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How can I think globally and act locally on my dairy?

Matthew Gould for Progressive Dairyman Published on 24 February 2016

“Think global, act local.” This advice has again become popular in the dairy industry as exports have grown in importance to the U.S. market. The goal of this article is to provide actionable and usable takeaways to help you think about growing your business in an increasingly global environment.

During 2015, about 15 percent of the U.S. milk supply was exported to customers outside the U.S. Experts say that number is only going to grow and could be as much as 20 percent of U.S. milk supply by 2020.

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The world population is adding about 80 million people each year, about another U.S.-worth-of-people, every four years.

But here lies a problem. As the size of the dairy market expands, so does the number of competitors. That is to say, as the game gets bigger, the competition gets stiffer. When competing in the domestic market, there are trade barriers, standardized mechanisms for milk pricing and similar milk production systems. In the global marketplace, the field is not nearly as “level.”

This past year provided a case in point. During 2015, cheddar cheese in the U.S. was priced above international benchmarks, at times as much as $0.50 per pound of premium. This meant U.S.-based commodity cheesemakers watched from the sidelines, their international sales staff mostly idle. Processors from Europe, New Zealand and Australia, competing on price, swooped in and stole market share.

But be glad. At those international price levels, you didn’t want to sell milk anyway. In fact, if your milk check had been linked to those global cheese markets (instead of domestic prices), most U.S. producers would have had a financial meltdown this past year, with a milk price equivalent below $13 per hundredweight for much of the year and, most recently, below $11 per hundredweight. Take that as a lesson.

That is to say, it is a mistake to focus on the generic market strategy of feeding the world. Why? Sometimes the global market will not pay; you will lose money. Yes, the rising numbers of middle class people around the world are going to provide growth for this industry, but it’s also going to result in increased competition. From the get-go, if the strategy is to compete just on price, be prepared to struggle.

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This is where the rubber meets the road with the concept of “Think global, act local.” It’s about understanding how to best position your business in an environment where competitors do have significant economic advantages.

Take Irish dairymen and dairywomen as an example. No longer limited by quota supply controls, they can produce at a lower cost than most of the rest of the world due to their grass-based model and, over the long run, will be able to out-compete a U.S. dairy farmer if ever facing off on milk price alone.

New Zealand also provides a point of comparison, as their industry takes a more strategic approach worthy of notice. Also a grass-based system, New Zealand’s milk processors have developed a milk pricing scheme which allows processors the financial freedom to export at international price levels, no matter the market environment.

Most recently, the industry has leveraged this ability with marketing dollars differentiating New Zealand-origin dairy products as “grass-fed” in the Chinese market, an effort to establish a unique set of attributes (consistent supplier; differentiated product) which are nearly impossible for a U.S. dairy manufacturer to replicate at any kind of scale at this point in time.

That said, the Irish and New Zealand models do have recognizable weaknesses. While low-cost, they are also subject to major seasonal shifts in supply and unforecastable weather risk. As a consequence, processing plants rarely operate at capacity in those regions, and manufacturers are limited in their ability to competitively produce fresh products.

In comparison, American and European (outside Ireland) dairy industries have an advantage in common. With limited seasonality in supplies, manufacturers are able to keep plants near capacity all year long. These regions are best suited for fresh product manufacturing such as fresh cheese, fresh milk and cultured dairy production.

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From an industry level, the U.S. is already doing more to expand and add to these points of advantage. Take, for example, the Farmers Assuring Responsible Management (FARM) program developed by the National Milk Producers Federation that addresses the desires of millennial consumers; it creates a barrier for international milk processors to capture our customers closest to home. Not to mention free-trade agreements such as the Transpacific Partnership, NAFTA, Korea and others that support trade.

At the farm level, what can you do? The goal is to identify the customer you want and hone your business to provide value in ways others can’t. If you accomplish this, the money will follow.

As a starting point, think about the relationship with your processor. Whether you’re part of a co-op or are an independent producer, are there things you can do to give your milk buyer an advantage in the marketplace? If so, there is value to be shared.

Examples I’ve seen here in the U.S.: In California, Idaho, Michigan and other states, milk producers have built processing capacity to condense milk solids on-farm. While this reduces transportation costs, it also creates value for their cheese-manufacturing buyers that rave about the increased yields and, ultimately, plant efficiency gains.

Another example: Several cooperatives are partnering with retailers on issues including animal welfare, transparency and integrated marketing strategies. The coordination and procedures that extend through the entire supply chain (truly farm to fork) creates a substantial barrier for competition.

Too often, farmers and processors focus their attention on cost, never enough on value. While it runs counter to the mindset of most, there are other sustainable ways to make money besides lowering costs. And you don’t have to go out and become organic to get there. What you do have to do is find the customer you want and learn how to best serve them.

At the beginning of the article, I wrote about the commodity cheesemakers losing their international customers in 2015 because they could no longer compete on price. That isn’t a sustainable model.

With that said, there were a number of U.S.-based cheesemakers that did export cheese overseas successfully last year despite the major price differences between U.S. and international markets.

They call themselves “specialty cheesemakers.” But don’t be misled. Specialty does not mean artisan; it just means customer-focused. Over time, these makers have developed cheeses that meet the specific needs of individual customers.

The modern barrier to competition is customization. Specifications can include moisture levels, salt content, textures, colors and flavoring, among other factors. It is low-volume business but also sustainable, even in the most challenging of market environments. These businesses have searched and found higher-value customers and adapted their business models accordingly. I urge you to do the same.

There is value out there waiting to be captured, beyond just volume and quality premiums. Some milk buyers do want increased coordination with their milk suppliers; they too seek differentiation and are looking to extract premiums from the marketplace.

Finding out where those opportunities are and what they look like is your job as you dream big, think global and act local.  PD

Matthew Gould
  • Matthew Gould

  • Dairy Market Analyst
  • Email Matthew Gould

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