Dairying in a flatter, globalized world

By Tom Suber

Dairy producers enter a new year and decade with no shortage of challenges. Perhaps topping the list: dealing with an increasingly globalized playing field.

The proportion of our milk supply sold overseas is close to double what it was a decade ago. But that’s just part of the story. Globalization affects everyone in the supply chain, from cow to consumer, according to a new report titled “The Impact of Globalization on the U.S. Dairy Industry: Threats, Opportunities and Implications.” The study was conducted by the Innovation Center for U.S. Dairy, with support from Bain & Co., an internationally recognized management consulting firm.

“Global dairy trade has undergone a significant transformation,” the report said. “The dairy industry is an increasingly integrated network of markets and suppliers. The confluence of increased demand for dairy products in non-producing regions, reduced trade barriers, improved production, processing and logistics capabilities of suppliers, and emergence of global dairy companies has led to increasing levels of global dairy trade from an unprecedented number of sources. Although the majority of dairy is consumed locally or regionally as fluid milk – leading to relatively thinly traded global markets focused mainly on ingredients – increased global trade nonetheless has influenced the dynamics of domestic markets in dairy producing regions.”

As we saw in 2009, even if you don’t directly export, the survival of your business can be heavily influenced by economics, weather conditions and policy decisions on the other side of the world.

One problem, the Globalization report concluded, is the American dairy industry is not set up to accommodate a global market. Structural constraints, many of which took hold decades ago when the world was a very different place, get in the way. Major challenges cited include severe price volatility, market-distorting price mechanisms and, generally speaking, insufficient customer focus, leading to narrow product ranges, fickle customer service and inconsistent product quality.

Don’t expect a return to the “good ol’ days.” In a globalized dairy world, “supply and demand imbalances will drive continued volatility,” impacting domestic and international players in the United States.

What can the U.S. industry do about it? More of the same is an option, but not a good one. “Maintaining the status-quo will likely result in a weakened U.S. industry,” the report said, characterized by limited growth opportunities, continued volatility and erosion of U.S. competitiveness both here and abroad.

Instead, the industry would be better served by strengthening specific competitive weaknesses and developing a “consistent exporter” strategy. To do this, the industry must transition from production-centric to customer-centric.

Armed with this analysis, the Innovation Center board, made up of 32 CEOs, general managers and chairs from all industry segments, is addressing the structural barriers that prevent the industry from being customer-centric. It identified priorities, developed a focused plan and created a Globalization Operating Team. Groups are moving forward with plans to engineer policy, promotion and innovation adjustments better suited to accommodate a globalized competitive landscape.

Potential changes are aimed at improving suppliers’ commercial focus, developing capabilities to deliver on customer product specifications. Other initiatives will help suppliers address crippling price volatility, with new mechanisms for risk management. There could be reform of the current pricing regime as well, with many taking a look at whether the support program and classified pricing system impede global competitiveness.

Change always creates new challenges, but “a ‘do-nothing’ strategy is both insufficient and dangerous to the health of the sector,” the Globalization report said. “The underlying trends that are likely to create a global demand gap in dairy run deeper than today’s business cycle and are broader than current U.S. dairy policy,” it concludes.


Tom Suber is president of the U.S. Dairy Export Council. Contact him via e-mail: tsuber@usdec.org or visit www.usdec.org.