Over the last generation, the U.S. has become a dairy export juggernaut; the worldwide economic downturn interrupted the growth in sales, but the outlook for the future is bright.

 

In 2009, according to the U.S. Dairy Export Council, 9.2% of U.S. dairy production by volume of milk solids was exported. That was down a bit from the 10.8% sold overseas and across the border—Canada and Mexico are America’s biggest customers—the previous year. But it’s substantially more than the 4-5% being sold just a decade ago. “And almost all of that was being subsidized through the Dairy Export Incentive Program,” says Bob Yonkers, vice president and chief economist of the International Dairy Foods Association. Now, the DEIP is practically unused, although Agriculture Secretary Tom Vilsack did revive the program during the depths of the 2009 dairy economy. “When you think about it,” says Yonkers, “if one out of every 10 lbs that comes out of a milk cow here in the U.S. is being exported, that’s a very important market to us.”

 

Even the reinstitution of DEIP in 2009 had a relatively minimal effect on the market; Washington’s obligations under the World Trade Organization limit the amount of subsidies that can be used in a given year. Vilsack had said the move was justified because the European Union had also restarted dairy export subsidies, causing U.S. market share to erode; under the program, USDA offers exporters surplus product to buy down their sales prices and allow them to compete.   About 200 million lbs of product was offered, less than 10% of the 2.15 billion lbs of U.S. milk solids exported in 2009. Under the WTO’s Doha Development Agenda, the U.S., Europe and other major industry players belonging to the trade body have agreed to phase out dairy export subsidies entirely. Doha has been going on since 2002 and has been stalled for several years; on the other hand, says Yonkers, “There isn’t any interest in going back and renegotiating the elimination of export subsidies, so those will be phased out when the next round of trade negotiations is implemented. And we think that’s a good thing.”

 

It’s a good thing to the IDFA, which represents 220 U.S. dairy processors and 320 allied industry companies, because U.S. dairy exports have until recently been going up, while imports have been declining. Yonkers says historically, the U.S. has imported around 4-5% of domestic consumption; much of it very high value-added cheeses, and one reason imports are falling is an increase over the last decade in U.S. specialty cheese manufacturers. They won’t entirely displace the imports—as Yonkers says, “For the same reason people like to drink imported wines, there’s a certain class of people in the U.S. that want to consume imported cheeses”—but U.S. processors are capturing a greater share of that domestic market.

 

Another heavily imported product has been milk protein concentrates. At one point, U.S. processors imported tens of millions of pounds of MPC a year from Australia, New Zealand and the European Union; in 2003, the National Milk Producers Federation filed a complaint with the Commerce Department’s International Trade Commission, alleging the imports were subsidized and costing U.S. farmers $750 million a year.

 

However, Yonkers says U.S. imports of MPC are declining, because processors are now making their own. “We were not doing so to any great degree five or six years ago,” he says. “Since then manufacturing plants have put in the membrane filtration technology, which is very expensive and requires a lot of upkeep and maintenance and replacement.” But they’re willing to spend the money because there’s new demand in the U.S. market—MPC is used to make sports drinks and power bars, as well as geriatric and infant formulas. Yonkers says when domestic food processors started making those products a decade ago, the only source they had was from overseas; now, they can get more of the high protein ingredients here.

 

The global economic downturn affected dairy farmers around the world; when it hit, they were still saddled with high feed costs as grain and oilseed producers diverted much of their production to meet rising demand from the rapidly growing biofuels industry. The sudden drop in dairy consumption produced a double whammy that veteran U.S. dairymen said was the worst in their memory. In her May, 2010 Livestock, Dairy and Poultry Outlook, USDA economist Rachel J. Johnson said the economic recovery was continuing and boosting international trade in dairy products; she predicted higher exports on both a fats and skims-solids basis. “U.S dairy products are competitively priced on world markets, and production from Oceania countries fell short of early season forecasts,” Johnson said. “Also, there is no indication of the EU reinstituting export restitutions.” Although sales of nonfat dry milk lagged early in the year, she said there was potential for second half 2010 improvement; meanwhile, skims-solids exports are expected to reach 25.3 billion pounds in 2010 and 27.0 billion pounds in 2011.

Yonkers says historically, the strongest U.S. dairy exports in sheer volume have been products derived from whey, like proteins and lactose; 40-70% of the production is exported. Skim milk powder is also a popular export item. While Canada and Mexico tend to buy finished products that they have difficulty producing domestically, bulk commodities like whey derivatives and dry milk are increasingly going into Asia. “China, Korea, Malaysia, Indonesia, the Philippines are all big markets for those products,” says Yonkers. “Those are the developing economies in the world that are growing the fastest, and as they’re Westernizing their diets they’re looking for protein feeds to go into livestock feeds.”

 

As a result, China’s notorious 2008 melamine scandal had little impact on U.S. dairy exports. Chinese dairy processors were discovered to have been spiking the low-protein milk they were receiving with the chemical byproduct, which is rich in nitrogen and fools protein testers. But the products were inadequate nutritionally, sickening thousands of children and killing several infants. The discovery led to a massive recall and caused consumers to turn away from dairy foods, but did not affect the flow of proteins for livestock feed into China from the U.S. “We continue to come some issues with trade with China,” says Yonkers, “not only in dairy but in a broad range of issues, but we’re continuing to try to work through those because that’s a huge potential market for us.”

 

Although other countries, notoriously Russia, have been known to impose impediments to U.S. exports, the rapid food price inflation of 2007 and early 2008 actually had the opposite effect—countries that had previously been exporters of dairy and other foodstuffs cut off sales in order to ensure adequate domestic supplies. India, in particular, with limited resources and 1.2 billion mouths to feed, stopped exporting skim milk powder. “They consume an awful lot of dairy products, and actually are one of the world’s largest dairy producers after the United States,” says Yonkers, who notes not all of the milk comes from cattle—water buffalo, goats and sheep are also sources.

Where the global downturn had the most effect on dairy trade was in developing nations with state agencies that procure food for hunger and nutrition programs; those bodies were short of capital and credit. Is the market getting back to normal? Yonkers says, “It depends what you define as normal. A lot of people would say we had very strong growth in the last 15-20 years internationally in our economic markets, and perhaps that wasn’t normal, either. Certainly we’re not back to the growth rate in the international economy that we were in 2006-07, when things were growing very rapidly. But international prices for dairy products have recovered, and some of them have increased by more than 100% from their lows that they encountered last year. And that’s one reason why milk and dairy product prices in the U.S. are higher.”

 

Only about 7% of the world’s dairy production enters trade channels. As of 2008, the European Union was the biggest exporter, commanding 31% of the market; New Zealand was second at 28%, followed by the U.S. and Australia with 10% and 9%, respectively. In particular, New Zealand has geared up for the market; the island nation has increased production over the last 25 years by well over 50%, and exports 95% of its production. They’re also the world’s lowest cost producers.