Global markets offer huge dairy export opportunity for California, Rabobank

Growth in domestic markets are limited for California, with sales of fluid milk for example, lying almost flat for some time despite its growing population, said Rabobank’s FAR report “CaliforniaDairy: Turn West”.​

In the domestic market, the region also faces other constraints, such as the expansion of its US cheese business, producing twice of the product as it consumes, said the market analyst.

However, demand for dairy goods in countries such as China, Vietnam and Brazil is booming, with double digit growth in recent years.

This has been underpinned by population growth, rising incomes, urbanisation and Westernisation of diets, said the report.

Despite local investment, these regions are struggling to keep up with their own demand requirements, made even more challenging in the face of local supply disruptions such as the Chinese melamine crisis, the Russian drought and the Korean foot-and-mouth outbreak, it said.

Advantage over competitors​

California has some “clear advantages​” over global competitors like New Zealand, Australia and the European Union that all face constraints preventing them from filling this growing global demand for dairy products, said the report.

First of all, the country is geographically well placed to access certain markets.

“Proximity to California ports gives California processors an edge in getting their products to Asian markets less expensively,”​ it said.

In addition, California dairies have a low cost model, focused on efficiency and scale in milk production, according to the market analyst.

The region is therefore better positioned to ramp up production than dairies in other states and the potential to capture increasing demand from emerging markets, said the report.

“California is not the lowest cost producer of milk in the world, but it is the lowest cost producer that is capable of significant expansion in the medium term with acceptable investment risks,”​ said author of the report, Vernon Crowder.

Less experience in exporting​

Traditionally, the US dairy industry has viewed the global market as an outlet for excess production, rather than a primary target for their products, said Crowder.

The US dairy industry is generally less practised at maximising benefits in the world market. This is because for most of its history, the US has operated in a large, profitable domestic market, away from a global market that offered only discount pricing, said the market analyst.

However, other dairy industries such as New Zealand and Australia have not had the option to rely on a large domestic market and have therefore have had decades of refining their export businesses, it said.

“But the game has changed,”​ said the report. “The export market now offers pricing at least as attractive as that available domestically and provides the only real avenue to significant volume growth.”​

Boosting competitiveness​

In order to improve its global competitiveness, the report advised the Californian industry to strengthen its commercial relationships with buyers abroad and increase manufacture of products such as milk powder, cheese and butter to match the specifications of overseas rather US markets.

The report also recommended modifying some of the pricing schemes for exported commodities and employing financial tools, such as hedging, to take some of the risk out of volatile milk and feed prices.

Crowder said this “window of opportunity​” was expected to remain open to the US for the next five years.