With an Asian “middle class” population ready to expand dramatically, the U.S. Dairy Export Council (USDEC) and the nation’s largest dairy cooperative, Dairy Farmers of America (DFA), are eyeing an increased presence in that part of the world, while protecting and growing export markets closer to home. However, in addition to a strong U.S. dollar, headwinds to dairy exports now include uncertainty over the U.S. trade policy, as U.S. competitors aggressively seek bilateral free trade agreements following President Donald Trump’s withdrawal from the Trans-Pacific Partnership (TPP).
Aggressive goal set
After tough sledding in early 2016, U.S. dairy exports rebounded during the last quarter of 2016, with further growth in January 2017. Annual exports have been moving about 14-15 percent of U.S. milk (on a total solids basis) production into global markets. Former U.S. Secretary of Agriculture Tom Vilsack, now head of USDEC, said the goal has been raised to 20 percent of U.S. milk production by 2020.
Addressing delegates and guests at DFA’s annual meeting in Kansas City, Missouri, March 20-22, Vilsack identified three specific actions to reach that goal: Seek additional access to markets that have been closed, increase demand globally, and facilitate increased trade by expanding U.S. presence in foreign markets.
Priorities identified
Among his list of priorities, Vilsack said preserving the Mexican export market is vital. Under the backdrop of political rhetoric that is making Mexican buyers skittish, Vilsack recently joined National Milk Producers Federation (NMPF) president and CEO Jim Mulhern and International Dairy Foods Association (IDFA) president and CEO Michael Dykes in taking the extraordinary step of traveling to Mexico to assure dairy leaders there the U.S. dairy industry wants to remain a valued business partner.
“When there are discussions of walls, workplace deportations are taking place, and there are discussions about getting rid of, changing or renegotiating the North American Free Trade Agreement (NAFTA) and the possibility of import taxation, all of that has created a sense of uncertainty in Mexico,” Vilsack said. “Some in the Mexican government have begun to question whether they are better off looking for more diverse opportunities in terms of their purchasing, instead of relying so much on the U.S.”
“They are our number one customer,” Vilsack said. “We want to make sure they don’t start to diversify away from us. We have to preserve and protect that market.”
Vilsack, Mulhern and Dykes spent four days visiting with Mexican government officials, producers and processors. Read: U.S. dairy leaders promise commitment to Mexico
“We tried to assure them this relationship really matters to us, to let them know we see them as partners first, and purchasers and consumers second,” he said. “We asked them how we as an industry can be more supportive; what can we do collaboratively to increase demand, to build opportunity for both Mexican producers and U.S. producers. We wanted to remind them that we will be their in the good times and bad times, that we’re simply not going to come in when the market is surplus and we’re trying to sell it to them to get rid of it.”
Vilsack said Mexico was an example where helping develop a dairy industry aids both domestic and U.S. dairy producers.
“In encouraging people to get into the dairy business globally, it doesn’t necessarily mean they will be competing with (U.S. producers),” Vilsack said. “What they will be doing is creating demand for dairy, which, if history is a lesson, demand will always exceed that country’s producers’ ability to provide supply, which creates new export opportunities for U.S, producers.”
“Over the past 15 years, Mexican dairy production has increased 58 percent, but the reality is demand exceeded that 58 percent, which has created an export opportunity for the U.S. Today, roughly 20-25 percent of the dairy needs of Mexico are met by imported products and the U.S. provides about 73-74 percent of that market.”
Vilsack said the U.S. withdrawal from TPP negotiations and the potential reopening of NAFTA has empowered competitors, including the European Union (EU), to become more aggressive in bilateral trade talks with Mexico. Among EU priorities is inclusion of geographical indicators (GIs) that restrict use of dairy product common names, provisions recently included in a EU agreement with Canada.
“There is a tremendous push by the EU to get to Mexico to embrace what Canada has embraced,” Vilsack said. “We spent a good deal of our time down there making sure they understood that (GIs) are not in the best interest of Mexican producers or processors, that it will negatively impact their capacity to sell branded products and common-name products. We received assurances from them that they understood that.”
Any renegotiation of NAFTA is likely to occur at the same time Mexico is negotiating with the EU.
“They have options,” Vilsack said. “We must be working with our Mexican counterparts to make sure they are strong when it comes to that free trade agreement, further cementing a relationship to help us collectively and collaboratively increase demand, which will increase new opportunities for us to maintain and grow the market share we have.”
Second priority: Canada
The second priority is opening the Canadian market to more U.S. products, Vilsack said.
“If NAFTA is going to be renegotiated, it’s got to be about dairy (in Canada),” he said.
Vilsack said USDEC is trying to evaluate whether recent changes to Canada’s dairy ingredients programs are World Trade Organization-compliant, while educating U.S. policy makers at every level about the importance of dairy to U.S. and individual state economies. USDEC has begun providing governors in states along the U.S./Canadian border with state-by-state analysis of the dairy industry as it relates to the dairy export market, detailing the number of dairy farms, dairy plants, jobs and economic impact in each state.
Building an Asian presence
The third priority, but perhaps the one holding the largest long-term opportunity, is the Asian market.
“We have to send the message to ease the concern about U.S. pulling out of TPP that we want to be there, to be competitive in that market to help build demand, to find creative ways to introduce middle-income Asian consumers to the wide variety of dairy products.
“To get a competitive edge, we have to be in-country, listening, understanding and appreciating what consumers in those countries want and need,” Vilsack said. “And, we need to be able to be responsive to the needs of processors and ingredient users so we’re in the same position as (competitors) who may be closer to the customer, to be able to provide inventory just in time. The conversations we’re now having about warehousing and presence becomes extremely timely.”
“Today, there are 500-600 million ‘middle class’ consumers in the Asia market,” Vilsack said. “In the next 15 years, that number is expected to grow by 2.7 billion people, which means the middle class consumers in Asia alone will be 10 times the size of the United States. That’s just the middle class, the folks who want high-value U.S. cheese and other products.”
Vilsack said USDEC would work with Dairy Management Inc. (DMI) and DFA to seek a physical presence in Southeast Asia.
“We can’t afford to cede that territory to our competitors,” he said. “We must build relationships and figure out how to build demand, to be creative and innovative.”
Vilsack also identified long-range opportunities in North Africa, including reintroducing dairy in humanitarian assistance.
“There isn’t the luxury of just focusing on Mexico or Canada,” Vilsack said. “To get to the goal of 20 percent, you have to do it all, which means you have to be careful about the resources you have and the need for additional resources.”
Vilsack concluded with the “three Rs” of dairy exporting:
• Relationships matter. “They can get you through the tough times and allow you to take advantage of the good times.”
• Resources. “We will have to allocate resources to build relationships. We’ll have to make investments in the global market.”
• Reasonable risk. “With any investment, there’s risk. Our competitors aren’t fearful of taking risk, especially with the size of the middle class and those in need of nutrition assistance.”
DFA looking toward Singapore
Rick Smith, DFA president and chief executive officer, told annual meeting delegates the cooperative is preparing to put its first facilities on Southeast Asia soil.
“I expect next year we’ll be telling you about our office in Singapore,” Smith said. “For reasons of language, culture and geographic location, (Singapore) feels a little more comfortable than other options.”
Although specifics are yet to be released, Smith said the DFA presence might include a food technology lab and product warehouse.
“With population bases in China, India and Southeast Asia, there will be tremendous opportunity if we make the right investments,” he said.
The presence in Southeast Asia will not only provide closer direct access to a large population of consumers, but will also represent a change in mindset, Smith said.
“As a dairy industry, we’ve been exporting 14-15 percent of our milk solids, but much of that is transactional, a buy-sell arrangement, not based on relationships,” he said.
The global market can be challenging, with lots of unknowns and price volatility, Smith said. However, exports are a vital part of DFA’s future.
“U.S. consumption is going up, but not as fast as the rate of milk production, making exports more critical,” he said. “The answer to that surplus is the export market. The domestic market has protected U.S. producers from the global market, but without a doubt, future growth will require looking at exports and selling to new customers in new places.”
Buyers ‘trading up’
Randy Mooney, DFA board chairman, also addressed exports in his remarks.
Mooney, who also serves as chairman of National Milk Producers Federation (NMPF), said while dairy export volumes slowed in 2016 in some parts of the world, global consumers are “trading up,” replacing margarine with butter, processed cheese with natural cheeses, and adding more yogurt and dairy beverages to their menus.
“In the U.S. and globally, dairy is a growth industry, but growth is never as stable or predictable as we would like it, and there are times we start to doubt the long-term process,” Mooney said. “However, when we step back and remind ourselves about the ’big picture’ themes: growing population, a growing middle class, increased urbanization, expanding Western lifestyles, demand for better nutrition at all income levels, and importantly, the ability of the U.S. to be a competitive dairy supplier, we are reminded of the opportunities we have.”
Mooney said the U.S. dairy industry has benefited from NAFTA, and would have benefited from TPP.
“Those opportunities require we have access to customers around the world, requiring free and fair trade agreements,” Mooney said. “Dairy must be treated fairly in all trade agreements, and we must be prepared to fight long and hard to ensure U.S. dairy is not treated unfairly in potential trade disputes.
“While to date there are only talks of trade wars, these words alone are starting to impact our ability to export and impact customer confidence in the U.S. as a reliable supplier,” he continued. “We cannot sit on the sideline as dairy product exports to countries like Mexico and China are put at risk. The stakes are too high for dairy farmers. We must ensure U.S. dairy has a seat and strong voice at the trade negotiating table whenever dairy has the potential to be impacted.”
Agricultural trade complexity
Trade agreement negotiations are incredibly complex, beginning with the multiple interests brought to trade talks, Vilsack said. Dairy is often down the list of U.S. priorities.
“If the U.S. trade representative’s (USTR) priorities have cars, steel and aluminum, information technology and entertainment at the top of the list, where do you think dairy is (on the list)? The people (the USTR) is negotiating with come from countries where agriculture is number one, two or three. It’s incredibly important for our representatives, starting with the Secretary of Agriculture, to remind the USTR and Commerce Secretary of the role agriculture plays, and to not just limit it to the producers, but extend it to the number of jobs connected to it. When we talk about manufacturing, don’t limit it to autos, because everything on the board related to dairy processing is manufacturing. It starts there, even before you get across the pond.”
One of seven tankers of milk is exported, with a $15 billion impact on the U.S. economy, supporting 100,000 jobs, he said. 
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Dave Natzke
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