Tackling trade: how two dairy cooperatives function in world markets.
Each of the cooperatives provided an overview of their international marketing efforts during the 2015 USDA Agricultural Outlook Forum. Jay Waldvogel of DFA discussed the cooperative's approach to trade with China. From the other side of the globe, Rick Pedersen gave Fonterra's global perspective on sourcing dairy products around the world.
DFA is a leading milk marketing cooperative and dairy food processor that was formed by a merger of four dairy cooperatives in 1998. Since then, more dairy cooperatives have merged into DFA and the cooperative now has more than 14,000 farmer-members who operate more than 8,000 farms in 48 states. DFA members produced nearly 20 percent of the nation's total milk supply in 2013.
DFA is also a dairy foods processor with investments in brands and plants that bring added value to members.
The co-op delivers raw milk to various customers and joint venture partners. It also makes cheese, butter, dairy ingredients and various consumer products in its extensive, nationwide system of manufacturing plants. Counting both member and nonmember milk, DFA uses about 30 percent of the nation's milk for its activities.
The co-op's core business is marketing members' milk, paying members a competitive price and providing leadership in the forging of dairy industry policy. In addition, DFA offers programs and services aimed at making it easier and more profitable for their members to farm.
Fonterra (which means "spring from the land") was formed in 2001 to represent the interests of most of New Zealand's dairy farmers. The milk produced by Fonterra's 10,500 farmer-shareholders in New Zealand amounts to more than 90 percent of the country's milk. However, over one-fourth of the total milk processed annually by Fonterra worldwide--about 50 billion pounds in 2013--is sourced from outside of New Zealand.
Fonterra is the world's largest dairy exporter, Pedersen said, sending milk products to 140 countries. Fonterra sources some of its fresh milk from within such key markets as Australia, Chile, Brazil, Sri Lanka and North America. The cooperative also produces its own milk in China on two farms with three additional farms under development. Fonterra produces more than 4 billion pounds of dairy ingredients, specialty ingredients and consumer products annually, nearly all of which is exported.
Global dairy trade
Global milk production is led by the 28 countries that make up the European Union (EU), the United States and India. The EU produced more than 300 billion pounds of cow's milk in 2013, while the U.S. produced around 200 billion pounds. India produced 127 billion pounds of milk from cows and another 170 billion pounds from buffalo.
However, less than 10 percent of global dairy production is traded across national borders. According to Pedersen, in terms of total product-pounds, the top exporters are the European Union, New Zealand and then the United States. The top importers are China and Russia, followed by Mexico.
Table 2 shows milk production and export levels of four major dairy products that are commonly traded internationally. The United States is a leading producer of cheese, nonfat dry milk (NDM) and butter. New Zealand is the world's top whole milk powder (WMP) producer.
The United States exports a minor share of the cheese, butter and WMP it produces (6, 11 and 36 percent of domestic production in 2013, respectively). NDM is the only product where a majority of the U.S. domestic production was exported in 2013 (58 percent).
In contrast, New Zealand exports almost all of the dairy products it makes. It is the world's leading exporter of butter and WMP. Indeed, more than 60 percent of the butter and whole milk powder traded worldwide in 2013 were exported from New Zealand.
Contrasting marketing environments
The statistics outlined in tables 1 and 2 highlight the different market environments faced by dairy producers in the two countries. The United States produces almost 20 percent of the milk produced worldwide, but uses nearly one-third of it for fluid purposes within its borders. In contrast, New Zealand ranked seventh among the milk producing nations and accounted for less than 5 percent of worldwide milk production in 2013 (USDA Foreign Agricultural Service). Furthermore, just 2 percent of the milk produced in New Zealand is used for domestic fluid use.
The sheer size and dynamism of the U.S. market has drawn multinational dairy companies, including Fonterra, to the U.S. market (USDA Economic Research Service). New Zealand's milk production far surpasses the ability of its domestic market to absorb it. So, export markets are vital to the livelihood of New Zealand's milk producers.
Export markets are growing in importance for the U.S. dairy industry. Dairy exports from the United States rose from about 5 percent of total milk solids produced in early 2000s to 15 percent in 2013-14.
Export markets became more attractive to U.S. suppliers as world prices for dairy products converged with domestic prices, in part because of tighter global stocks of dairy products, milk production declines and rising demand in various foreign countries. The relatively weak dollar value vs. some major foreign currencies also played a role (although recently, the dollar has strengthened). The favorable conditions spurred some U.S. dairy marketers to seek to become reliable suppliers to world markets, rather than making intermittent sales of surplus products. The increasing quantities exported also contributed to bolstered prices for U.S. producers.
Different approaches to markets
As cooperatives, Dairy Farmers of America and Fonterra are each owned and controlled by their producer-owners; they are operated to best secure optimal market outlets for their members' milk.
However, a cooperative's structure and operational focus reflect the character and aspirations of its membership. This is influenced by the economic, social, market and agricultural environment members operate in (Ling, USDA Cooperative Programs). Accordingly, DFA and Fonterra have taken different approaches to find and preserve markets for their members' milk (table 3).
DFA's approach--Waldvogel explained that DFA's approach to world markets is to build upon the capacity it has developed domestically. He pointed out that export markets offer "more people, more money, more places." International markets can be a viable outlet for ever-expanding U.S. milk production, a growing opportunity to market member milk.
DFA's approach to exporting is to:
* Enter markets where DFA is competitive;
* Focus on volume growth and value-added products;
* Build relationships in international markets;
* Understand and manage risk.
As an example of DFAs strategy for international marketing, Waldvogel described the co-op's efforts in China. DFA's products are competitive in China due to that country's "food challenge": a large, growing population and limited farmland and fresh water all combine to contribute to relatively higher cost of milk production. The coop focuses on developing new market demand by developing premium and new value-added products.
DFA supports its customers who sell into global markets. The experience gained in working with the customers' exporting efforts provided opportunities for DFA to cultivate relationships directly with businesses in China. For example, the co-op now has a joint venture with a Chinese company.
DFA built a plant in China to demonstrate DFAs long-term commitment to the Chinese market. The goal of the joint venture is to supply new needs, not replace existing suppliers. Supply agreements with national and global customers will expand the market for member-producers' milk.
Fonterra's approach--By necessity, Fonterra has been more aggressive in entering international markets than DFA. Due to population growth, rising prosperity in developing nations and urbanization, Pedersen expects worldwide consumption of dairy products to rise some 36 percent over the next decade, requiring a whopping 1.4 trillion pounds of liquid milk to make those products.
The co-op's New Zealand production base has limited capacity for growth. Therefore, as world trade expands, its market share could shrink, perhaps undermining the co-op's dominant role in world trade.
To complement the production of their New Zealand farmer-shareholders and to ensure they are always able to supply their customers, Fonterra has developed local supplies of fresh milk in key foreign markets. In addition, through its partnerships, the co-op has a global manufacturing footprint and can source a variety of products from its various "hubs" around the world.
Calling this a multi-hub strategy, it allows the co-op to better match demand growth to the co-op's best source of supply.
Fonterra views China as a key strategic market because it is one of the world's largest markets for dairy products. It is a key market for Fonterra ingredients, foodservice and consumer products. Fonterra is seeking to enhance its already significant presence there by investing directly in dairy farms. The co-op believes the local milk supplies will provide it with a platform to develop partnerships down the marketing chain within China.
These two cooperatives show that the cooperative form of business is effective in securing markets for dairy farmers. The examples of DFA and Fonterra illustrate the far-reaching efforts cooperatives can and do take to efficiently market milk and dairy products to domestic and world markets. Cooperation has allowed farmer-members to focus on the efficient production of quality milk by assigning the marketing function to their cooperatives.
Editor's note: This article focuses on the findings of two cooperatives presented at the 2015 USDA Agricultural Outlook Forum, held in Arlington, Va. in February. The author welcomes your feedback on this article: Carolyn.Liebrand@ wdc.usda.gov.
* Pedersen, Rick, "Becoming Globally Relevant: Sourcing Dairy from Around the World," Fonterra North America, presentation to the USDA 2015 Agricultural Outlook Forum, Washington, D.C., February 20, 2015. http://www.usda.gov/oce/forum/2015_S peeches/RPedersen.pdf
* Waldvogel, Jay. "Dairy Farmers of America's Joint Dairy Venture with the Chinese," Dairy Farmers of America, presentation to the USDA 2015 Agricultural Outlook Forum, Washington, D.C., February 20, 2015. http://www.usda.gov/oce/forum/2015_S peeches/JWaldvogel.pdf
* USDA Foreign Agricultural Service http://apps.fas.usda.gov/psdonline/psdQ uery.aspx, downloaded 4/14/2015.
* Ling, Charles. "The Nature of the Cooperative," Cooperative Information Report 65, United States Department of Agriculture, Rural Development, November 2014, page 11.
By Carolyn B. Liebrand
USDA Cooperative Programs
Table 1--Milk production in the United States and New Zealand, 2013 COUNTRY COWS MILK SHARE DOMESTIC PRODUCTION FLUID USE Billion Percent of Percent of pounds total * domestic production production United States 201 19 31 New Zealand 45 4 2 Total * 1,032 100 COUNTRY DFA Billion Percent of pounds domestic production United States 39 19 New Zealand Total * COUNTRY FONTERRA Billion Percent of pounds domestic production United States New Zealand 41 91 Total * Sources: Hoards Dairyman, USDA Foreign Agricultural Service * Total, 16 selected countries Table 2--Dairy products, production and exports, 2013 COUNTRY PRODUCTION RANK SHARE (1) Million Percent of pounds total * production Butter United States 1,863 3 9.2 New Zealand 1,179 4 5.8 Total * 20,172 Cheese United States 11,100 2 28.6 New Zealand 686 8 1.8 Total * 38,830 Dry Whole Milk Powder United States 73 11 0.7 New Zealand 2,866 1 28.8 Total * 9,963 Nonfat Dry Milk United States 2,108 2 24.2 New Zealand 891 4 10.2 Total * 8,715 COUNTRY EXPORTS SHARE RANK (1) Million Percent of pounds domestic production Butter United States 203 10.9 3 New Zealand 1,120 95.0 1 Total * 1,797 Cheese United States 699 6.3 2 New Zealand 611 89.1 3 Total * 3,721 Dry Whole Milk Powder United States 26 36.4 6 New Zealand 2,846 99.3 1 Total * 4,396 Nonfat Dry Milk United States 1,224 58.1 1 New Zealand 864 97.0 3 Total * 3,666 Source: USDA Foreign Agricultural Service (1) Rank among reporting countries * Total, 13-20 selected countries representing approximately 90 percent of world trade volumes Table 3--Milk marketing environment, Dairy Farmers of America and Fonterra Attribute DFA Milk production Thirty percent of the nation's milk production is domestic fluid use. (62 billion pounds in 2013.) Co-op's role in Significant (members produce 19 percent of the domestic domestic production). Co-op markets 30 percent market of the nation's milk. Export markets Volume exported growing--from about 5 percent of total milk solids produced in early 2000s to 15 percent in 2013-14. Minor shares of the nation's butter, cheese and whole milk powder are exported. Majority of the nation's nonfat dry milk production is exported (58 percent). Co-op's export Enter markets where the co-op's products can strategy compete. Follow their U.S. customers into foreign markets. Focus on building lasting relationships directly with international customers. Attribute Fonterra Milk production Two percent of the nation's milk production is domestic fluid use. (1 billion pounds in 2013.) Co-op's role in Dominant role (members produce 91 the domestic percent of domestic production). market Export markets Must grow milk supply from international sources to maintain international market presence. Almost all of the dairy products produced domestically are exported (89 to 99 percent). Co-op's export Develop a global manufacturing footprint. strategy Source milk supplies globally utilizing a multi-hub strategy to match demand growth to best source of supply. Invest in foreign dairy farms to enhance downstream partnerships.
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|Author:||Liebrand, Carolyn B.|
|Date:||May 1, 2015|
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