Impact on US dairy prices minimal under trade liberalization, study predicts

However the subsequent rise in international prices due to trade liberalisation would provide an opportunity for US companies to compete in other markets, the USDA stated.

The US is a significant dairy market in the international arena—as an importer of certain products and, more recently, as a source of supplies for export by international dairy firms.

The study was published as the US and other countries enter negotiations to eliminate trade barriers, including subsidies and tarrifs, used by countries to protect their domestic dairy industries. The barriers result in keeping the price of milk and milk products lower than they would have been without the protection.

"Globalization of dairy markets provides a potential opportunity for producers of certain US dairy products, such as dry milk powders,"​ the USDA report stated. "The sheer size of the US domestic market and projected higher international prices, which could rise even more if the current round of trade negotiations leads to further trade liberalization, suggest that there may be additional opportunities for the US dairy sector in international markets in the future."​

Changes in global dairy markets are taking place in the context of significant market intervention by some of the world’s leading dairy product importers and exporters.

Of the three largest exporters, only the EU intervenes significantly in its dairy markets. Canada, the US and Japan also have significant domestic dairy policies, but all three countries are net importers of dairy products.

Dairy policies around the world are changing slowly, primarily as a result of the Uruguay Round of trade negotiations. The dominant border measures now in place are tariffs or tariff-rate quota systems, and they are at the core of many issues surrounding market access.

Trade liberalization would generate relatively modest impacts on the US dairy sector because of the large size of the U.S. market and high level of efficiency of US dairy farmers.

If the efficiency of the US. dairy sector continues to increase as it has in recent years, it is possible that American dairy producers and manufacturers could even gain from trade liberalization, the USDA stated.

Analysis suggests that productivity increases as small as one percent a year would offset the impact of trade liberalization on US milk production.

"Empirical analyses of international dairy markets suggest that a global liberalization of dairy policies eliminating all tariffs, quotas, export subsidies, and domestic supports would lead to a significant increase in the world market prices for dairy products,"​ the USDA stated. "While the volume of trade would decline, primarily due to the elimination of export subsidies, the value of trade would increase.​"

The ongoing processes of technological change, globalization, and shifts in consumer demand are far more likely to affect the future of the US dairy sector than changes in dairy or trade policy.

Companies will have to adapt by using new processing technology and marketing tactics to meet the pressures of globalization, structural changes in world dairy markets and the potential for further trade liberalization according to the report.

The dairy trade is now increasingly driven by demands from developing-country consumers wanting to upgrade diets and developed-country markets seeking specialty products, the report stated.

In response the industry is producing products to meet the changing consumer demands, the USDA stated. The products range from basic raw milk to fairly standardized “commodity” products to an array of higher valued products that have only recently gained wider market presence.

Factors such as the emergence of sophisticated milk components as ingredients, greater emphasis on cheese variety and brands, recognition of well-defined local, national, and even international product markets, development of manufacturing processes that lengthen shelf-life and improved transportation systems have changed the way firms assess both domestic and global dairy marketplaces.

The major dairy products traded internationally can be broadly characterized as butter, cheese, dry milk powders, and ingredients. Within these categories are a large number of “differentiated products”—cheese varieties, dry milk powders with a range of fat contents, or milk components, such as the various milk proteins.

The ingredient trade has only recently emerged as a key sector, driven primarily by widening uses of milk proteins and lactose (milk sugar) in various food applications, the USDA stated.

In some developing countries with fast-rising urban populations, demand for dairy products is outstripping domestic milk production, providing opportunities for international companies.

The rapid growth in consumption is driving growth in dairy imports in land-scarce Southeast Asia and in China. New Zealand’s dairy exports to the EU have remained nearly unchanged for 25 years, but the EU share of New Zealand’s dairy exports has dropped to eight per cent from 30, due largely to increasing exports to developing countries in Asia.

Because water and land needed to produce high-quality dairy feed are limited in these countries, rising demand has exerted upward pressure on international dairy prices. As a result, the gap between prices of milk received by farmers in the US and New Zealand’s price has diminished in recent years to $128 per metric ton in 2004, from $147 per metric ton in 2000.

The study notes that US domestic dairy industries and markets worldwide are often cast as heavily protected with limited exposure to global competition. Despite the high tariffs and price support policies, milk producers and dairy companies still face increasing competitive forces from outside their borders.

Competition worldwide has given rise to increasing dairy consumption, trade, and foreign direct investment in domestic dairy industries, and though many trade barriers remain in place, they do not appear to be stopping globalization of the dairy industry, the USDA noted.

In this environment, domestic dairy sectors must compete aggressively for a share of consumer food budgets and for resources and investment capital. Dairy farmers, processors, and manufacturers who prosper are those who continuously innovate by adopting new processing technology and adapting to changing consumer demands.

While these forces have brought about major changes within the US dairy industry, namely, expansion and significant consolidation, the sector will still have to adapt. The industry's advantages include the presence of efficient production systems open to foreign investment and a large, growing population of affluent consumers.

Direct investment across borders has also altered competition in dairy markets, the report stated. Globalization has tended to emphasize the strength of multinational dairy firms, with the most prominent being Switzerland-based Nestlé, Denmark and Sweden-based Arla Foods, France's Danone and Lactalis, New Zealand's Fonterra Co-operative Group, Netherlands-UK based Unilever and US-based Kraft Foods.

While competition among firms has grown, so has the number of firms joining forces. International dairy companies are repositioning themselves to source milk and products from multiple locations. This trend is spawning partnerships and joint ventures among firms seeking to benefit by controlling all stages of the production process.

Multinational firms can operate in several countries or regions using any number of approaches, the report noted. They build new facilities to manufacture locally-demanded products, or they form alliances or partnerships with existing local firms. The purchase of local brands is another option.

"A strategy that employs all of these approaches enables multinationals to reduce price risks and market volatility,"​ the USDA stated. "While multinationals are most active in stable, well-established markets, alliances or partnerships with local firms have helped them expand to emerging markets in recent years."​

For example Nestlé and Unilever have gained a major stake in the US ice cream industry through purchases of local brands. Together, they account for about 30 per cent of supermarket ice cream sales in the US.

Several French companies—Fromageries Bel, Sodiaal, Lactalis, and Bongrain—are involved in the local yogurt and cheese markets. Yoplait, a premier brand of Sodiaal, has been licensed to General Mills, while the Président brand of cheese is a Lactalis product manufactured in Wisconsin and California.

New Zealand’s Fonterra, the world’s top dairy product exporter, has teamed with Dairy Farmers of America, the largest farmer-owned dairy cooperative in the country. The resulting partnership, DairiConcepts, produces and markets milk protein concentrates—the first commercial production of its kind in the US.

Fonterra has also entered into an agreement with Dairy America, a marketing cooperative, to serve as the marketing agent for the nonfat dry milk received from seven US farmer-owned dairy cooperatives.

Fonterra is considered a “partnership model” because of the growing number of foreign companies with which it has established links. This strategy enables it to access dairy markets where dairy demand is met by local supply.

Its other partnerships include joint ventures with Nestlé through Dairy Partners Americas in South America, Arla Foods in the UK, Clover Industries in South Africa, and Britannia Industries in India.

Fonterra is the world’s largest dairy ingredients company, but is also a supplier of consumer branded products, such as its Anchor brand butter, Anlene brand milk powders, and Mainland brand cheese products. Fonterra has a major stake in the Australian dairy company, Bonlac Foods Limited, and has undertaken the formal merger of both companies’ consumer products operations in Australia and New Zealand.

Foreign direct investments in the US dairy product markets contribute to the continued strength of domestic markets for products produced from domestic milk, the USDA concludes.

"As global dairy markets evolve, policies designed to limit foreign competition will become less relevant,"​ the report stated. "Moreover, protectionist policies can be detrimental to a country’s continued longrun prosperity as new opportunities are squandered. How trade policy supports US dairy farm income is less clear today than in the past, given rapid changes in the structure of the industry. The efforts of U.S. milk suppliers, processors, and product marketers to remain competitive in a global setting are continuing to benefit U.S. dairy farmers and consumers."​