“The Importance of the Asia Pacific Market to the U.S. Dairy Industry”
by Connie Tipton, President & CEO, IDFA
Delivered at the Asia Pacific Dairy Summit in Singapore
November 19, 2015
Thank you to the organizers for the invitation to join you at this important summit. Good morning, ladies and gentlemen.
I am here today on behalf of the members of the International Dairy Foods Association, an organization representing companies that make and market a wide array of dairy products. Our members are primarily located in North America, but we also have member companies in 16 other countries. Our staff primarily works with the United States Congress and government regulatory agencies to create the best possible market environment for our members. So you could say we are experts on the dairy industry, but also in advocating for better U.S. laws and policies affecting the industry.
I am pleased to be here because this summit represents the future of the global dairy industry.
There is no place more important than the Asia Pacific region; it is, without question, the most dynamic sector of the global dairy industry today. Why?
The Asia Pacific region:
- accounts for 40 percent of the global economy.
- It includes the largest consumer markets in the world,
- has the fastest growing demand for dairy products, and
- has the largest and fastest growing regions of milk production.
And all of us here in the dairy industry – from producers to processors, marketers, researchers and retailers – now have the opportunity of a lifetime.
I congratulate the organizers of this summit, and commend all of you here for having a vision of what our industry can be.
Let me add my perspective. And offer a metaphor.
Think of the old-fashioned milking stool. It was made with three legs because a tripod is the most stable foundation, especially when the terrain is uneven, as it was in many cow barns not so long ago. And just as the ground was often uneven then, the global economy and dairy markets have ups and downs that require a steady, stable foundation for this industry to grow.
From our vantage point, we’re sure that dairy is poised for unprecedented growth, and that is why our collective strategy for growth, like a milking stool, should be built on three legs.
In order for our strategic vision to be “20/20” we will need
- Foresight; and
First, hindsight. We need to recognize and appreciate where our industry came from – and, in some places, where it still needs to move into the 21st century.
The International Farm Comparison Network (IFCN), which is headquartered in Germany, reports that the average dairy farm in the world has only 2.9 cows. Moreover, 38 percent of all milk produced globally is never sent to a processor; it’s either consumed on the farm or sold or bartered to a neighbor.
Indeed, preservation of small farms, producing a perishable commodity, traditionally has been the rationale for protection for the dairy industry across the globe. And that rationale has been true for countries with dairy industries of all sizes – small, medium and large.
Our hindsight allows us to recognize that none of the various schemes of supply controls, production quotas, mandatory herd reductions, tariffs and trade barriers have helped our industry grow. In fact, in many cases these policies have actually prevented countries from reaching their full potential.
That brings up the second leg of the stool, “Foresight.” We have to visualize and understand what is coming next.
Whether we are ready or not, growing demand is here – and by all accounts, it looks to be here for a long time to come.
Countries like New Zealand and Australia had the foresight years ago to eliminate policies that impeded growth and expansion of their dairy industries, while the European Union, the United States and Canada clung to production quotas, government price supports and supply controls.
These differing policy approaches largely explain where these countries stand in meeting the growing demands of today’s marketplace.
At the recent World Dairy Summit in Vilnius, Lithuania, the International Dairy Federation offered an interesting prediction, saying if dairy consumption grew to match the actual nutritional needs of all global diets, total world demand for milk and dairy products would double by 2030. And triple by 2050.
Think of that. A doubling of demand in 15 years. For context, in the past 15 years, world milk consumption grew by one-third. In the 15 years prior to that, world milk consumption shrank six percent. The demand was there, but restrictive policies intentionally limited trade in dairy.
Looking back, it has taken more than 50 years to double global milk consumption. Yet we could see that rate of growth again in the next 15 years.
In fact, the Australian Bureau of Agricultural and Resource Economics (ABARE) estimates that, in the Asia Pacific region alone, dairy consumption should double by 2050. That’s good news for all of us.
And that’s why our foresight must include countries taking steps to change domestic policies that stand in the way of producing enough milk to meet this demand. We also need to reach agreements on greater market access for each of us to sell our products where the demand exists.
It is essential that we embrace agreements such as the Trans-Pacific Partnership to increase markets for products that our various countries have the comparative advantage to produce.
And, for the United States, one of the most important trade deals that no one is talking about is the bilateral investment treaty between the U.S. and China. This has been quietly inching forward for nearly a decade, but its progress has accelerated in recent months.
Reportedly, if completed, the deal would roll back technical barriers and investment restrictions that are limiting access to lucrative markets in both countries, similar to an investment chapter of a free trade deal. U.S. investment in China last year topped $60 billion, according to our Commerce Department. While this investment isn’t directly focused on agriculture or dairy, the impact and implications could be wide ranging.
So an important part of foresight is reaching agreements around the globe that would expand trading opportunities.
That brings me to the third, and most important, leg of our stool: “Insight.”
Once we understand what’s coming, we need to know why. Economically. Demographically. Geographically.
That is what I really want to focus on: How all the pieces of the world dairy situation puzzle fit together.
Let me say, I am not one typically given to crystal ball gazing. So when we hear these phenomenal predictions about what the future holds, I like to put them to the test.
For example, let’s put the prediction by the International Dairy Federation of a potential doubling of dairy demand in 15 years in perspective.
We know that increasing incomes around the world has led to dietary changes – namely a greater demand for protein. And dairy is an excellent source of protein.
Consider what’s happened globally with two other popular protein sources: pork and poultry.
Global consumption of pork – the world’s most widely consumed meat – has doubled over the past 20 years. And it is still growing.
Global consumption of broiler meat – one of the world’s most affordable meats – has doubled over the past 18 years.
So, when you consider the track record of those two commodities, and then consider the additional nutritional benefits of milk, the variety and adaptability of dairy products and the value that dairy foods provide consumers, it almost seems unremarkable to project dairy consumption to double in 15 years.
Given that likelihood, the dairy industry has three choices.
First, we can resist those trends – fighting to preserve the old ways that don’t fit a changing world.
Second, we can be swept along by those trends, hanging on and hoping for the best – that is, not falling off somewhere along that ride.
Or, third, we can drive those trends, which is what I would suggest. We can do that by understanding what is driving demand and learning how to harness the power of the global consumer.
Let’s look at some trends in the Asia Pacific market.
First stop, China. It is one market with 19 percent of the world’s consumers. It is also the fastest-growing milk producer in the world.
Since 2000, China has increased milk production by more than 300 percent, … but that is still not enough to meet the country’s growth in demand.
China’s younger generation is consuming more and more fluid milk, both fresh and UHT milks with long shelf life. Dry dairy products rich in protein are in demand for milk beverage production and for infant formula.
China offers a marketer’s dream for dairy products. E-commerce is a key factor in the Chinese beverage market. And China has a large elderly population – more than 210 million people over age 60 – providing a great opportunity for cultured products rich in calcium, like yogurt.
Next up, of course, is India – a country where meat avoidance is a widespread religious and cultural practice, and dairy is important in the diet.
Actually, India is the largest single-country milk producer in the world, but more than half of that production – 55 percent – is buffalo milk used in culturally traditional products.
Yet there is a growing demand for cows’ milk and products, especially value-added dairy products. On top of that, India already has the highest fluid milk consumption in Asia.
A whopping 28 percent of the population is under age 14, which means, among other things, that the country’s population will continue to expand. And tastes for new foods will likely continue to increase. Cheese production, for example, is growing about 15 percent per year.
India is looking to grow its dairy production, but it is still today an industry characterized by small farms and a high percentage of informal marketing.
The country is still 70 percent rural, but urbanization is a growing trend. The ever-increasing rise in domestic demand for dairy products and a large demand-supply gap could lead to India being a net importer of dairy products in the not too distant future.
However, despite growing cheese demand, only 40 to 45 varieties of cheese are available in the Indian market, which is very low compared to other markets.
The United States, for instance, produces over 300 varieties. And, for now, India stringently regulates dairy imports, including cheese, and the U.S. currently is unable to meet the country’s requirements for milk and dairy product imports.
But here’s why it’s important to pay attention to China and India – 35 percent of the world’s population lives in these two countries!
That’s a commanding market, but that still leaves a vast majority to serve.
Here in Singapore, the hub of the Southeast Asian economy, the culinary environment is very international – with many ethnic cuisines offered in world-class restaurants.
Consumption of cheese and cultured products, as well as low-fat and skim fluid milk and milk-based beverage products, is growing.
In Japan, we’re seeing one of the region’s higher per capita consumption rates for milk. Cheese demand is growing there as well, and an aging population likely will demand more cultured and probiotic products.
The same domestic demand growth for these products is occurring in other markets, even in net exporting countries like Australia.
Likewise, Korea’s dairy demand is increasing – especially for cheese –and it’s moving faster than the supply can expand.
Given relatively stable production levels and increasing consumption in Japan and Korea, dairy imports to those two countries are expected to nearly double in the next 30 to 35 years, as long as we and they have the right trade agreements to allow that to happen.
In countries like Indonesia, Thailand and the Philippines that are dealing with fresh water shortages, consumption of convenience-packaged beverages – such as milk-based drinks – is growing.
And one of the key growth sectors is – and will continue to be – the demand for milk powders for infant formulas. Demand for dairy in food manufacturing won’t be far behind.
To put this demand in context, consider that exports from major suppliers of skim milk powders grew 38 percent from 2010 to 2014. Whole milk powder exports grew 28 percent in the same period, driven by the demand in the Asia Pacific region.
What’s behind this boom? Let me offer this observation.
Asian consumers are very health conscious, and they are increasingly recognizing the health benefits of milk and dairy products. Their interests range from commodities fortified with dairy protein to consumer-packaged dairy probiotic products.
But that’s just one of many selling points. The dairy industry will have many opportunities to market based on health, wholesomeness, food safety, sustainability and other qualities.
In fact, it is probably fair to say that it will be difficult to market products that do not meet consumers’ expectations in these areas.
And these expectations will only continue to grow as consumer income increases worldwide.
As I mentioned earlier, income growth affects diets. Initially, as consumers gain purchasing power, they demand more calories, more proteins, more nutrients. With increasing levels of income growth, consumers also demand more assurances about the quality, safety and sustainability of the products they buy.
Here’s why this is important. According to the Organization for Economic Cooperation and Development, we are in the early stages of an economic shift coming between 2010 and 2030 where three billion consumers worldwide will move up to the middle class.
Most of the new middle class will live in Asia. And most members of this new Asian middle class will live in India.
Now consider the triple impact of growing incomes, growing populations and urbanization.
Population growth is a sure thing. And not just in the least developed parts of the world.
Even though the annual global population growth rate has declined every year since 1992, and even though it is projected to continue to decline through 2050, we will still add more than two billion people to the planet in the next 35 years. The total population will be an estimated 9.4 billion. That’s a lot of people to feed. Are we up to the challenge?
Today, an estimated 54 percent of the world’s population lives in urban areas. By 2050, according to the United Nations, that percent will grow to about 66 percent.
Let’s do the math. The world will gain 2.1 billion people by 2050. And with the trend toward urbanization, that same number of people – plus another 200 million alive today but not yet living in an urban area, or about as many people as currently live in Brazil – will become urban dwellers. Serving this population will demand infrastructure and supply chain logistics that don’t exist today.
If the world’s current milk supply – produced from a global average of 2.9 cows per farm, with less than two-thirds of the milk going to a processer – stayed the same, would it adequately supply this future, middle class, urban population?
Foresight and insight identify the opportunities, but there are real challenges before us in meeting future demand.
Now more than ever, the future will depend on global trade and opening our respective markets to one another to take advantage of what each of us has the comparative advantage to produce.
For instance, the United States may have a comparative advantage to produce dairy products, but we need to stop protecting our domestic sugar industry and let other countries supply more of our sugar.
That’s a good segue to the last piece of the puzzle: looking at the future from a milk production point of view.
Currently, about 75 to 80 percent of all exports come from four places: the EU, New Zealand, Australia and the United States.
They will likely remain the top exporters into the future, along with Argentina and Brazil.
New Zealand is currently the top milk exporter in the world in terms of volume. They’re good at it. That’s because, in part, they’ve been at it for so long. But also they recognized years ago that their best advantage was to grow their export business by streamlining internal policies to eliminate barriers and encourage expansion into new markets.
They have embraced and developed those market opportunities. First to Great Britain. Now to the Asia Pacific region.
But New Zealand is only about the size of the U.S. state of Colorado, and its total milk production is about the same volume as California, which represents about 20 percent of total U.S. milk production.
The second biggest exporter is neighboring Australia. About half of all Australian milk is exported, but exports have been declining, on average, on an annual basis since 2000 as the country has been plagued by droughts.
The biggest dairy producer in the world is the European Union. The EU produces more milk than the United States, but only through combining the output of all 28 countries in the Union.
Indeed, as a single country, the United States is the largest producer of cows’ milk in the world. So at the end of the day, there is no place more important to the global dairy supply than the United States.
And that importance is growing. Literally. Milk production in the United States has grown at an average of 1.6 percent annually for the past 10 years.
Now, of course, no discussion of global dairy supply or exports would be complete without a closer look at what is going on in the European Union.
After 30 years, the European Union ended production quotas on milk on March 31 of this year. You may think my next comment is odd coming from a representative of the U.S. dairy industry, but I think this action is a positive development. It will help the entire global industry to grow.
Protectionist policies, quotas and export subsidies in the European Union have had a chilling effect on world dairy markets for years, holding prices artificially low in export markets so others couldn’t afford to compete.
At the same time, U.S. policies have included regulated pricing schemes, price supports, payment subsidies, mandatory herd reductions and export subsidies over the last 70 years. Thankfully, most of these protectionist policies have ended in both the EU and the U.S., but we still struggle with tariffs and trade barriers that have failed to help the industry meet its potential.
Recent developments with Russia’s import bans on dairy products from many dairy exporters are distorting our markets in the short run in much the same way those policies did in the past.
None of these strategies are good for growing markets in the long run.
So what does this change in European policy mean? First of all – a shift in production areas. Without the protection of quotas, some European countries won’t produce as much farm milk as they did under the old quota system.
On the flip side, production in other countries, without the constraints of product quotas, will grow.
Those likely to expand their production include Germany, which is the largest producer in Europe, followed by France, Poland, Denmark, the Netherlands and Ireland.
Second, expansion. Without quotas, the EU’s production will increase. Those six countries I just mentioned will account for more than three-quarters of that growth, according to the U.S. Dairy Export Council. Ireland will likely see the largest percentage increase, while Germany will likely see the largest volume increase.
Total supply growth is projected to be 11 percent by 2020. But because of shifts in farm milk production patterns, intra-EU trade will likely increase as well.
To be sure, there will be more competition among the top four exporters: New Zealand, Australia, the EU and the U.S. Competition is good. Especially for consumers. And it is good for producers and processors as well. It keeps them on their toes to be efficient and productive.
Competition also helps to focus the industry on doing the right things: improving quality, developing new products and improving customer service.
It is also likely to focus the industry on increased investment in growth. Look for more joint ventures and other value-added processing in high demand regions like the Asia Pacific region.
But let me underscore one more point. Under the current trends – which competition will help sustain – global dairy product demand is growing faster than growth in farm milk supply, and that demand will pull more supply onto the market over the next 10 to 15 years.
Where will this milk supply will come from – and why?
Allow me to offer this observation.
Not all milk is created equal, or should I say, not all milk creation is equal. The growth in the milk supply will come from those areas that have particular production advantages as well as the resources to produce more milk.
Dairy production takes an appropriate water supply – 97 percent of the water resources used in dairy is for feed and milk production. The other three percent is for processing, packaging and shipping. This must be combined with an adequate supply chain to move the milk to processing facilities for quality products.
And it takes the proper climate and the soil resources to produce feed for the cows. That’s why some countries in the developing world can’t meet their growing domestic demand for dairy products. Many lack access to fresh water, and many have climates that are just too hot or don’t offer proper growing conditions.
In the U.S., the regions and states that produce milk are those with the suitable resources. They range from New England on the East Coast, to California on the West Coast and across the U.S. heartland.
Resources drive the world’s production as well. Take Australia, for example. Milk production is concentrated in the eastern and southern regions of the country. The largest producing state is Victoria, where production is still largely seasonal.
Feed is a key component to dairy production, too. And that is certainly an advantage in the U.S. over Australia, New Zealand and the EU. That is part of the reason why the United States is one of the highest in milk production per cow in the world – providing approximately four times the production of the average dairy cow worldwide.
Land availability and land costs are key factors, too.
In this way, dairy production is similar to other animal agriculture production. It is not surprising that the top dairy exporters also are meat exporters.
Indeed, the U.S. has a long history of being a primary and reliable supplier of meat to Asia.
The U.S. livestock and poultry industries have built trust in these markets by following what I outlined earlier as the keys to growth: increasing supply, improving quality, expanding new products and focusing on customer service. Although these industries never had the burden of dealing with the type of domestic policies that dairy has faced, they have had to fight trade barriers.
In much the same way, I am confident that we are well on our way to seeing the United States as a primary, long-term and reliable dairy supplier to Asia.
Here’s the bottom line: the U.S. dairy industry has…
- The natural resources to expand its milk production;
- The industry and regulatory standards to assure consumers of food safety;
- The technology to innovate;
- The infrastructure to deliver; and
- A growing focus on global consumers.
Indeed, U.S. dairy has in many ways globalized over the past decade. Ten years ago, exports accounted for five percent of U.S. milk production. Last year they represented more than 15 percent.
I’m here to tell you that U.S. dairy suppliers are committed to meeting growing demand for milk and dairy products in sustainable, safe and innovative ways.
Regarding sustainability, the industry is pioneering production and processing methods that reduce water use, energy use, greenhouse gas emissions and waste. Already, U.S. dairy farms have lowered greenhouse gas emissions per unit of milk by about 45 percent below the global average.
To ensure and enhance food safety, most processing facilities create and maintain robust records to determine the immediate previous sources and immediate subsequent recipients of food. This is a traceability requirement meant to assist in the recall of products.
And U.S. innovators are continuing to discover and provide new opportunities for milk use. Not too many years ago, whey was discarded in the cheese-making process.
Now, more and more of the whey stream goes toward higher protein products, such as concentrates and isolates of whey and milk with more than 80 percent protein. Almost 60 percent of the whey now goes into high-protein ingredients; that’s double the amount from a decade ago. And there are more opportunities to come.
I assure you that the U.S. dairy industry is committed to the global market and to the Asia Pacific region. And, of course, the United States has always maintained a long-term commitment to liberalized trade.
With the conclusion of the recently negotiated Trans-Pacific Partnership, we are encouraged to increase trade in the Pacific region, and we will continue to be more and more aggressive in expanding trade based on our comparative production advantages.
I realize that is a give-and-take process, but for the U.S. dairy industry to continue to expand, trade will be an essential component.
To sum up, the Asia Pacific region will continue to be a very important driver of dairy demand. The United States is poised to help meet that demand, and we want to be good partners in trade around the globe.
Thank you for the opportunity to address you this morning. I look forward to enhancing our relationships around the world for the growing success of the global dairy industry.
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