Guest Editorial
Less a perfect storm than a new weather pattern

by Tom Suber

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

You know it’s been a good year when, 10 months into it, you’ve not only exceeded sales records, you’ve obliterated them.

The final numbers won’t be in until mid-February, but through the first 10 months of 2007, U.S. dairy export value leapt nearly 50 percent to $2.35 billion, nearly $500 million more than all of 2006.

Last year, the U.S. Dairy Export Council expected U.S. suppliers to break the $2 billion sales mark — a benchmark that the industry has been swiftly approaching since topping $1 billion five years ago. Few expected the industry to do it so handily by drawing near $3 billion.

Certainly, recognition is in order. But before we dislocate our shoulders patting ourselves on our backs, it’s important to look back at this watershed year in global dairy trade and assess why the United States performed so well and what it means for the next 12 months.

Some analysts see dairy export performance in 2007 as a set of extenuating circumstances: The unusually weak dollar, weather-related production declines in Australia and Argentina, export restrictions in India and Argentina, weather/policy-based production malaise in Europe, and the suspension (but not elimination) of European Union (EU) export subsidies helped make U.S. products more competitive.

Such an analysis equates the convergence of these factors to the rare “perfect storm” for U.S. export shippers. They are all important factors, but some of them are likely to linger. Certainly, Australia’s water shortages and the weak dollar are projected to remain with us for a while.

But, the biggest flaw in the analysis is the heavy focus on supply factors, while not accounting for the unprecedented impact of steadily burgeoning demand brought on by rising incomes (and consequential changes in dietary patterns) in developing countries like China and India, and the oil exporting nations of the Middle East, Indonesia, Mexico, Nigeria and Russia.

Secondarily, the U.S. dairy industry has taken export opportunities to heart. Nothing gets a company’s attention like a strong order book, and the percentage of U.S. production that is now moving overseas commands attention. For example, when the numbers are finalized for 2007, exported volumes for U.S. production will approach 40 percent of our nonfat dry milk, 60 percent of our whey, 75 percent of our lactose and 2 percent of our huge cheese output (the world’s largest producer), together with a significant amount of butter.

Converted to a milk solids equivalent, we will have shipped more than 11 percent of the U.S. milk supply to overseas customers — more than double the percentage we exported just five years earlier. In pure volume terms, 2007 U.S. dairy exports are on track to top 1.24 million metric tons, about 130 percent more than 2002.

Had the dollar remained a little stronger, Australia and Argentina matched previous-year production and the EU increased milk output and maintained export support, we might not be flirting with $3 billion in export sales, since global prices would not have surged quite so strongly. But the demand for U.S. product would still have been substantial, probably at prices still well above historical U.S. averages, but below the record global prices that prevailed among desperate buyers.

That being said, as we move into 2008, market conditions, while good, are not likely to be so one-sidedly in favor of U.S. dairy suppliers. The EU is planning to hike its milk production quotas by 2 percent, which would add, if realized, more than 2.8 million metric tons of milk into the system. Though some predict internal demand for cheeses and fresh products will absorb this production, if surpluses result, the EU can easily resume its voluntarily-suspended export subsidies.

In addition, encouraged by high milk prices and rising internal demand, developing nations around the world are redoubling efforts to boost domestic production. Improved weather conditions could reignite milk output in Argentina, China and India.

Consequently, these increased supplies will soften global prices and decrease somewhat our total U.S. export receipts in 2008, even if U.S. export volumes were to increase. As prices soften, the factor of a weak U.S. dollar will rise in its relative significance compared to when global dairy supplies were universally short.

Continuing demand growth in the face of higher price plateaus, and continued effort to help U.S. companies meet that demand, are even more crucial elements of our industry’s national export policy. By that I mean strengthening domestic and overseas policies and practices to make products more relevant to the market or the market more hospitable to U.S. dairy products.

This can be accomplished in a number of ways, some of which the Export Council has emphasized in previous Export Toolkit columns over the past year:

• We need to seriously pursue Gouda manufacturing, which holds the most potential for U.S. cheese export growth.

• We need to continue to develop the nutritional appeal and health benefits of dairy products to both attest to their value in the diet and simultaneously defend the dairy franchise from attacks from alternative products like soy.

• We need to continue to assist overseas buyers and consumers in recognizing the variety, tastes and functions of U.S. dairy products. That includes tailoring products to local tastes and assisting new product developers with items (e.g., Gouda cheese, proper fat levels in butter, and protein-standardized skim milk powder) that match other nations’ preferences or unmet demand opportunities.

• We need to continue working toward a successful conclusion of the Doha World Trade Organization round to prevent the global supply system from returning to an imbalance should the EU decide to unload any internal surpluses through export subsidies. We also need to support beneficial free trade agreements such as the deals with Colombia, Panama and South Korea, which would create the type of sustained, preferential demand that past trade agreements with Mexico, Chile and Central America have created.

• Perhaps most importantly, companies need to implement the systems and human resources necessary to take charge of and drive their lucrative export sales and not rely simply on buyers coming to them. Our rising domestic milk powder stores are an illustration of too passively involving ourselves in building sustainable supply partnerships with key overseas buyers.

In short, it’s all about a proactive, strategic commitment to the market.

Matching the 2007 performance is not going to be easy. But U.S. dairy suppliers can compete overseas. The numbers have shown it. There is demand out there that can benefit the entire U.S. dairy industry if we continue to ride out not a perfect storm but the new global dairy market climate.

CMN

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