Guest Editorial
No choice but to supply the world

by Tom Suber

Tom Suber is president of the U.S. Dairy Export Council. He contributes this column exclusively for Cheese Market News®.

The world wants more dairy products. The depletion of global dairy stocks over the past three years, the rise in international prices and the steady incline of U.S. exports that culminated in 2007’s export boom should put to rest any lingering doubts about the correlation between rising incomes and higher protein diets.

The question then becomes: Who is going to supply the cheese, whey, milk powder and other dairy products to eager buyers? Or, on a more basic level, who is best suited to increase milk production to make those products?

Despite record-high payouts to farmers, milk production in Oceania is at a stand-still. Drought took a 5 percent bite out of Australian milk production in the 2006/2007 year and looks like it’s going to do so again for the year ending June 30, 2008, according to the Australian Bureau of Agriculture and Resource Economics (ABARE). Cow numbers are down by more than 150,000 head and yields fell by nearly 4 percent over that same time period.

Although conditions are improving, ABARE does not see milk production recovering to 2005/2006 levels until 2010/2011 — and that is contingent on continued good rainfall.

In New Zealand, output has been growing steadily in recent years and officials were projecting a new record for 2007/2008 — until December when the La Niña weather pattern plunged key dairying regions into the worst drought in decades. A projected 3 percent gain in milk output turned into an estimated 1 to 3 percent decline for the year through May.

Fonterra Cooperative Group, which handles more than 95 percent of the country’s milk, reported that due to reduced milk output it would likely not be able to take any new customers prior to June.

The latest forecasts from New Zealand’s national weather service predicted a slight improvement over the next three months — although “above average temperatures” and “normal-to-below-normal rainfall” will not be enough to return to optimal conditions and could have a lingering affect on milk output into 2009 and beyond.

As for the European Union (EU), its Common Agricultural Policy caps milk output, although the bloc did vote to increase production quotas by 2 percent effective April 1, 2008. The change allows the 27 member states to increase milk flows by 2.84 million metric tons (in addition, 11 member states received an additional 0.5 percent increase).

But whether the bloc can take full advantage of the change is debatable. The EU-25 managed less than a 1 percent milk production gain in each of the last three years, hardly touching an additional 1.2 million metric tons of quota approved in 2007. For the 2007/2008 year, some nations (including the third largest producer: the United Kingdom) were on track to significantly undershoot their quota. In such instances, any new quota is likely to go largely unused; other countries might only use a portion.

In its March 2008 “U.S. Dairy Ag Focus” report, Rabobank says that despite the 2 percent quota hike, EU farmers in many areas will be constrained by high feed costs and access to cows.

On top of everything, a major reason the EU approved the hike was a study it conducted showing that from 2007-2014 it is going to need an additional 8 million metric tons of milk to meet its own consumers’ growing appetites for cheese and fresh dairy products. Translation: The EU, with or without additional quota, will have its hands full meeting its own internal needs.

Each of the three largest dairy exporters face tough challenges to boost milk output. And regions often mentioned as up-and-coming players, like South America, face hurdles of their own. Argentina, for instance, already a net exporter, saw milk production decline around 10 percent in 2007 due primarily to flooding. Moving forward, Argentine government interventionist policies, including export taxes and price controls, are putting projected gains in doubt.

The United States, on the other hand, is positioned fairly well on all fronts. U.S. milk production averaged 2.8 percent growth for the last three years and analysts project 2008 up 2.4 percent to 86.2 million metric tons.

The surge in commercial exports and the higher prices of 2007 brought about a surge in U.S. milk output in the second half of 2007, as production jumped 3.1 percent vs. July-December 2006, beating preliminary USDA estimates by 1.3 million metric tons.

The United States dairy industry may still be, in general, internally focused, but production trends belie such an orientation in the future, as they outpace domestic consumption.

We are now building in “extra” production capacity (both on the farm and at processing plants) that has to go into the export market — not an unexpected surplus that must be quickly disposed of to balance internal markets, but in essence a structural, export-oriented excess. To minimize the extent of price declines as production rises, the United States needs “continued focus on developing export markets,” Rabobank says, in addition to domestic innovation and promotion.

It used to be when U.S. dairy suppliers jumped in and out of the market — when we stopped exporting — it hurt our potential buyers, but it didn’t really hurt us that much. But now if we stop exporting, it damages the U.S. dairy industry. From a milk production standpoint, the United States is best positioned on a large scale to meet export growth. And now milk production growth not only allows dairy export expansion, it demands it.

CMN

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