A simple principle of economics is that when production outpaces demand, you either cut production or open new markets.
Over the last three decades, the dairy industries in the main milk-producing regions of the world have opened international markets as they search for destinations for a growing supply of milk.
Global trading of dairy products is still new compared to other agricultural commodities, but it presents a huge opportunity for sellers who can learn the system. To help, here’s a high-level look at the global field of play.
Meeting demand in the Americas
One of the most mature export destinations for dairy products on the world stage is Mexico and Latin America. The U.S. supplies most of these nations’ dairy imports. That’s even though many of these nations have their own dairy production capacity. Here’s how the dynamic plays out:
- Mexico and its Central American neighbors have dairy farms of their own that can supply part of their domestic demand, but not all of it.
- Meanwhile, the dairy industries in Brazil, Argentina and Uruguay are big enough to meet their domestic demands with enough milk left over to balance the demands of their South American and Central American neighbors. However, political uncertainty and self-destructive agricultural policies in those nations result in inconsistent supplies.
- South American and Central American nations tend to buy dairy products from the U.S. to meet leftover demand, even if they’re geographically closer to South American dairy producers. The U.S. provides a more reliable supply of high-quality products and ingredients.
As global dairy consumption continues its upward trend, this region will remain a key export market. The U.S. is the logical supplier, but it isn’t automatic business. When buyers buy on price alone, fluctuations in world supply and price sometimes mean far-flung producers in the E.U. or New Zealand get the business instead.
The Middle East and North Africa
Dairy products are nothing new to populations in the Middle East and Africa. But rapid modernization of economies and tastes, especially in Saudi Arabia, Egypt and the United Arab Emirates, has led to the need to import dairy products to meet growing demand.
There is some domestic milk production in these areas. In fact, some large-scale dairy farms now dot the deserts of Saudi Arabia despite the obvious challenge that invites. However, in general, domestic production in the Middle East and North Africa doesn’t come close to meeting their growing demand.
The region would likely be a more active importer of dairy products, but a few factors hold it back. First, it’s hard to get products to some of these markets. The only “easy” dairy trading pathway is to ship products across the Mediterranean from the E.U. Accordingly, French producers have all but cornered the North African market. Producers in Oceania and the U.S. usually can’t compete. The only way they can sell into this part of the world is if their prices are at a deep enough discount to overcome the higher cost to ship long distances. And buyers who need their products right away won’t be willing to wait 60 days for a shipment from the U.S., regardless of the price.
Another factor holding this region back from having its demands fully met and its markets fully opened is a lack of purchasing capital. Simply put, there’s not enough cash, especially in Africa. The lowest prices on dairy products are secured when large volumes are ordered, but African buyers usually only place these large orders while also asking for generous extended credit terms since they lack the up-front capital.
Some programs exist to assist cash poor buyers in financing their purchases. For example, the USDA’s GSM 102 program guarantees credit so that developing countries can finance imports of American products.
It’s a start, but it’s also cumbersome. All other things held equal, sellers favor buyers whose financial position isn’t in question.
East Asia is the hottest export market on the planet
East Asia, led by China, Japan, South Korea, Vietnam, Malaysia and The Philippines, is characterized by explosive population growth and accompanying food and feed demands that cannot be met domestically. The region’s need to import dairy products is acute, as east Asian nations tend to lack the space and resources necessary to cultivate modern dairy industries capable of meeting their domestic demands.
Dry products like nonfat dry milk, milk proteins and whey proteins dominate the volume of dairy products shipped to east Asia. Uses for these products break down this way:
- A growing portion of Asian populations are gravitating toward supplementing traditional diets with high-protein products popular in the West.
- Asian livestock farmers have gradually adopted the American system of feeding hogs, cattle and chickens on a massive scale. That necessitates supplementing livestock diets with dairy proteins to maximize the desirable qualities of the meat that livestock eventually becomes.
In terms of value, cheese is the most valuable product exported to east Asia. The trend started in the 1980s, as rapidly-modernizing populations in Japan and South Korea began adding Western foods into their diets. With the help of American firms sourcing their products from the U.S., the Japanese and Koreans fell in love with pizza and the mozzarella cheese that topped it.
Today, cheeses remain the most valuable product segment exported to east Asia from around the world. High-producing regions like the U.S., Oceania and Europe all recognize the trends and are in fierce competition to grow their shares in this lucrative market.
Building relationships to meet global dairy consumption trends
Global dairy consumption will continue strengthening. As the world’s dairy exporters clamor to meet these growing needs, they’ll have to work within a worldwide dairy trade system still in its infancy compared to other commodity markets.
The bottom line may be the ultimate driver for buyers and sellers, but building relationships must also be a part of the process as the global dairy trade matures.
T.C. Jacoby & Co. is at the forefront of dairy exporting. As co-founders of the U.S. Dairy Export Council (USDEC), we helped open international dairy markets that provided new ways for the industry to thrive. We continue our work by forging relationships with buyers in the key regions noted above. We don’t always win the business, but we make sure buyers have options, a key risk management strategy we’ve mastered. Seven decades in the business has taught us that things can change in an instant, and we’ll be ready if they do.
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