We’ve entered the era of a global dairy market, Vernon Crowder, food and agribusiness research economist with Rabobank, told audience members this week at a dairy financing conference in Visalia, Calif.
The U.S. market is now linked to the world market and will continue to be connected in the future, he said.
Traditionally, the world’s dairy industry has been very fragmented. International trade has been very thin. Markets have been highly distorted by regulation, which has ensured limited connectivity between pricing in different markets around the world.
However, these things are changing.
Global dairy consumption is improving and should continue to do so as the world economy recovers. The world economy is expected to grow 4 percent this year, compared to a 20-year average of 3.5 percent. China and Russia are expected to exceed the average growth rate.
China’s dairy growth continues to be shaped by food-safety scandals in the country, as China doesn’t trust its own indigious milk supply.
Global milk supply is expected to expand along with increased global demand, but higher grain prices may temper some of that growth.
Crowder says he expects global dairy commodity prices to remain extremely high through 2011, but he has some concerns regarding the fourth quarter.
Risks to be aware of are overproduction in the United States or European Union and if China and/or Russia don’t come to the party. Both of these risks could have a negative impact on dairy prices.
On the upside, India may run short of milk, which would have a positive impact on milk prices. And, any weather disruptions to the next growing season in New Zealand would also have a positive impact.
For now, the prognosis is good, but volatility will remain.
To be a player in the new global dairy era, Crowder says the U.S. dairy industry needs to get itself export-ready. Historically, the U.S. has not been export-ready. Among other things, the U.S. has often been faulted for not meeting the exact specifications of foreign buyers.
There is a real cost to this, he notes. U.S. commodities are sold at a discount; industry-funded subsidies are used in a boom environment, and milk prices are lower in the U.S. than they could be as a result of ineffective role of the U.S. market. Crowder notes that U.S. farmers are now receiving less for their milk than New Zealand farmers.
The solutions to these problems are straightforward, but require application by the processors, notes Crowder. There are signs that progress is being made, but the U.S. market discount suggest the industry isn’t there yet.
The old regulatory system is no longer appropriate, he adds. The old system was designed for a domestic market era; the Dairy Export Incentive Program has little firepower, and the Commodity Credit Corporation provides little protection.
The era of the global market will open up opportunities for dairy producers. But this new era is going to be characterized by volatility, says Crowder. Businesses need to be well-managed to minimize the volatility and robust enough to withstand the volatility that they can’t mitigate.
The U.S. dairy industry has entered a global market era and it can’t go back. In order to thrive in this new era, the U.S. dairy industry needs to act now.