Fonterra VP paints picture of world markets,  citing convergence of U.S. and Oceania prices

Mark Piper, vice president of sourcing for Fonterra (USA) Inc., talks about global markets at the 2012 Pa. Dairy Summit. This graph shows the skim milk powder price (SMP) for the U.S., the EU, and Oceania (New Zealand / Australia). He said the “convergence” of the world price and the U.S. price in recent years bodes well for a sustainable U.S. future in dairy exports. He said the graph also shows the trend toward a more narrow – and higher – trading range for SMP in recent years. The light blue line is Oceania with the highest price; the purple line is the EU in the middle; and the green line is the U.S. price for SMP, which is the lowest of the three. Photo by Sherry Bunting

By SHERRY BUNTING
Special for Farmshine

LANCASTER, Pa. -- The U.S. can compete in the international dairy marketplace. In the past three years, changes have created a positive trade balance between dairy exports and dairy imports as export sales have grown from 3% of U.S. production in 2004 to 14% in 2011. The U.S. reputation is improving, and world prices (Oceania) have converged with (and exceeded) U.S. prices to create a more sustainable future for the U.S. to consistently supply the growing international demand for dairy protein.

These were just some of the observations by Mark Piper of Fonterra (USA) Inc. He brought an international viewpoint to the Pennsylvania Dairy Summit crowd of over 500 last Wednesday (Feb. 8) in Lancaster.

Born and raised in New Zealand, Piper started out 19 years ago loading bags of casein in the warehouse before the New Zealand Dairy Group became Fonterra. He moved up through the ranks in his homeland, and worked offshore in Tokyo coordinating supply chain activities for Japan and Korea. Today, he is vice president of sourcing at Fonterra’s U.S. office in Chicago, where he focuses on sourcing products for domestic supply and exports.
He noted that Fonterra is engaged in a “gigantic strategy refresh.” The New Zealand company sells over 2.5 million metric tons of products annually (5.58 billion pounds), and 25% of the volume is non-New Zealand milk.

Fonterra currently  “facilitates the sale of 220,000 metric tons (485 million pounds) of U.S. product annually on a commission basis from the U.S. to countries around the world,” said Piper. “We want to see the U.S. get a better feel for the export trade instead of using traders. The strategy certainly is to try to do more with the U.S. And it starts with listening to what customers want.”

While volatility will remain a part of the marketing picture and currencies and climates pose challenges for the future, the world price for milk and dairy products -- as calculated on the Oceania (New Zealand / Australian) price -- has converged to a sustainable range that is more stable, and higher than the U.S. price.

He showed graphs confirming New Zealand farmers received more for their milk than U.S. farmers. New Zealand farmers are paid on kilograms of milk solids, and last year’s payout converted to $25 per hundredweight in U.S. dollars.

”One of the big things to happen in recent years is this convergence of  prices,” Piper noted. “The U.S. used to be above Oceania... a few years ago that all changed.”

He acknowledged that Fonterra has been guilty, in the past, of dumping product in the U.S. -- not on purpose. Piper added: “That is not the case today because the marketing has caught up with the production. Now we are focused on achieving the right price and putting milk into the right applications and making milk at the right quality.”

Fonterra has developed a global network employing 16,000 people -- half of them offshore. How did this country with a landmass the size of Colorado and production just three times as great as Pennsylvania become the world’s largest exporter?  Necessity was the mother of invention.

In 1984, New Zealand found itself at a crossroads similar to where the U.S. is today.

“Our government woke up to find we were broke and stopped all farm subsidies. Farmers protested, but the government said: ‘We will focus on the macro economic climate, but other than that, you are on your own,’” Piper related.

The first few years of deregulation were “incredibly hard,” he said, adding that 20% of total farm debt (beef, sheep and dairy) was written off, and 5% of the farms were sold.

”But in the end, dairy came up a big winner,” he said. Today, land used previously for beef cattle and sheep is converting to dairy.

Since deregulation, there has been growth in dairy productivity and profitability. Because New Zealand has as many cows as people, they export most of their production. But even a growing industry in New Zealand only accounts for 3% of the world’s milk supply, compared with the U.S. production making up 13% of world milk volume.

According to Piper, New Zealand’s production can grow just 2 to 3% per year now. He said that’s not enough because the far larger world demand is growing by the same percentage.

Fonterra markets 90% of New Zealand’s production and has a large customer footprint, worldwide, with more demand that cannot be met.

“That’s why I have this job here (in Chicago) to find product to meet export demand,” he said.
Aside from the U.S., who can fill this unmet demand?

Piper noted Brazil is a big one, but their politics and climate play a role. China’s production is growing, but they cannot produce their own country’s needs. India’s  production is huge, but the milk is from water buffalo. And the European Union – the largest block of milk -- will be removing its quotas in 2015. Piper also observed that Russia’s demand for dairy is growing and they buy from the EU, which does a large “intramarket” trade.

The big question relative to the EU is: What will happen when the quotas come off? Will production double? Will the most efficient countries increase and the least efficient decrease? And how will the weakening EU currency affect the global market picture?

Revealing a bit about how the dairy industry functions in New Zealand, Piper observed that it is getting harder and harder for young people to enter the business. Share milking arrangements help, but New Zealand investors are turning to South America, and even North America, to buy land because land prices in New Zealand are so very high.

The country’s seasonal production curve is also a challenge because processing capacity needs to be large enough to handle the peak production, resulting in underused assets when the country’s production tails off for the year.

Factories shut down when milk output reaches the bottom of curve. In some cases, stainless steel remains idle for 11 months and operates just one month out of the year.

Producers are paid differently as well. They receive 50% of the “price forecast” in their monthly checks. As the forecast becomes more certain, more is paid. Then, at the end of the year, the farmers get a really big check for the final price value. Producers also buy shares in the processing capacity according to their production level. This is deducted from their monthly checks (similar to the make allowance here in the U.S.).

So how far has the U.S. come in marketing its dairy products instead of using the export markets strictly to move inventory that’s sitting around?

Piper said the U.S. – in the past -- has not shown keen interest in marketing to the export trade. Being in and out of the market has “burned good will and earned a bad reputation for the U.S. as a dairy producer that is not there all the time,” he observed. “The U.S. has not had the reputation for the best quality either, but that reputation is improving with the good work of the U.S. Dairy Export Council.”

China’s demand has grown, making it the largest importer in the world. This has prompted an even greater focus on quality, according to Piper. He also noted the impact of more countries eating soft products, like yogurt.

To visualize the food marketing opportunities in China, Piper stated that a new Pizza Hut is built every three days and a new KFC every 23 hours.

The U.S. is selling some product to China, but Mexico is still the biggest buyer of U.S. dairy goods.
Piper also highlighted Japan as being the most profitable market to sell  into. But they expect perfection. “It can cost you the most if you don’t do everything right,” he said.

The bottom line is the need to be consistent. He cited a meeting where the CEOs of the largest cheese makers said: “We need to stay exporting. We can’t be in and out of the market. We have to prove we are here to stay. This will give our international customers the confidence to start innovating with us.”

In the powder markets, he noted that New Zealand does not make much whey protein concentrate (WPC) and has become the world’s largest importer of lactose. He explained the difference between nonfat dry milk (NFDM) and skim milk powder (SMP). Simply: NFDM is not standardized, whereas SMP is a codex term, which means it can be standardized. While the West Coast is making SMP for export, NFDM can only be sold domestically, and NFDM is the price that gets used in the Class IV pricing formula.

He talked about two pathways for dairy marketing: commodity versus specialty. New Zealand has developed a niche by turning proteins into high value products, which he said is a good way to create a lot of value ”But the real key to sustainability is to differentiate yourself from someone else,” Piper suggested. “The quality of the service and the reputation of the product are important from the farm level to the customer. Ask yourselves the question: ‘How do we make what the customer wants?’ If you can do that, you can get in the door. You can make the same commodity on paper but achieve a different price.”

The key to quality, he said, is “really about consistency and making sure the product they sampled is the product they are getting five years from now.”

In short -- quality and consistency bring superior returns, secure markets, and give the supplier the right to innovate further with that customer.

“It took us 40 years to learn all of this,” Piper concluded.

Among the U.S. challenges are freight charges. Piper maintained that it costs more to ship from the Midwest to the West Coast than from New Zealand to Japan.

A producer in the audience asked about the impact of expanding the Panama Canal. Piper stated that, “It will have a big impact on the East Coast. You could make it and ship it cheaper from here than from the West.”