Middle East Dairy Business: An inward look needs an outward focus, too

National Perspectives

By Dave Natzke

While many U.S. dairy farmers and organizations seek ways to balance domestic milk supply/demand as a means to improve U.S. dairy’s dreadful economic picture, others are seeking to build international markets. For dairy’s future, the latter should not be overlooked.

I had the opportunity to participate in a U.S. dairy export information mission in Dubai, in the United Arab Emirates (UAE), Feb. 20-26. In addition to U.S. Dairy Export Council (USDEC) and USDA staff, dairy producer participants included Paula Meabon, Wattsburg, Pa.; Kenton Holle, Mandan, N.D., and Paul Rovey, Glendale, Ariz., all who serve on the Dairy Management Inc. board.

A simile for the trip might be Dubai’s Burj Khalifa, the tallest building in the world. The building’s elevator isn’t working, and probably won’t be until May 1. So, while there’s lots of potential to reach new heights, more groundwork must be done first. The same is true for U.S. dairy export potential.

The Middle East’s growing population and social changes make it an attractive market. Population in the Middle East/North Africa region is forecast to reach 692 million by 2050. And, we were witness to a growing “westernization” of Dubai, with supermarkets and smaller stores featuring dairy cases rivaling or surpassing any I’ve seen in the U.S. for product offerings. Fast-food and casual dining restaurants bear names of those commonly seen in every U.S. city. While some of the buyers we met primarily served an elite, commercial business/tourism class, crowded markets revealed an emerging and growing middle class.

The arid climate of the Middle East means many of its countries import a majority of their food. It is a milk-deficit region, yet dairy is a traditional part of the diet, with a long history of consuming white cheeses, yogurt, butterfat and milk powder.

The European Union (EU) is the Middle East’s leading dairy supplier, with a 30% market share. New Zealand supplies 20%-25%; Australia, about 10%; and the United States accounting for 5%-10% of overall imports (milk-equivalent basis), including about 4% of cheese and 30% of whey proteins.

U.S. dairy exports suffered in 2009, and business with the Middle East was no exception. Competitive forces and the global financial crisis hurt buyers’ demand and credit availability. Sales growth in 2007-08, when U.S. prices were  favorable relative to world prices, was lost in 2009, when that relationship reversed. U.S. sales to the region (by volume) were down by about 50% from the prior year. New Zealand implemented aggressive pricing, and temporary reinstatement of export subsidies enabled the EU to pick up market share.

The United States has not been a consistent supplier of dairy to the region, providing 3% of total cheese imports in 2007; boosting that to 8.8% in 2008; falling back to 3.2% in 2009. Sweet whey concentrates saw a similar fluctuation: 27% in 2007 and 2008; to just 11% in 2009.

Looking ahead, Middle East trade agreements with EU and Oceania – some in place, others in negotiations – could have a significant negative impact on U.S. price competitiveness. But while logistics and prices currently put many U.S. companies at an economic disadvantage, the potential market is too great to overlook. That message didn’t just come from USDEC staff. It came from Middle East dairy product and ingredient buyers hungry for what we produce.

A centerpiece of our information mission was Gulfood, the Middle East’s largest food exhibition for the foodservice and hospitality business. Even more informational, however, were five days of meetings with dairy product and ingredient buyers. They identified several challenges facing U.S. dairy industry’s attempts to export to the Middle East are:

• Distance and logistics, which add costs.

• Middle East companies would prefer to deal directly with U.S. companies, but lower sales volumes and inexperience in world markets mean U.S. companies frequently use brokers. In some cases, brokers representing both U.S. and EU companies find financial benefits by steering purchasers to the EU.

• Product mix. The U.S. dairy product price support program provides a safety net for yellow cheddar cheese, salted butter and nonfat dry milk, which directs our production into those products because we have a guaranteed buyer of last resort. Middle East customers prefer other cheeses, unsalted butter, whole milk powder and anhydrous milkfat.

• Other product specifications. Whey derived from U.S. yellow cheddar cheese production discolors end-user products; whey derived from white cheddar produced by other countries doesn’t. Other U.S. products may contain ingredients not permitted by all religions/cultures, including some starches to prevent shredded cheeses from clumping.

• Lack of U.S. customer support for marketing and product utilization, including labels in Arabic and other point-of-purchase support.

• Financial transactions. EU companies use a central bank to provide financing/credit to Middle East buyers. Most U.S. sales are cash, and the cash must arrive before the product is even shipped.

• U.S. products are often “commodity” focused, while “branding” is important to Middle East consumers.

Another elephant in the room is “fear,” and it raised its head several times in preparation for the trip. Friends, bombarded by the region’s cultural and religious disputes nightly in television news, asked me: “You’re going to the Middle East? Aren’t you afraid? They hate Americans, you know.”

What I found was a business community that separates foreign policy and business transactions. They’re hungry for American dairy products, and eager to do business. They are, by nature, a trading people, with routes of commerce evident even in Biblical times. Personal relations are important in their business relations.

Farid Habibi, assistant general manager of Hassani Group, has high hopes for increased U.S. dairy product availability, and was most vocal concerning U.S. potential in the region.

“When the U.S. decides to focus on something, it is second to none,” he said. “The trouble is, the U.S. domestic market is so large, and the export market comparatively small, so the U.S. doesn’t focus on it. The U.S. could replace Fonterra without effort, and the EU doesn’t know where it wants to be politically.”

The most immediate opportunity for U.S. dairy probably remains dairy ingredients, so local manufacturers can put together products with the right nutritional, cultural, ethnic, religious and economic attributes for their consumers. USDEC is focusing on business-to-business relationships to boost U.S. dairy sales. It  worked with just 13 U.S. dairy companies to export products to the Middle East in 1999; that jumped to 41 U.S. companies in 2009.

One other question surfaced several times on our trip: Why is the U.S. dairy industry using New Zealand-based Fonterra, a global market competitor, as a major marketing agent/advisor?

I’ll leave others to answer that one.

FYI

■ To offer your own opinion or response, e-mail Dave Natzke, national editorial director, DairyBusiness Communications, e-mail: dnatzke@dairybusiness.com.

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