Grant Heilman, Grant Heilman PhotographyDomestic
dairy industries and markets worldwide are often cast as heavily
protected with limited exposure to global competition. However,
despite high tariffs and price support policies that persist in
many of the world’s dairy-producing countries, today’s
milk producers and dairy companies face increasing competitive forces
from outside their borders. Globalization of the dairy industry
is exerting pressures on both domestic-oriented dairy industries
and international market “players” to adapt to changing
market relationships.
International dairy trade has often been called a dumping ground
for unwanted surplus commodities. However, dairy trade is now increasingly
driven by demands from developing-country consumers wanting to upgrade
diets and developed-country markets seeking specialty products.
Competition worldwide has given rise to increasing dairy consumption,
trade, and foreign direct investment in domestic dairy industries,
and though many trade barriers remain in place, they do not
appear to be stopping globalization of the dairy industry.
In this environment, domestic dairy sectors must compete aggressively
for a share of consumer food budgets and for resources and investment
capital. Dairy farmers, processors, and manufacturers who prosper
are those who continuously innovate by adopting new technology and
adapting to changing consumer demands. These forces have brought
about major changes within the U.S.
dairy industry, namely, expansion and significant consolidation.
The U.S. dairy sector has advantages over its competitors that enable
it to withstand such changes—it has efficient production systems
open to foreign investment and it serves a large, growing population
of affluent consumers. Nevertheless, the pressures of globalization,
structural changes in world dairy markets, and the potential for
further trade liberalization as a part of the current round of trade
negotiations have brought the U.S. dairy sector to a crossroads.
Dairy Companies
Adopt New Strategies
Dairy markets everywhere are being shaped
by consumer demands, the ability of dairy farmers to react to change, and
dairy company strategies for maximizing profits. Firms operating successfully
in global dairy markets are those that respond quickly to changing
economic forces, changing policies—nonagricultural as well
as agricultural—and shifts in milk supply and demand factors.
Those firms may be national firms operating in single countries,
regional firms operating in a well-defined area, or multinational
(global) firms with a presence in multiple regions or areas. Competition
among firms has grown, but so has the number of firms joining forces.
As international dairy companies recognize the potential benefits
from supplying milk and dairy products in different countries and
the prospects for demand growth, they are repositioning themselves
to source milk and products from multiple locations. This trend
is spawning partnerships and joint ventures among firms seeking
to benefit by controlling all stages of the production process.
Direct investment across borders has also altered competition in
dairy markets. Globalization has tended to emphasize the strength
of multinational dairy firms, with the most prominent being Nestlé (Switzerland),
Arla Foods (Denmark-Sweden), Danone (France), the Fonterra Co-operative
Group (New Zealand), Lactalis (France), Unilever (Netherlands-U.K),
and Kraft Foods (U.S.).
Multinational firms can operate in several countries or regions using any number
of approaches. They can build new facilities to manufacture locally demanded
products, or they can form alliances or partnerships with existing local firms
that have cultivated local demand. Purchase of local brands is another option.
A strategy that employs all of these approaches enables multinationals to reduce
price risks and market volatility. While multinationals are most active in
stable, well-established markets, alliances or partnerships with local firms
have helped them expand to emerging markets in recent years.
Multinational dairy companies have long viewed the U.S. with its large
and affluent market as an opportunity. Since trade opportunities are limited
by trade impediments, multinationals have chosen to make direct investments.
Led by firms based in the European Union (EU), foreign direct investment
in the U.S. now stands at about $5 billion. Nestlé and Unilever have gained
a major stake in the U.S. ice cream industry through purchases of U.S. brands.
Together, they account for about 30 percent of supermarket ice cream sales
in the U.S. Several French companies—Fromageries Bel, Sodiaal, Lactalis,
and Bongrain—are involved in U.S. yogurt and cheese markets. Yoplait,
a premier brand of Sodiaal, has been licensed to General Mills, while the Président
brand of cheese is a Lactalis product manufactured in Wisconsin and California.
New Zealand’s Fonterra, the world’s top dairy product
exporter, has also increased its presence in the U.S. market. Fonterra
has formed a number of partnerships throughout the world that enable
it to source milk and dairy products from multiple locations (see
New Zealand’s Fonterra: Partnering in
a Global Dairy Industry). In the U.S., Fonterra has teamed with
Dairy Farmers of America, the largest farmer-owned dairy cooperative
in the Nation. The resulting partnership, DairiConcepts, produces
and markets milk protein concentrates—the first commercial
production of its kind in the United States. Fonterra has also entered
into an agreement with Dairy America, a federated marketing cooperative,
to serve as the marketing agent for the nonfat dry milk received
from its members (seven U.S. farmer-owned dairy cooperatives).
New
Zealand’s Fonterra: Partnering in a Global Dairy Industry
The Fonterra Co-operative
Group was formed by the merger of New Zealand Dairy Group,
Kiwi Co-operative Dairies, and the New Zealand Dairy Board
in late 2001. The group is owned by its 13,000 dairy farming
shareholders and is the world’s largest exporter
of dairy products, exporting 95 percent of New Zealand’s
production. Fonterra is considered a “partnership
model” because of the growing number of foreign companies
with which it has established partnerships. This strategy
enables it to access dairy markets where dairy demand
is met by local supply. Partnerships, such as joint ventures,
give Fonterra market access without major capital investments
and financial risks, while providing mutual benefits
to both companies.
In the U.S. market, Fonterra
is a buyer and an exporter of U.S. nonfat dry milk to other
foreign markets, providing valuable global marketing expertise.
Its other partnerships include joint ventures with Nestlé through
Dairy Partners Americas in South America, Arla Foods in the
United Kingdom, Clover Industries in South Africa, and Britannia
Industries in India. Fonterra is the world’s largest
dairy ingredients company, but is also a supplier of consumer
branded products, such as its Anchor brand butter, Anlene
brand milk powders, and Mainland brand cheese products. Fonterra
has a major stake in the Australian dairy company, Bonlac
Foods Limited, and has undertaken the formal merger of both
companies’ consumer products operations in Australia
and New Zealand.
The Changing Face of Dairy Products
Dairy products available on the
market range from basic raw milk to fairly standardized “commodity” products to an array of higher valued
products that have only recently gained wider market presence. Historically,
when trade is the issue, both within and between countries, the commodity products—cheese,
nonfat dry milk, and butter—have held center stage. These were the
products that could best withstand the rigors of transport. However, factors
such as the emergence of sophisticated milk components as ingredients, greater
emphasis on cheese variety (including brands), recognition of well-defined
local, national, and even international product markets, development of manufacturing
processes that lengthen shelf-life, and improved transportation systems have
changed the way firms assess both domestic and global dairy marketplaces.
The major dairy products traded internationally can be broadly placed in
four categories: butter, cheese, dry milk powders, and ingredients. Within
these categories are a large number of “differentiated products”—cheese
varieties, dry milk powders with a range of fat contents, or milk components,
such as the various milk proteins. The ingredient trade has only recently
emerged as a key sector, driven primarily by widening uses of milk proteins
and lactose (milk sugar) in various food applications.
Trade Flows
Reflect Consumer Demand and Dairy Resources
The biggest players in international
dairy trade are not necessarily the largest producers. New Zealand,
for example, is one of the smallest producing countries but is a
major dairy trading country. A country’s population relative
to its production of milk is a key to determining the likelihood
of its having a milk surplus or a milk deficit. Milk-surplus countries
that supply foreign markets typically have an efficient manufacturing
sector capable of producing storable dairy products with quality
attributes at prices that make exporting economically feasible.
Based on the value of trade flows in 2003, New Zealand, Australia,
and the EU are leading dairy exporting countries/regions. Low-cost
producers in Australia and New Zealand are the principal suppliers
of cheese and dry milk products to Asian markets, while subsidized
EU producers focus on nearby markets in Africa, the Middle East,
and Russia and export significant amounts of cheese to North America.
As diets around the world have changed, so, too, has global demand
for milk and dairy products. The mix of products demanded, however,
varies by region or country and the stage of a region’s economic
development. The largest consumers of dairy products are high-income
developed countries, such as the U.S., EU, Australia, New Zealand,
and Japan. Middle-income developing countries use large quantities
of dry milk powders for fluid milk reconstitution programs and
as ingredients in other foods. In low-income developing countries,
demand is insignificant outside of food aid programs.
In some developing countries with fast-rising urban populations, demand
for dairy products is outstripping domestic milk production. Rapid growth
in consumption is driving growth in dairy imports in land-scarce Southeast
Asia and in China. New Zealand’s dairy exports to the EU have remained
nearly unchanged for 25 years, but the EU share of New Zealand’s
dairy exports has dropped from 30 to 8 percent, due largely to increasing
exports to developing countries in Asia. Because water and land needed
to produce high-quality dairy feed are limited in these countries, rising
demand has exerted upward pressure on international dairy prices. As
a result, the gap between prices of milk received by farmers in the U.S.
and New Zealand’s price has diminished in recent years
from $147 per metric ton in 2000 to $128 per metric ton in 2004.
Are
Dairy Policies Keeping up With Today’s Market?
These changes in global dairy markets are taking place in the context
of significant market intervention by some of the world’s
leading dairy product importers and exporters. Many countries maintain
border and domestic support measures of various types for their
dairy sectors (see Domestic Dairy Policies in Key
Global Markets). Of the three largest exporters, only the EU
intervenes significantly in its dairy markets. Canada, the
United States,
and Japan
also have significant domestic dairy policies, but all three countries
are net importers of dairy products.
Dairy policies around the world are changing slowly, primarily as a result
of the Uruguay Round of trade negotiations. The dominant border measures
now in place are tariffs or tariff-rate quota systems, and they are at
the core of many issues surrounding market access. Domestic dairy policies
include mainly price support and institutionalized pricing systems, policies
that have been called trade distorting in many circles. What would happen
to global dairy markets and the U.S. dairy industry if all of these policies
were stripped away?
Empirical analyses of international dairy markets suggest that a global
liberalization of dairy policies eliminating all tariffs, quotas, export
subsidies, and domestic supports would lead to a significant increase
in the world market prices for dairy products. While the volume of trade
would decline, primarily due to the elimination of export subsidies,
the value of trade would increase.
Trade liberalization would generate relatively modest impacts on the
U.S. dairy sector because of the large size of the U.S. market and
high level of efficiency of U.S. dairy farmers. If the efficiency of
the U.S. dairy sector continues to increase as it has in recent years,
it is possible that American dairy producers and manufacturers could
even gain from trade liberalization—analysis
suggests that productivity increases as small as 1 percent a year would
offset the impact of trade liberalization on U.S. milk production.
The ongoing processes of technological change, globalization, and shifts
in consumer demand are far more likely to affect the future of the
U.S. dairy sector than changes in dairy or trade policy.
Domestic
Dairy Policies in Key Global Markets
In a recent analysis of trade liberalization,
USDA developed a 12-country/region model of international
dairy trade and identified border measures (tariffs and
tariff-rate quotas) for all regions. Only four of the countries/regions—Canada,
the European Union, Japan, and the United States—have
domestic support or regulatory policies or programs in
addition to border measures. Japan, however, receives more
protection from border measures than from its many domestic
support programs.
The principal types of policies and programs affecting dairy producers in these
four countries/regions are as follows:
Canada
Milk production/marketing quotas
Classified pricing
Price support (purchase or sales program for butter and nonfat dry milk)
Subsidized exports of dairy products
European Union
Milk production/marketing quotas
Price support (intervention purchases of butter and nonfat dry milk)
Subsidized exports of dairy products
Consumer subsidies for some products
Japan
Direct producer payments
Subsidized manufacture of certain products
Strict labeling program for dairy products
Consumer subsidies for some products
Subsidized input costs—environmental protection, insurance of animals
United States
Direct producer payments
Price support (purchase program for butter, cheese, and nonfat dry milk)
Subsidized exports of dairy products
Federal milk marketing orders
Challenges and Opportunities for the United States
The U.S. is a significant dairy market in the international arena—as
an importer of certain products and, more recently, as a source of supplies
for export by international dairy firms. Globalization of dairy markets provides
a potential opportunity for producers of certain U.S. dairy products, such
as dry milk powders. The sheer size of the U.S. domestic market and projected
higher international prices, which could rise even more if the current round
of trade negotiations leads to further trade liberalization, suggest that there
may be additional opportunities for the U.S. dairy sector in international
markets in the future.
Foreign direct investments in U.S. dairy product markets contribute to the
continued strength of domestic markets for U.S. products produced from U.S.
milk. Traditional methods of analyzing trade liberalization scenarios do not
readily anticipate the effects of strategic decisions of firms in international
markets. Because of international market dynamics, dairy trade liberalization,
were it achieved, would foster both opportunities and challenges for U.S. milk
producers and manufacturing firms.
As global dairy markets evolve, policies designed to limit foreign competition
will become less relevant. Moreover, protectionist policies can be detrimental
to a country’s continued longrun prosperity as new opportunities are
squandered. How trade policy supports U.S. dairy farm income is less clear
today than in the past, given rapid changes in the structure of the industry.
The efforts of U.S. milk suppliers, processors, and product marketers to remain
competitive in a global setting are continuing to benefit U.S. dairy farmers
and consumers.
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