer term, new low-cost sources of supply (for example, Brazil and Ukraine) will compete for a larger share of the global opportunity, creating a finite window for the U.S. dairy industry to establish a defensible competitive position.
The Innovation Center considered a set of strategic options that U.S. dairy industry may take in response to globalization of dairy markets, ranging from “Fortress USA” (focus on domestic market, attempts to limit effects of globalization) to “Global Dairy Player” (export focused model, off-shore investments in milk supply and processing”). The strategy finally recommended by the Innovation Center Board of Directors is called “Consistent Exporter” strategy. The strategy envisions aligning product portfolio with global demand trends, efforts to reform federal dairy policy insomuch as existing tools discourage exports, improvements in forward contracts and futures markets and joint industry efforts to build insight and capability to compete at world stage.
In 2011, a follow-up study was executed by Bain & Company. Three key findings of that analysis are:
- Demand: Despite short-term disruptions due to the global downturn, long-term demand for dairy products will remain strong, driven primarily by emerging markets.
- Export supply: Traditional sources of supply continue to be constrained over the medium-to-long term and will fall short of expected demand. Although Europe and New Zealand may expand output more than originally anticipated, Brazil and Ukraine have stumbled in recent years while Argentina and Belarus have yet to emerge as major global players.
- Buyer feedback: Significant global dairy product buyers desire an alternative source of supply and have affirmed that the U.S. is well-positioned to meet this need, but the U.S. still has clear areas for improvement.
On the size of the window of opportunity, the 2011 study concludes: “In summary, the window of opportunity for globally traded dairy products remains open in the near- to medium-term, with the previously estimated latent demand gap of 6.5 billion to 7 billion pounds likely to be as big or larger than estimated in 2009. It should be remembered that this latent demand gap represents an estimate of a gap that exists at a particular point in time, one that would continue to grow according to the underlying supply and demand trend lines. Therefore, it is not simply a finite volume that, once attained, remains static with no further growth opportunity.”
Latent demand gap is a concept often used in the 2009 and 2011 Globalization study. It is explained as world demand for dairy that exceeds global capacity to provide dairy products. This concept is rather confusing and poorly defined. Prices emerge where supply curve intersects demand curve, and as we observe year after year, global prices for dairy products are formed in a free market, and there are no stock-outs reported. What to make then of this concept, and why was it able to dominate the discourse on dairy trade? One re-interpretation would be that because dairy is in essence a set of commodity markets, there cannot be profit opportunities that stay unexploited for a long time. If feed costs and milk prices make for a highly profitable milk production dairy herds will expand until returns to dairying converge to long-run average level. In that context, existence of latent demand may be understood to mean that in the forthcoming period, demand curve will shift so much that up to 7 billion more pounds of milk can be absorbed by the market, at the milk prices level that corresponds to average profitability of dairy production. It only makes the sense to emphasize this opportunity, however, if there is a substantial first-mover advantage, i.e. if first country to capture this latent demand is well poised to maintain the market share for very long period of time. That may indeed be the case, if extraordinary returns to investments are what is needed for new players such as Argentina to establish their market presence. If returns to dairying are maintained at a long-run average, then no incentives will be present for new players to make substantial initial investments in infrastructure, research, and human capital needed to deliver high-quality dairy products. In conclusion, the emphasis on latent demand gap, as a leading “call to arms” insight from dairy globalization studies implies that sufficient condition for U.S. to capture the emerging dairy export markets is to supply products quickly, expand milk supply in line with export growth and thus maintain global dairy prices low enough to prevent new entrants.
Overview of Major Dairy Producing Countries
The impact of population growth and rise in per capita income are often listed as reasons behind demand for dairy imports from countries as China. But it is also interesting to see the impact of these variables on countries that have the potential to become major competitors in the world dairy trade. USDA FAS World Market and Trade Circular brings data on major dairy producing countries – herd size, production per cow, production and consumption of butter, fluid milk and milk powders. In the last six years, Brazil dairy herd has increased by almost three million milk cows, from 15.9 million in 2007 to 18.6 million in 2012. A change of such magnitude is hard to comprehend in the United States, where a year with major herd expansion means an increase of 100-150 thousand cows, to a herd of 9.1 million. Over the last six years, fluid milk consumption in Brazil has increased 13 percent, cheese consumption is up 25 percent and skimmed milk powder consumption is up 27 percent. A quick glance at basic demographic and economic variables reveals that GDP per capita has grown 25 percent over the same period, and as a final result, while overall Brazilian milk production has increased by 17 percent since 2007, the Brazil has transformed from net dairy exporter to net dairy importing country.
Like Brazil, Argentina has increased its milk production considerably over the past six years, from 9.55 to 12.83 million metric tons, a production increase of 34.3 percent. Unlike Brazil, the Argentinian dairy herd remained stable at 2.2 million dairy cows with almost all gains in milk production arising from improvements in per cow milk yield. Primary dairy export products include cheese and whole milk powder. Cheese exports doubled since 2008, from 36,000 metric tons to 75,000 metric tons forecasted for 2012. Whole milk powder production exhibited comparable growth, rising from 117 thousand metric tons in 2007 to 260 thousand metric tons in 2012. Major export markets for Argentina’s dairy industry include Brazil, Venezuela and Algeria, but the industry seems determined to expand aggressively in other markets and offer new products beyond cheese and WMP.
Although not among the biggest U.S. dairy export markets, with 1.4 billion-sized population, China is an important dairy producer and importer. The China dairy herd is forecasted to reach 8 million cows in 2012, with total milk production of 32.35 million metric tons. Following a food contamination scandal in 2008 that left six infants dead and more than 300,000 sickened due to tainted infant formula, trust in domestically produced milk products has declined, and imports of whey, lactose, skimmed and whole milk powder skyrocketed. Between 2007 and 2012, imports of skimmed milk powder rose from 55 to 180 thousand metric tons, and whole milk powder imports jumped from 59 to 332 thousand metric tons in the same period. China is the biggest market for U.S. whey exports, with export value of $175.5 million constituting 24.5 percent of total U.S. whey exports. A recent study of China dairy industry by the Babcock Institute forecasts that demand for dairy products in China will grow between 3.4 and 4.7 percent per year. China is making major investments in food security and dairy herd expansions, and good forecasts on the rate of growth of imports are lacking.
Mexico is the largest market for U.S. dairy exports, accounting for one quarter of exports value in 2011. Skimmed milk powder exports to Mexico constitute 41 percent of all U.S. SMP exports. For cheese and dry whey exports, Mexico’s share is 21 percent, and 18.7 percent respectively. Beside physical proximity that allows easy market access by road and rail, another factor Mexico features prominently as dairy export destination for U.S. products is the North American Free Trade Agreement (NAFTA) that abolished all tariffs on U.S. dairy exports. Mexico’s dairy herd is forecasted to remain stable at 6.4 million head, and there is no expected yield per cow growth either in the short-run. Water scarcity and competition for land are some of the factors hindering further growth of domestic milk production. That stands in sharp contrast to 1 percent annual population growth and GDP growth rate in excess of 4 percent over the past two years. The Babcock Institute Mexico country study estimates income elasticity for dairy products of 0.7, which translates to 2-3 percent annual growth in demand for dairy products. Most of that increase will be supplied by imported dairy products.
EU-27 has seen a steady decline in dairy herd, from 24.2 million in 2007 to 23.1 million in 2011, forecasted down to 22.8 million in 2012. Despite this decrease, due to increases in milk yield per cow, total milk production is increasing, from 265 billion pounds in 2007 to forecasted 280 billion in 2012. EU has been losing market share of world dairy trade, but that may reverse after 2015. Currently, milk production in EU is regulated using quota system that penalizes overproduction. This policy is scheduled to be abolished by 2015, with substantial impact on both regional distribution of milk production in EU, and the overall level of milk production which is expected to start to grow faster.
At 4.8 million cows, the size of the NZ dairy herd is higher than its population size, and most of NZ dairy production is placed through exports with NZ accounting for nearly half all world dairy exports. Analysis of long-run prospects of U.S. dairy export prospects often invokes limited availability of land resources in New Zealand, where primary dairying model is intensive rotational grazing. However, New Zealand has added more than 1 million cows in the last 10 years, increasing its dairy herd by 30 percent to 4.8 million. While NZ sheep numbers continue to fall, there are still more than 30 million sheep grazing, suggesting continued ability to convert land to dairy farming. Oddly enough, NZ has become a destination for U.S. dairy exports. In particular, lactose is imported from the U.S. and used for standardization of milk powders manufactured for export markets.
Globalization and Value-added Agriculture
Dominated by the commodity-type products, dairy trade would not seem as a natural marketing channel for artisanal producers or dairy farmers interested in value-added efforts. But there are at least two issues that one should consider here. First, as far as marketing opportunities go, substitution of imported Milk Protein Concentrate is thriving. One example how value-added oriented producers have exploited this niche can be the case of Idaho Milk Products (www.idahomilkproducts.com). As their webpage explains, IdaPro was created by three dairy producers in 2009 to capture more value through vertical integration, focusing on milk protein concentrate and isolate.
Second, there is a scope for specialty cheese exports. A 2008 article in Cheese Reporter (www.cheese-exchange.com/news/news_page.cfm?n_id=9) explored this issue in depth. The Artisanal Cheese Exchange from Sheboygan, Wisconsin, (www.cheese-exchange.com) actively helps specialty cheese manufacturers find international buyers.
The Babcock Institute for International Dairy Research and Development
The University of Wisconsin-Madison hosts the Babcock Institute for International Dairy Research and Development. Professors Emeriti Ed Jesse and Bob Dobson write discussion papers describing U.S. dairy trade situation and outlook. Of particular interest are country studies conducted since 2004 on Oceania, Poland, India, Ireland, Brazil, Mexico, Canada and China.
Foreign Agricultural Service, USDA
USDA’s Foreign Agricultural Service publishes data on dairy trade. Its “Dairy: World Markets and Trade” Circular is published biannually and provides commentary on recent developments and short-term trends.
U.S. Dairy Export Council - Founded in 1995, The U.S. Dairy Export Council (USDEC) is a non-profit, membership-based organization that represents the global trade interests of U.S. dairy producers, processors, cooperatives, ingredient suppliers and export traders. Among publications that can be found on this site are “Export Profile” and “Global Dairy Market Outlook.”