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3 open minutes with Marin Bozic

Progressive Dairy Editor Walt Cooley Published on 07 February 2020

Ag economist Marin Bozic of the University of Minnesota calls himself a “jack of all trades” when it comes to his work in the dairy industry. He does primary research in the area of dairy markets; teaches about agribusiness finance, futures and options; and recently helped create with John Newton the Dairy Revenue Protection (Dairy-RP) program.

He is also a frequent speaker at both regional and national dairy events. Editor Walt Cooley recently interviewed him for Progressive Dairy’s podcast. What follows is an edited transcript of that podcast episode, which went live in January.

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Marin BozicMarin Bozic
Ag economist
University of Minnesota

Tell me the things you’ve been speaking to audiences about lately.

BOZIC: I peer a bit into the crystal ball for the dairy industry to see what the next few years may bring. I focus on the dairy trade situation and explain which factors, in my opinion, are driving the current foreign policy of the United States. I want to first dispel any notion that our policy is being designed one tweet at a time. Because the media are so sensationalized and are always trying to win the next news cycle, you will get the impression that it is all very capricious, unorganized, not really strategic, poorly executed, etc. But when you step back and you look deeper at the facts driving the policy, what you find is that we have some very, very deep geopolitical forces that are underpinning our foreign policy.

What are today’s geopolitical forces?

BOZIC: First, we used to have Russia, or the former Soviet Union, as our strategic adversary for many, many years. Our foreign policy was organized around building coalitions to protect against their competing ideological system. That is no longer the case. If one country can be designated as our strategic adversary right now, it would be China. Their GDP is growing tremendously; their technological advances are staggering; the battle on who is going to be the first to Mars is no longer between Russia and United States, it is between China and the United States.

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So the way you organize your foreign policy is by your strategic adversaries. China is following a nation-first policy, minding its own business. China has benefited tremendously from the U.S. maintaining the world order over the last few decades. They have piggy-backed on our willingness to protect the maritime routes to secure supplies channels and to organize world trade. They try to be a middle-of-the-road player, but they depend on the system to a large degree. The best way and the first way to hurt China is to stop helping them. I do believe that is part of what is going on; the trade war with China is just added on top of that.

The next factor driving our foreign policy is really, really amazing technological changes – automation, artificial intelligence, machine learning, advanced robotics. We are living in the future. Over the next decade, we will see a great many manual or low-skill jobs, even some white-collar jobs, be threatened by automation. What that means is that if you are no longer short on labor, your incentives to trade with partners overseas who have abundant and cheap labor is lower. You can actually bring manufacturing home.

The third big factor is energy independence. In the U.S., we have talked about energy independence ever since President Carter put solar panels on the roof of the White House. What’s really happening is the advances in horizontal drilling, fracking and extracting oil from shale. We have increased our oil production in the last five years by more than 33%. The U.S. is now a net energy exporter, no longer an importer. That changes how we see the world tremendously. We are no longer interested in maintaining the peace in Saudi Arabia or in the Arabian Peninsula.

Finally, demographics changes. We used to trade with our partners overseas because they had an abundant, young labor force – but they are aware that their labor force is graying just as well as ours. They aren’t automating, so then go back to what I said previously. If you have automation, A.I. and advanced robotics, you don’t need your trading partners to automate. You can automate just as well here at home.

You make it all sound so neat and tidy. Is the world really that simple?

BOZIC: I am not going to go so far as to claim that U.S. foreign policy has been explicitly designed with the full understanding of these trends. In the same way a ball doesn’t need to understand the law of gravity to go downhill, the current administration and their policies are aligned with the deep forces driving our society.

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And even though there are deep ideological divides on the surface, I do believe that most Americans actually do support an “America-first” foreign policy. For whoever gets elected in 2020 or 2024, I don’t think there’ll be any appetite for boots on the ground in other countries or nation-building overseas like we have seen in the previous few decades. I don’t believe there will be an appetite for a true multilateral free trade system. I think the U.S. is going to very aggressively negotiate trade agreements that benefit and narrowly define economic interests in the United States.

Tell me a little bit about your thoughts on the USMCA trade agreement.

BOZIC: That’s a very good example of the new way that the U.S. is negotiating trade agreements. The negotiation process was full of threats – such as “We won’t import your airplanes” or “We will put tariffs on your products” – unless you do things our way. Basically, it’s bully tactics to make a trade partner realize who is the big 800-pound gorilla in the room. That yielded us some progress. The Canadian dairy market is going to be just slightly more ajar for our exports. But it is not the only example.

We’ve seen interest in a trade deal with Japan. Japan really wants us to be their buddies. If they have to yield on some trade points, that is an easy trade-off for them. They need us from a military perspective. They need us, if for no other reason than to just not stand in their way so that they can rework the strategic geopolitics of the Far East to their preferences.

Recently, you suggested producers follow this suggestion from former Intel CEO Andy Grove: ‘Only the paranoid will survive.’ What does that mean?

BOZIC: First, Intel Corporation makes processing chips for computers. This quote was from back in the 1980s. They were a dominant player in that field. They were not really threatened by the second best because they were so far behind them. What they understood was that unless the next generation of chips is so much better than the previous one, or if they ever started resting on their laurels, they’d be gone. So what I am trying to communicate to their producers with this admittedly very colorful metaphor is that there is no time to just have peace with where you are.

In economics, we often talk about equilibrium. In reality, there are only two states: Either you are growing or you are dying. You choose which one because there is no middle. Dairy producers will be well advised to benchmark against the best, to constantly think whether they are in commodity space or differentiation space. If they are in commodity space, how can they lower their cost? And if they are in differentiation space, how can they stay differentiated? What is differentiation today is commodity tomorrow.

Tell me about the most meaningful conversation you’ve had in the past month in your dairy industry comings and goings?

BOZIC: I was invited to speak at a dairy association meeting in Vienna recently. There, I had the opportunity to have lunch with a processed cheese manufacturer from Austria. I asked her, “So what are you guys doing these days? What is your business plan?” And she said, “China. China is our big market.” I was like, “Really? Do they consume a lot of processed cheese there?” She said, “Oh yeah, the market potential is unlimited, but you have to adjust the flavor profile of the processed cheese for the market.” “So how do you adjust it?” I asked. “The cheese that we sell there has to taste almost as if it is rancid,” she replied.

Asian markets love different taste profiles, and I learned if you approach markets with an open mind and willingness to adjust a product mix or recipe, I think any market can be an opportunity for us as well. Personally, before that conversation I was thinking about our cheese exports mostly in terms of going after pizza markets overseas. I think that we should really, really look very closely into what the export markets can offer in a different respect.

What’s the worst advice you hear being dispensed today?

BOZIC: I am not going to name names, but a number of people are suggesting that a radical federal order reform would be helpful. They believe we should just dispense with minimum prices right away. I am more of a gradualist.

If you look at your phone when you type a text message, for example, the order of letters is q, w, e, r, t, y. Why? Why is it not just a, b, c, d, etc.? The reason for the order of the letters stems back more than 100 years ago when the first typewriters came into effect. The manufacturers of typewriters wanted to actually slow people down in their typing. That’s because if they were typing too fast, the typewriters would get clogged.

Today, there is absolutely no reason to maintain that system for a technology reason, and yet everybody’s brain is wired to use that ordering of letters. It is a trivial example, but it illustrates the power of dependence. The processing resources in the U.S. have been built around the plants. By that, I mean they have been built around the ability to focus on a narrowly defined product mix and they rely on pooling to pay sometimes higher, and sometimes lower, prices than what you can get on the market.

I think to just cancel all of that and liberalize the market fully would have some unintended consequences. Now, I am not advocating that we should forever keep regulations as they are right now. We should, of course, adapt – but there has to be a more gradualist approach, an approach that introduces additional incentives to think about global markets. Whenever you try to change something that existed for many, many decades, and if you try to change that overnight, you may have more unintended consequences that you can model up-front. We should be careful about that.

What’s a topic you wish were being discussed more in the dairy industry right now?

BOZIC: I must say I am really pleased with the focus on medium and long-term issues and trends. I think the industry is aware that times are changing and that everybody has to change, so I don’t see a particular lack of conversations on those important topics. I think our eyes should be firmly set on markets: How do we serve the markets, how do we expand our markets, and how do we preserve our social license to operate in the process of doing that?  end mark

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