World Dairy Diary

“Expect to see us investing in multiple farms in different percentages and ultimately investing in processing facilities of one type or another,” Andrew Ferrier, chief executive officer of the Auckland-based company, said in an interview.

Fonterra, with NZ$16.7 billion ($13 billion) in annual sales, is seeking to rebuild its business in China after a melamine contamination in 2008 killed at least six infants and caused the collapse of its local partner Sanlu Group. The company, which opened a farm in Hebei province in 2007, said last month it will invest NZ$42 million in a second.

“You’re seeing number two within a year and, assuming it goes well, we’d be looking at number three coming in closely behind it,” Ferrier said yesterday. “We see China as a market which will be served by Fonterra both with safe Chinese milk, that will be our value proposition, and New Zealand milk.”

Fonterra accounts for about 40 percent of global trade in butter, milk powder and cheese, and has sales in 140 countries. China’s imports of whole milk powder rose almost fourfold in 2009 to 176,000 metric tons, representing about 12 percent of the trade, according to an Australian government report.

“If there’s going to be a softening in dairy prices, it’s more likely to come in calendar 2011 driven by, for the most part, higher production out of the U.S.,” he said. “We see a scenario where U.S. production is stronger, more product hits the market and prices soften a little bit.”

U.S. milk production climbed 3.3 percent in September from a year earlier to 15.53 billion pounds, the U.S. Department of Agriculture said in an Oct. 19 report. Average prices of all products at Fonterra’s fortnightly GlobalDairyTrade auction have gained 6 percent in 2010. Whole milk powder reached a 21-month high of $4,092 a ton in April before slumping 29 percent to $2,917 in August.

The U.S. “is one of the more logical markets to help fuel growing Asian demand” and will increase its exports to Asia as the region’s demand outstrips New Zealand and Australia’s ability to supply consumers, Ferrier said. New Zealand may also see demand for its product from traditional markets decrease as more milk is exported to Asian countries, including China, Indonesia and Vietnam, he said.

“After declining significantly from a six-year steady growth trend in 2009, exports have strongly returned this year,” said Tom Suber, president of the U.S. Dairy Export Council® (USDEC), which represents the export trade interests of U.S. dairy producers, proprietary processors, dairy cooperatives, export traders, and ingredient suppliers. “All products have experienced robust trade. Cheese, in particular, has come back strongly.”

With a sluggish July, total volume of U.S.-produced dairy slowed after a strong second quarter, but remained well above year-earlier levels. Total export value in July was $309 million, up 65 percent. The increase pushed year-to-date export value to more than $2 billion, a rise of 66 percent over the first seven months of 2009.

July cheese shipments were up 66 percent versus July 2009, driven by strong business in Japan, South Korea and Mexico, last year’s top three U.S. markets.

USDEC demand-building programs – largely funded by dairy producers through their national dairy checkoff – convinced major foodservice and retail chains in Asia to diversify its Oceania supply sources with U.S. cheese. A major foodservice chain in Japan sourced U.S. cheese for the first time during a promotion featuring “Big America” cheeseburgers, which was projected to use up to 400,000 pounds of U.S. cheese during a six-week promotion.

Since CWT reactivated the Export Assistance program on March 18, 2010, it has assisted members in making export sales of cheddar cheese totaling 15,843 metric tons (34.9 million pounds) to 17 countries on four continents.

The Export Assistance program was reactivated when economic analysis indicated that sizeable cheddar cheese inventories overhanging the market are hampering a recovery in producer milk prices. Assisting CWT members in exporting American-type cheeses provides the most immediate way to positively impact producer milk prices in both the short-term and the long-term.

CWT reactivated the Export Assistance program on March 18, 2010. Economic analysis clearly indicated that implementing the Export Assistance program focusing on cheddar cheese could provide the most immediate positive signal to address low producer milk prices. Sizeable inventories of cheese are hampering a recovery in milk prices and using CWT’s export program will address that situation.

“U.S. participation in the global dairy market is essential to putting the U.S. dairy industry on firmer footing going forward,” Wilson said. “It is critical that we work to expand opportunities for our dairy exports to allow our dairy producers, as well as their dairy manufacturing partners, to grow and prosper.”

H.R. 4645 seeks to address the most significant issues hindering trade to Cuba under the 2000 Trade Sanctions Reform and Export Enhancement Act (TSREEA). The bill calls for a clarification on the “cash in advance” requirement that – since being redefined by the Office of Foreign Asset Control in 2005 – has added complexity and expense for potential buyers. The bill also calls for the elimination of TSREEA’s “direct banking” provision, which similarly inflates costs and complicates transactions.

“Cuba is a market where we should be a natural preferred seller due to our strong proximity advantages,” Wilson said. “Yet it is clear that we are now among the least-preferred of suppliers given these technical and regulatory impediments to U.S. agricultural sales to Cuba.”

The bill – which was introduced by House Agriculture Committee Chairman Collin Peterson (D-Minn.) and Rep. Jerry Moran (R-Kan.) and is co-sponsored by more than 30 members of Congress – also aims to eliminate restrictions on Americans’ rights to travel to Cuba. Allowing Americans to travel to Cuba would help stimulate demand for and sales of dairy products in that country.

At the risk of being labeled the anti-Christ, I’m here to report that dairy imports—most notably milk protein concentrates (MPCs)—are not the reason U.S. domestic milk prices are where they are.

And, by the way, I’m not the only one reporting this bit of non-news. USDA, the National Milk Producers Federation and the U.S. Dairy Export Federation all acknowledged as much in congressional testimony this past month.

For starters, I’d like to report a few numbers on dairy imports that were released by USDA’s Foreign Agricultural Service last week. Through June, imports of MPCs were down a collective 12% from the same six-month period in 2008. In fact, MPC imports have not been this low for five years, and six of the last seven.

Casein imports, both casein and caseinates, are down a whopping 38% through June. They haven’t been this low this decade. Admittedly, cheese imports are up slightly—1.2%. But that, in part, is due to the fact that cheese imports last year were at their lowest level this decade.

Taken together, MPCs, caseins, cheese and butterfat imports are down 12.7% January through June compared to last year.

And the other amazing thing is that the total tonnage of these imports has very little variation year-to-year since 2001—regardless of whether U.S. milk prices are $10 or $20. There’s a certain level of demand for these products—year in, year out. If they were price-sensitive, you’d think you’d see ebbs and flows with our wildly swinging milk prices.

Mark Stephenson, a Cornell University dairy economist, did some analysis on MPCs this past spring and came to this conclusion: “[Dairy] imports vary quite a bit month-to-month but they are not trending upward in any significant fashion—particularly as a percentage of U.S. production of milk.

“A case could be made that they ‘displace’ or ‘augment’ about 0.8% of U.S. milk production,” Stephenson says. “The milk that is displaced by MPC imports in the United States is the amount of milk from about 70,000 cows.”

The Dairy Export Incentive Program allocations of 68,201 metric tons of nonfat dry milk; 21,097 metric tons of butterfat; 3,030 metric tons of various cheeses and 34 metric tons of other dairy products, as well as individual product and country allocations will be made available through Invitations for Offers. Country and region quantities may be limited by the invitation.

Kozak went on to say that, “We would like to also express our appreciation for the hard work done by many other dairy organizations throughout this country to drive home this message to Congress and the Administration as well.”

Tom Suber, President of USDEC added that, “The full elimination of all export subsidy programs around the world remains a priority goal of ours. However, until that goal is achieved, and especially during extremely challenging times like those we are currently facing, we must employ all available tools to assist our industry to compete against the active export subsidy programs of the European Union. Our industry has worked hard to establish commercial relationships over the past few years and the DEIP program will sustain U.S. market presence until global demand in dairy products recovers.”

“In addition to the negative role of EU export subsidies, our exporters also face unfair trading practices and lowered world prices as New Zealand pushes to eliminate its own record-high surpluses at all costs,” said Suber.

Now that DEIP has been announced, NMPF and USDEC urged USDA to quickly open the process, given the limited time remaining before the end of the 2008-2009 DEIP year in order for bids to be awarded. Both organizations asked that careful consideration be given to swiftly approving as many bids as possible in order to fully utilize the allocated amounts for each of the covered products.

Three of the bids were from California Dairies Inc. of Artesia, Calif., for the sales of butter: 12 tons to China (26,455 lbs.), and two separate sales to Japan in the amounts of 10 metric tons (22,046 lbs.) and 9.8 metric tons (21,605 lbs.).

One bid was accepted from Humboldt Creamery of Fortuna, Calif., for the export of 20 metric tons (44,092 lbs.) of whole milk powder to Georgia.

Finally, one bid was accepted from Land O’Lakes of Arden Hills, Minn., for the export of 18 metric tons (39,683 lbs.) of butter to Iran.

With these accepted bids, CWT’s total 2008 export obligations are: butter, 21,913 metric tons (48.3 million lbs.); cheese, 1,501 metric tons (3.3 million lbs.); whole milk powder, 1,238 metric tons (2.7 million lbs.); and anhydrous milkfat, 11,411 metric tons (25.2 million lbs.). The butter
total is adjusted to reflect a recently-cancelled order of 3,471 metric tons.

One bid was accepted from Humboldt Creamery of Fortuna, Calif., for the export of 300 metric
tons (661,387 lbs.) of whole milk powder to Cameroon – the first time a CWT-assisted export
has gone to that nation.

Finally, two bids were accepted from Darigold of Seattle, Wash., for the export of 25 metric tons
(55,116 lbs.) of butter to Kuwait, and another 25 metric tons of butter to Indonesia.

Two bids were accepted from Land O’Lakes of Arden Hills, Minn. One was for the export of 216 metric tons (476,199 lbs.) of Cheddar and Monterey Jack cheese to South Korea. Another was for 36 metric tons (79,366 lbs.) of butter to China.

And finally, the fifth bid was accepted from Upstate Niagara Cooperative of Buffalo, N.Y., for the export of 19 metric tons (41,888 lbs.) of butter to Syria. This is the first bid CWT has accepted from Upstate Niagara.

CWT will pay an export bonus to the bidders, only when delivery of the product is verified by
the submission of the required documentation. In addition, a previously-accepted bid for 900
metric tons (1.98 million lbs.) of whole milk powder was cancelled.

Two bids were accepted from California Dairies Inc., of Artesia, Calif., for two separate exports of butter to Guatemala, in the amounts of 18.85 metric tons (41,557 lbs.) each.

Finally, one bid was accepted from Humboldt Creamery of Fortuna, Calif., for a whole milk powder export of 20 metric tons (44,092 lbs.) to Nicaragua.

With these accepted bids, CWT’s total 2008 export obligations are: butter, 18,843 metric tons (41.5 million lbs.); cheese, 1,434 metric tons (3.2 million lbs.); whole milk powder, 1,248 metric tons (2.7 million lbs.); and anhydrous milkfat, 6,204 metric tons (13.7 million lbs.). The milk equivalent total of these products is 1.31 billion pounds.

Also today, CWT formally revised its operating procedures for its Export Assistance program reflecting the addition of skim milk powder (SMP), standardized to 34% protein content, and butter blends containing at least 75% butterfat. The CWT Committee had approved the addition of SMP and butter blends to the list of products eligible for export assistance when it met on October 27, 2008.

“The demand for U.S. dairy products overseas is growing,” said Jerry Kozak, President and CEO of National Milk Producers Federation, which operates the CWT program. “Adding skim milk powder is a logical extension of the CWT Export Assistance program. It is a $2.3 billion market that consumes 2.4 billion pounds of product annually. SMP product value ranks third behind cheese, and whole milk powder.”

Four bids were accepted from Land O’Lakes of Arden Hills, Minn., for the follow exports: 36 metric tons (79,366 lbs.) of Cheddar cheese, and 9 metric tons (19,842 lbs.) of mixed cheese, both bound for South Korea; 30 metric tons (66,139 lbs.) of mixed cheese to China; and 10 metric tons (22,046 lbs.) of butter to South Korea.

Finally, one bid was accepted from California Dairies Inc., of Visalia, Calif., for the export of 10 metric tons (22,046 lbs.) of butter to China. CWT will pay an export bonus to the bidders, only when delivery of the product is verified by the submission of the required documentation.

Four bids were accepted from Darigold of Seattle, Wash., for the following butter exports:
400 metric tons (881,849 lbs.) and 200 metric tons (440,925 lbs.) to Egypt; 200 metric tons (440,925 lbs.) to Morocco; and 13 metric tons (28,660 lbs.) to Hong Kong.

Finally, one bid was accepted from United Dairymen of Arizona of Tempe, Ariz., for the export of 70.125 metric tons (154,599 lbs.) of butter to Egypt.

CWT will pay an export bonus to the bidders, only when delivery of the product is verified by the submission of the required documentation.

The affable chairman of the China Dairy Industry Association would like to see people consume more dairy. And, he certainly understands the need. He was 35 years old before he took his first drink of milk ― not because he resisted milk all those years, but because it wasn’t available. He grew up in an era where milk was rationed out to children, the sick and the elderly, mainly in urban areas. Chairman Song grew up in a rural area on a diet consisting of steamed bread and vegetables. All the while, he was aware that milk was available to a privileged few, so it must have outstanding nutritional benefits.

Today, milk is much more available in China. And, annual dairy consumption has risen to 53 to 56 pounds per person in the urban areas. Although that is less than one-tenth of U.S. consumption, the growth curve is quite high. Chairman Song predicts that dairy consumption in China will rise 15 to 17 percent annually over the next several years.

This should matter to you.

Unlimited potential

OK, you say, the domestic market here in the United States still carries the lion’s share of demand. But did you know that exports now account for about 11 percent of total U.S. dairy production on a total solids basis? That can make an important difference to your milk check.

Four bids were accepted from Dairy Farmers of America of Kansas City, Mo., for the following anhydrous milkfat exports to Mexico: 54 metric tons (119,050 lbs.), 54 metric tons (119,050 lbs.), 54 metric tons (119,050 lbs.), and 36 metric tons (79,366 lbs.).

Finally, one bid was accepted from Land O’Lakes of Arden Hills, Minn., for the export of 36 metric tons (79,366 lbs.) of Cheddar cheese to South Korea.

CWT will pay an export bonus to the bidders, only when delivery of the product is verified by the submission of the required documentation.