Guest columnist/opinion:
Blue-chip Mexico

Rodrigo Fernandez is marketing manager of the U.S. Dairy Export Council’s Mexico Representative Office. He contributes this column exclusively for Cheese Market News®.

Eleven years after the first stages of NAFTA implementation, Mexico is like the big blue-chip holding in our portfolio that is so easy to take for granted, while smaller, “up and coming” markets excite us like this week’s hot growth-stock.

Lest we forget, Mexico is still our largest export market, with 2005 sales of $511 million — 31 percent of all U.S. dairy exports. It also boasts a growth rate that would quicken the pulse of any investor; export value has more than tripled since 2000.

If we make it, we move significant amounts of it to Mexico: milk powder, dairy blends, whey proteins and lactose, plus consumer-ready cheese, ice cream, fluid milk and yogurt.

U.S. cheesemakers have been targeting Mexico for more than a decade. Last year’s exports were 38.3 million pounds, valued at $58.9 million. In the first eight months of 2006, shipments had already reached 34.2 million pounds, up 44 percent from the prior year, according to USDA data.

More importantly, the conditions favor continued growth. Mexico is a milk-deficit country, producing only 65 percent of the needs of its domestic population. Milk production will be about 22 billion pounds this year, less than what will be produced in Wisconsin, for a population that exceeds 100 million. Over the last five years, overall dairy consumption south of the border has increased 6 percent per year, while milk production has expanded just 1 percent per year.

In this environment, the United States is the natural and primary source of dairy products to Mexico. Of total Mexican dairy imports, the United States supplies about 55 percent. U.S. suppliers have some unique competitive advantages, not the least of which is completely free trade in everything but skim milk powder (SMP), courtesy of NAFTA. So while our competitors from Europe and Oceania pay 20-40 percent duties on most cheeses and 10 percent duties on whey and fluid milk, the U.S. ships tariff- and quota-free. As for SMP, quotas and duties will be eliminated Jan. 1, 2008.

But truth be told, the prospect of an open border for milk powder scares a very vocal minority of Mexican producers. Last year farmers successfully pressured the Mexican government to impose temporary tariffs that shut down U.S. exports of dairy blends. (The tariffs are scheduled to come off at the end of this month.)

Most of the industry understands producers’ fears are unfounded. Mexican milk production will continue to go into bottled milk, UHT milk, yogurt and fresh cheeses, as it always has. The rest of the nation’s dairy demand — hard cheese, whey proteins, lactose, milk powder — will have to be filled by imports, because the supply and the manufacturing infrastructure in Mexico simply doesn’t exist. On other products, such as ice cream, local supply is available, but import demand will continue as consumers seek out higher quality and variety.

The U.S. dairy industry isn’t casually dismissing producer concerns, though. The U.S. Dairy Export Council has stepped up its industry relations and monitoring efforts in Mexico, working closely with government officials, partnering with producer and processor groups and jointly developing programs to stimulate domestic dairy demand. With a healthy, thriving Mexican dairy industry, plenty of room can exist for both imports and domestic suppliers.

Assuaging local producer anxiety is just one issue that must be addressed to ensure we remain Mexico’s No. 1 supplier. In the last couple years, even as we’ve taken share from Australia and Europe, we’ve faced increased competition from South America, particularly Argentina, Chile and Uruguay, on cheese, fluid milk and condensed milk. Consider:

• With a share of better than 95 percent on whey proteins and lactose, it’s tempting to assume the United States “owns” the Mexican market for ingredients. However, to boost sales our focus now must be on growing the overall market for value-added proteins.

• There is a market for a range of products not currently supplied by the United States, including Gouda cheese, condensed milk, whole milk powder, butteroil, butter and casein. On Gouda, for instance, we’re missing out on a market of about 120 million pounds per year.

• We need to continue to develop strategic alliances with key local players who can provide large-scale distribution, merchandising support and brand recognition in the marketplace. For example, Conaprole from Uruguay has teamed with leading Mexican milk processor Lala to supply about 110 million pounds of UHT milk per year.

So Mexico still warrants our attention. Given its proximity, the NAFTA tariff advantage and rising consumption, it remains the most important market for U.S. dairy exporters. But it poses some unique challenges as well that will require individual efforts by exporters as well as more strategically-driven industry-wide programs.

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.