Domestic markets to face slower growth
Over the next decade, the majority of new opportunities in dairy product sales will come from Asia and other developing markets.
Meeting domestic consumers' needs and expanding inter?national dairy markets were the unofficial but prevailing themes at this year's Dairy Forum hosted by the International Dairy Foods Association (IDFA). The Orlando, Fla., gathering included a record 1,000-plus attendees which were a mix of dairy processors from around the globe along with some U.S. dairy producers.
A pair of co-workers speaking at different times during the forum agreed that overall fluid milk consumption will continue to grow. However, that expansion would be tipped towards developing markets as fluid milk sales continue to slump in the U.S. and other mature markets.
"Globally, fluid milk sales will grow 2.4 percent annually," said Charles Brand, a vice president with Tetra Pak. "It will be led by emerging markets. There are 2.7 billion consumers living on $2 to $8 a day. As incomes grow, these consumers will become the new middle class," said Brand, noting these people want to add dairy protein to their diets.
In a presentation the next day, fellow Tetra Pak co-worker Libby Costin agreed, "Fluid milk consumption in developed countries is declining by 0.3 percent annually while it is growing by 3.4 percent in developing countries. Of that growth, 92 percent will be found in 10 developing countries," said Costin, noting that India, China, Pakistan, Brazil, Russia and Mexico rank as top sales areas.
When looking at all dairy products, Asia will also be a bedrock for new sales opportunities. "Sixty-three percent of the growth in dairy demand will come from Asia," said Fiona Hutchinson with New Zealand's Fonterra.
Servicing these markets will not be easy due to milk procurement and packaging issues. At the moment, more loose or home-processed milk is sold around the globe than milk that is pasteurized and sold in containers. "By 2014, packaged milk is set to surpass loose milk sales for the first time," noted Tetra Pak's Brand.
"The milk equivalent of two to three times of the U.S. milk production will transfer into the processed category in the coming decade," added Torsten Hemme of the International Farm Comparison Network Dairy Research Center.
While it has been difficult for U.S. processors to expand fluid milk sales, yogurt has shown tremendous upside and remains a relatively untapped market.
"In the Netherlands, consumers eat a cup of yogurt each day. In the U.S., that number hovers between a cup each week to one cup each month," said Costin. "As commute times to work go up, more people are eating on the go," she said, noting yogurt helps to fill that market space.
Connie Tipton, IDFA's chief executive officer, expanded on that notion quoting Harry Balzer, chief industry analyst from the NPD Group.
"If you understand yogurt, you understand what this country wants from its food suppliers. It wants a food that satisfies breakfast, lunch, supper; it can be the snack, it can be the main dish or it can be the side dish," said Tipton, requoting Balzer.
The biggest success story in the yogurt category has been Chobani. It went from a startup company to market leader in just 6-1/2 years.
"In 2007, Chobani shipped 6,000 cases of yogurt and processed 100,000 pounds of milk weekly," noted Kyle O'Brien, executive vice president of sales with Chobani. "Today, we send out 2 million cases and use 30 million pounds of milk each week," he said.
With that market expansion, the company has captured 18 percent of the U.S. yogurt market and is now New York's largest dairy manufacturer. Chobani just completed a processing facility in Idaho. It took 326 days to build and will employ 400 people when it is fully on-line.
When looking to global markets, the U.S. remains a relative newcomer on the international stage. "There are not a lot of U.S. companies going overseas to invest," said Dalyn Dye, president of Hoogwegt's U.S. division. "We must remember more growth is happening elsewhere and we must do a better job beyond our shores."
The growth in dairy has been astounding, and it shows no signs of slowing. "In 1996, there were 11 companies around the globe that exceeded $3 billion in sales (U.S $)," stated Benoit Rouyer with French-based CNIEL. "In 2011, that list expanded to 27 companies."
While many dairy products have upside potential, cheese may slow. "Global cheese sales will grow slower this decade than they did in the previous decade," said Rabobank's Tim Hunt. "In Europe, cheese sales will grow at 1 percent or less. It is a mature market."
Volatility to persist
While sales opportunities abound, everyone from dairy producer to processor has felt the impact of greater volatility which shows no signs of subsiding.
"The last six years were the most volatile years in dairy ingredient pricing," stated Hunt. "In fact, there has been more than a 20 percent variation in prices each of the last six years. That only happened once in the decade prior to this time period."
"The time of cheap milk is over because costs around the globe are rising," noted Hemme. "In fact, New Zealand and Australia are no longer in the low-cost category."
The U.S. market has evolved a great deal in the past three decades. "In the 1980s, the government purchased 13 percent of dairy production through the price support program," recalled Ed Gallagher, president of dairy risk services for Dairy Farmers of America (DFA). "Fast forward to today, we now export more than was sold under the price support program in the 1980s."
The Farm Bill's Future
During a very spirited panel discussion, lobbyists representing dairy processors and producers shared their insight on a potential long-term farm bill. "You are not going to sign a five-year lease on the farm bill until we have a federal budget," predicted Tyson Redpath who is a former staffer for House Speaker John Boehner and now with the Russell Group.
"The effort to tuck the farm bill into last minute legislation has come to pass," Redpath went on to say. Fellow panelist Harry Katrichis of The Advocacy Group chimed in along the same lines, "There wasn't one hearing on dairy policy in the Senate of the 112th (last) Congress."
Both of those panelists represented organizations that were not in favor of the Dairy Security Act's supply management or production disincentives (word choice depends on one's position) in times of heavy production.
"Have we forgotten that we agree on these significant reforms in the Dairy Security Act (DSA) because we are so caught up fighting about the stabilization program?" asked panel moderator Ruth Saunders with IDFA. "We should focus on what is attainable," answered Katrichis.
"The term supply management has a 1980's look to it. Folks need to rethink that term," countered Jackie Klippenstein with Dairy Farmers of American (DFA). "We need producers; ending up with three producers in some states supplying milk will not be good for this industry," explained Klippenstein.
"Federal dairy legislation always leads to more," cautioned Redpath when discussing supply controls in the DSA. "That is why many fear that component of the Dairy Security Act."
"We must remember dairy is uniquely different and should not be treated like other commodities," Klippenstein retorted. "We (dairy farmers) don't get to store our commodity long-term like crop farmers."
This article appears on page 119 of the February 25, 2013 issue of Hoard's Dairyman.