2019 December Board Book

CMAB’s “Project Milkman” Starts

Sailing time from the Port of Los Angeles to Ningbo, China requires about 20 days. CMAB’s “Project Milkman” features refrigerated, 40-foot containers that hold about 5,500 gallons of milk – about the same volume as a milk tank trailer. Upon arrival at Ningobo, the con- tainers are moved to a bonded warehouse … and then delivered to online customers within a couple days. Photo credit: Port of Long Beach .

by Pete Hardin

September and early October witnessed the arrival of five international shipping containers of California fluid milk at the Chinese port city of Ningbo. Each 40-foot, refrigerated container holds 5,500 gallons of Extended Shelf Life (ESL) fluid milk – roughly the capacity of an over-the-road milk tank trailer. Upon arrival at the port of Ningbo, those shipping containers laden with fluid milk were transferred to a refrigerated warehouse. Within two days of arrival at the bonded warehouse in Ningbo, deliveries of California-sourced fluid milk were made to customers who’d placed online orders. Delivery vehicles included small trucks and motorized carts Distribution of California fluid milk in Ningbo – a port city with a popula- tion of approximately 8 million – culminates more than two years of complex spadework by officials of the California Milk Advisory Board (CMAB), under the moniker “Project Milkman.” Orders are already placed for at least 16 ship- ping containers of California milk (about 88,000 gallons) for shipment to China during October. Looking ahead, CMAB officials hope to be moving at least 50 shipping containers of fluid milk per month to China by mid-2020. The CMAB annual budget is approximately $38 million, and about $5 mil- lion of that total is allocated to building export markets for California dairy prod- ucts in Asia and Mexico. Due to confidentiality and competitive concerns, CMAB officials cannot release Project Milkman’s specific investment at this time. Project Milkman covers only milk from California farms processed in Cal- ifornia-based fluid milk plants. Value-added exports: long time coming … Dante Migliazzo, a dairy producer from Merced who has served on the CMAB board for 18 years, explains that CMAB started exploring value-added export opportunities seven to eight years ago. But attempts at fluid milk exports to Mexico encountered too many hurdles. About five years ago, when CMAB was searching for a new Chief Execu- tive Officer, Migliazzo explains that a top priority was finding someone with in- ternational food marketing expertise. John Talbot, who had served as vice president of global market development for the Almond Board of California, emerged as CMAB’s next CEO and continues in that post. Under Talbot, CMAB has expanded its investment in overseas market development, while adding other executives with similar disciplines. Migliazzo says that fluid milk export opportunities became somewhat clearer a few years ago, when discussions about California joining the federal milk order system turned serious. Under the prior state milk pricing system, ESL export sales were classified under the same category as milk processed into non- fat dry milk. But under the federal milk orders, fluid exports enjoy full Class I status. (See sidebar, on this page.) “We could see it coming and have been work- ing at it for five years,” Migliazzo remembers. By 2025, he estimates that monthly exports of fluid milk to China could reach 150 shipping containers. For starters, the container size for fluid milk sales shipped to China is quarts – packaged in cardboard cartons with pour spouts. Varieties offered through Project Milkman include: Whole milk, 2%, Skim and Chocolate. Converted to U.S. cur- rency, the cost to consumers in China for one quart of whole milk is approximately $2.81. According to Glenn Millar, director of international business development for CMAB, some initial orders for ESL quarts by individual consumers in China have totaled 10 to 12 quarts. He notes that plans include expanding packaging to half-gallon containers, which will make it easier to service such major purchasers. Packages of California milk shipped to China retain their descriptive lan- guage in English as Chinese consumers prefer buying dairy products that are de- tailed with the language of the exporting country. Goal: Optimize exports’ value to enhance producers’ milk checks California is already the single largest state exporting U.S. dairy products. California’s massive dairy production and processing industries, in tandem with it’s location on the Pacific Ocean, make the Golden State a natural, low-cost jumping off point for dairy exports to Pacific Rim nations. CMAB officials es- timate that 33% of total U.S. dairy exports originate from California. Histori- cally, U.S. dairy exports have mostly been low-value, dairy commodities often sold at low-ball, global market prices. Bob Carroll, CMAB’s vice president of

business development, observes that a significantly larger percentage of dairy exports originating from Europe and New Zealand sold in Asia focus on higher- value products. (Carroll came to CMAB with 10 years’ experience at Blue Di- amond, the final five years at which he headed international marketing projects.) The CMAB is actively working with the California dairy industry to increasingly shift to value-added exports to enhance producers’ returns. For U.S. dairy producers, selling commodity Skim Milk Powder and com- modity cheese often yields volume sales, but little net economic gain for state producers’ incomes. Export measurements by the U.S. Dairy Export Council generally emphasize volumes, rather than prices or net value gained from exports. The CMAB has been working with USDEC to include measurements of value- added growth. August 2019: $3.25/Cwt. SOCAL Spread Between Class I and Class IV Once the shipping containers of milk arrive at the warehouse in Ningbo, China, SF Best’s fleet of jet aircraft can deliver California-sourced dairy products to online customers in many cities throughout China. For the federal milk order program, USDA calculates each month’s Class I base price by taking the average of the Class III (cheese) and Class IV (but- ter-power) manufacturing milk prices derived from an advance survey of prices from the first three weeks (or so) of the prior month. Example: The August 2019 Class 1 price for Southern California was $19.99/cwt. That was derived by adding $2.10 to the average of the Class III and Class IV advance price calculations. Those advance price calculations stemmed from weekly sales reports to USDA from manufacturers of Grade A nonfat dry milk, Grade A butter, Cheddar cheese, and dry whey. During August 2019, for example, California’s federal order Class I price was $19.99/cwt. And that month’s Class IV (butter-powder) price was $16.74/cwt. Those prices are the values for farm milk testing 3.5% milk fat. Thus, for the month of August 2019, the difference between the Southern California Class I price of $19.99/cwt. and that month’s Class IV price of $16.74/cwt. equals $3.25/cwt. Such monthly differences will vary, sometimes dramatically. The August 2019 example is used here because that is the most recent, completed month at the time of writing this article. Due to multiple regulatory changes in the past year, it’s not easy to call up long-term data on Class I vs. Class IV in California. That’s because Cali- fornia’s federal order program began in November 2018. Also, in May 2019, USDA shifted how it calculates the monthly Class I base price from the “higher of” either Class III (cheese) or Class IV from the first three weeks of the prior months. Important to note: Shifting to federal milk price regulation provides far greater incentives to export Class I milk from California. Prior to November 1, 2018, California’s state milk pricing system classified the skim portion of fluid milk exports at the 4-A (butter-powder) rate. Thus, the state milk pricing system proved no actual economic gains for exporting fluid milk (compared to SkimMilk Powder), except to boost overall demand of the lowest price com- modity.

8 — The Milkweed • October 2019