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China, credit, consumer choice: PDPW Business Conference

PD Editor Karen Lee Published on 09 April 2012

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Nearly 1,400 people from 26 states and five countries gathered in Madison, Wisconsin, March 13-14 for the Professional Dairy Producers of Wisconsin (PDPW) Business Conference.

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Attendees could choose from 14 different specialty sessions during the two-day educational event, while the keynote speakers focused on three core areas – China, credit and consumer choice.

China
A native of Beijing, China, Su Hao (James) shared that until the early ’80s his parents were paid $5 per month. At 17 years old, it was his life dream to own a pair of Nike shoes. China today is different. “It is all about speed. It is all about catching up, to pursue a better life quality,” Hao said.

That better life quality includes a growing appetite for dairy, albeit a cautious one. The country has yet to fully recover from the “dairy tsunami” in 2008, when melamine tampering of milk resulted in 30 million children being examined for consuming contaminated milk powder. The aftershock continues today, Hao said, as consumer trust for Chinese dairy products has not returned.

While working in the ag sector, it is important to look at the dietary habits of the Chinese population. From 2007 statistics, Hao reported dairy consumption in urban areas is 71 percent liquid milk, 16 percent yogurt and 13 percent milk powder. The target market for dairy products is seniors and young children.

“Cheese is not really preferred in the Chinese dietary habit,” he said, “but that really is changing. Cheese imports are increasing year by year [and not by a small percentage.]”

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Urbanization is occurring in China with 18 million people migrating to cities each year. The population is also growing. In 2010, 16.15 million newborns arrived to inhabit the country.

Dairy consumption of this population is growing more and more each year. In 2000, it was less than 15 pounds per person. By 2007, it was nearly 60 pounds per person and by 2015 it is projected to be 88 pounds per person.

“There’s a long way to go to 2015,” Hao said, noting, “China’s dairy industry demonstrates great demand for growth.”

Currently there are 12.6 million dairy cows in China; however, most are raised in front of houses or along the roadside and milked in public parlors shared by all people in the village.

In 2008, only 21 percent of dairy cattle were raised on-farm with a total herd size of 100 or more. “Any farm with more than 50 cows is a sizeable farm,” he said.

In order to meet consumer demand, the dairy industry needs to improve production by 10,000 pounds per cow or 7 percent by 2020. It also needs to adjust infrastructure, as there is a surplus of milk in the six northern provinces and a deficit in southern China.

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Farms ranging in size from 500 to 10,000 head are being built. These new large freestall dairies are being built “American-style” with equipment coming from the U.S. and Canada.

This trend is driven in part by the melamine scandal and processing plants trying to invest upstream. “There is a need to communicate to consumers where the milk is from,” Hao said.

Hao’s company, East Rock Limited, is working with the Ministry of Agriculture and Dairy Association of China to provide guidance and assistance to dairy farmers across the country. It provides turnkey solutions in building dairy facilities, as well as hosts conferences such as the International Dairy Forum.

He said he sees potential opportunity for the U.S. in the number of cattle being imported to China. Milk powder imports are also growing with the U.S. now the number two importer of this product. China is also looking for quality feed, as well as experienced managers of modern dairies for its growing industry. “We really need professional people to run the dairies,” he said.

Hao’s concerns include threats to the environment, biosecurity issues and the return of trust to domestic dairy products. “We cannot afford the industry to grow without trust,” he said.

Credit
“There are three factors that determine if we have capital access problems – net farm income, asset values and interest rates,” reported Dr. Danny Klinefelter from Texas AgriLife Extension .

Net farm income was a record high in 2011 but three times in just the last decade income has fallen by more than 30 percent from the previous year.

A common practice is to judge the health of the ag sector by the debt-to-asset ratio, but that is a lagging number, he said. The debt-to-income ratio is a better example of what is to come. For instance, the debt-to-income ratio started going out in 1977, but debt-to-asset didn’t decline until 1982.

“We have lower ag debt this year in this country than last year,” he reported. “As long as the debt-to-income ratio stays below 4 we’re okay; over 8 we’re bad. In mid-1980s it was at 13:1.”

Nearly 90 percent of asset values in the U.S. are real estate. This has increased with the increase in land prices. Land ownership and debt are very unevenly distributed, he noted. Seventy percent of landowners have no debt, which means most of the debt is in the hands of the people that don’t own the land.

Klinefelter said the current rate of increasing land prices is unsustainable and the most likely scenario is the rate of increase will slow. If those values do fall, it won’t be current landowners that suffer. Instead, it will be those that are highly leveraged with large amounts of non-real-estate debt.

“We have become addicted to low interest rates in this country,” he said. Historically, interest on non-real-estate debt is 8 to 10 percent. If interest rates increase, the strain will be felt by young producers, concentrated livestock operations, highly leveraged operations and those with significant carryover debt.

Regulators have become a driving force in the credit arena. New regulations have just started to come from the Dodd-Frank Act, requiring higher monitoring of high-risk loans, more verification and documentation. In response, most commercial ag lenders have raised their underwriting standards.

“Working capital has become a huge thing,” he said. “I personally like to see net working capital at a minimum of 30 to 40 percent.”

Emerging issues noted by Klinefelter include volatility in weather and price, an emphasis by lenders on a borrower’s risk management ability, the next farm bill and agriculture impacted by legislation from committees where agriculture has no input – Department of Labor, Department of Energy, Department of Homeland Security, Environmental Protection Agency, etc.

Consumer choice
Rob Aukerman, president of U.S. operations for Elanco Animal Health , outlined three basic rights:
• Food is a basic human right.
• Choice is a consumer right.
• Sustainability is environmentally right.

Aukerman said food insecurity continues to threaten about 1 billion people worldwide. In the developing world, hunger may well be the number one health problem. Even in developed nations, like the U.S., a portion of the population continues to battle hunger.

The use of technology can help ensure a supply of safe, affordable and abundant food. As part of the food chain, we need to help consumers understand where technology fits, he said.

Aukerman and other Elanco representatives have visited the boardrooms of every major retailer in the U.S. and have heard that the retailer is not against technology but their consumers don’t want it.

In reviewing 28 studies from 26 countries including nearly 100,000 consumers during the period of 2001 to 2010, 95 percent said buying decisions are primarily based on taste, affordability and nutrition. Four percent were lifestyle buyers that make their choices on gourmet food, organic/local and gardens.

“No one is 100 percent in either group,” he said, noting sometimes those in the majority make lifestyle decisions and vice versa.

There is also a fringe group focused on food bans, restrictions and propositions. While small, this is a very vocal, very well organized, very patient and well-funded group. “That small fringe segment has done a better job telling their story than we’ve done telling our story,” Aukerman said.

By showing retailers this credible data, he said they have seen some change. Retailers are encouraged to satisfy the lifestyle segment but not to flip the entire supply chain to meet the needs of that group.

“Don’t try to level the playing field and make it all the same,” he said. “Don’t take away choice for the vast majority.”

The dairy industry has had tremendous success in terms of sustainability. For the past 60 years, inputs have remained flat while output has increased 150 percent.

“No one is more credible to tell the story than producers,” Aukerman said. He challenged the audience to be an advocate for technology, genetics and current practices. He also encouraged them to embrace the message of choice, not just for the lifestyle group, but also for the majority that buys on taste, affordability and nutrition. PD

PHOTO
In one of the final presentations of the PDPW Business Conference, Rob Aukerman, president of U.S. operations for Elanco, addressed the issue of consumer choice in today’s food chain. Photo by Karen Lee.

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Karen Lee
Editor
Progressive Dairyman

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