2019 December Board Book

CMAB’s “Project Milkman” Ships Fluid Milk to China, con’t

pushing hard for increased consumption of domestic dairy products. But many Chinese consumers remain skeptical about China’s dairy products, due to the scandal involving melamine contamination in many Chinese dairy products that was uncovered about a dozen years ago. Thus, the demand potential for increased consumption of dairy products imported from more developed dairy markets is unprecedented. Meeting potential dairy demand from China’s 1.4 billion citizens requires navigating a complex maze of government regulations, while forging business relationships for sales and distribution with reputable Chinese partners. Shipping costs; customs rules; storage in bonded, refrigerated warehouses; on-line sales; and delivery to customers’ residences were all steps in the path that must be suc- cessfully achieved, before the first shipping container of California-sourced, ESL milk could be loaded aboard a ship at the Port of Los Angeles. Credit CMAB’s directors and staff for the vision and hard work needed to fund at least two years’ developmental work to Project Milkman’s September 2019 first shipment of fluid milk to Ningbo, China, while understanding the inherent risk involved. Two crital events opened the doors Two significant events coalesced to make Project Milkman feasible. First: the realization by CMAB’s Glenn Millar about the Cross Border e- Commerce program’s 11.9% tariff rate for qualifying goods imported to China and sold directly to Chinese consumers. Imports qualifying for that 11.9% fixed tariff rate must strictly adhere to rules about direct sales to Chinese buyers. But once the Cross Border progam’s opportunities were perceived, CMAB officials could focus on establishing the logistical stepping stones necessary to reach out to Chinese customers. Dante Migliazzo, long-term CMAB director and former board chair readily acknowledges that capitalizing on the Cross Border program’s opportunity “was Glenn Millar’s baby.” And the second change was shifting from state to federal milk price regula- tion in November 2018. Under the old state system, the skim portion of fluid milk exports was priced under the old 4-A category – the same classification as milk processed into nonfat dry milk. But as of November 1, 2019, fluid milk ex- ports are classified as Class I – an increase of value, on average, per hundred- weight of farm milk of at least a couple dollars per hundredweight above the federal orders’ Class IV skim milk price. CMAB’s clear goal is to boost the value per unit of dairy exports, not just emphasize overall volumes of dairy products sent out of the country. Alibaba 11/11 Sales: Astronomical The immensity of China’s on-line sales is unfathomable. Take this sin- gle example as a reflection of the magnitude of on-line consumer purchases in China: November 11 in China is a special day, known as “Singles Day.” On that day, which is basically a “manufactured” holiday, it’s customary to order on-line gifts for friends and relatives. With 1.4 billion citizens in China, that’s a lot of friends and family. On that one day in 2018, Alibaba – China’s largest on-line buying site –generated sales of more than $30 billion, compared with Amazon’s $4 billion in Prime Day sales. Wow! Thus, by integrating sales of dairy products through Project Milkman with Chinese subsidiaries of Alibaba, the California Milk Advisory Board has locked in a strategic sales partner to try to meet demand from a potentially massive market. John Talbot, CMAB’s Chief Executive Officer, explains that the Chi- nese are heavily vested in e-commerce. In 2019, Talbot clarifies, it’s esti- mated that 35% of China’s retail commerce will take place on-line. That figure contrasts with only 11% of retail sales conducted on-line in the United States this year. Ultimately, CMAB sources explain that Project Milkman’s aims to ex- tend marketing efforts to include additional dairy products, such as cheese and butter. Project Milkman’s “vision” includes adding at least three dozen additional consumer products to the platform. Project Milkman is already actively marketing California fluid milk to numerous other countries in Asia, including Taiwan, Thailand, the Philip- pines, and the Singapore Region.

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Three participating California-based fluid milk processors ESLmilk, featuring a 90-day refrigerated shelf-life, is the fluid product most appropriate for shipboard transfer to China. Currently, three California-based fluid milk processors are involved at the early stages of Project Milkman. Currently, quarts are the only consumer packages for fluid milk shipped to Chinese consumers. It’s anticipated that half-gallons will soon be available. Va- rieties of beverage milk include Whole milk, 2%, Skim and Chocolate. One concern about growing sales of fluid milk to China through Project Milkman is available ESL processing capacity in California. Refrigerated, 40-foot international shipping containers It’s common for food products to cross the oceans in refrigerated containers. That’s critical for moving fresh ESL fluid milk to China. As part of quality-con- trol oversight, those refrigerated containers’ temperatures are constantly moni- tored by RFID chips. Cost for shipping a refrigerated, 40-foot shipping container from the Port of Los Angeles to Ningbo, China is approximately $2,000. Back- hauls of goods to China and Asia are often bargain-priced, because the containers would otherwise be returning empty. Inside those containers, 12 quarts of ESL milk are bunched in corrugated cardboard cases – for ease of handling and distribution to end-users. There are 80 cases (12 quarts each) stacked on a shrink-wrapped pallet, which is then loaded into the refrigerated, 40-foot shipping container. For a modern container ship to navigate from the Port of Los Angeles to Ningbo, China requires about 20 days, give or take, depending upon the weather. Time required for ocean transit is one reason why marketing ESL fluid milk in refrigerated shipping containers to China is vital to ensure quality. Access to a bonded, refrigerated warehouse Once the containers arrive at the port of Ningbo, they are immediately trans- ferred to the only bonded, refrigerated warehouse in China that’s approved under the Cross-Border program. Josh Zonneveld, a dairy producer from Laton, currently serves as CMAB’s board chair. He explains that Project Milkman is uniquely structured. Shipping ESL milk to China represents the first fresh food product moving to that country from the United States under the Cross Border program. Zonneveld is optimistic, explaining that, “Our research shows that the Chinese have a high affinity for California … they feel good about California dairy products.” Chinese order California milk online Online consumer purchases are massive in China. Remember: the Cross- Border Project requires direct-to-consumer sales to qualify for the advantageous tariff rate of 11.9%. To assure direct-to-consumer sales, all customers’ orders for California fluid milk are placed on-line. CMAB’s partner for on-line orders is China’s gigantic internet marketing firm, Alibaba. CMAB has an exclusive deal for on-line dairy orders for Alibaba’s cross- border sales within their online “store-fronts” within Tmall and Kaola. For the next year, when Chinese buyers go on-line to purchase fluid milk, these “store-front” search engines will prioritize California ESL milk in search rankings. Distribution: warehouse to consumer The final step for sales of fluid milk from the Ningbo warehouse to the rest of China will be distribution conducted by another vital CMAB partner – SF Best. SF Best is China’s leading distribution company. SF Best’s delivery system in- cludes small trucks and motorized carts. For delivery to Project Milkman cus- tomers in distant Chinese cities, SF Best owns a fleet of jet aircraft. Delivery of perishable milk products to on-line consumers is the critical, final fulfillment of orders by Project Milkman. CMAB officials explain that through Project Milkman, their in-country part- ners have negotiated favorable distribution rates to bring the best value to Chinese consumers. Actual delivery takes place by several means. Deliveries to consumers’ res- idences may arrive by small trucks and scooters. It’s anticipated that the 27,000+ gallons of milk involved in September’s first round milk of orders in Ningbo will all be delivered within two days of the shipping containers’ arrival at the bonded warehouse. CMAB CEO’s advice: P-A-T-I-E-N-C-E John Talbot’s years of international food marketing experience leave him with cautionary admonitions … particularly when trying to open up markets in China. Talbot freely offes cautionary advice: “You have to be patient.” “Be per- sistent … not for the faint of heart.” “Keep a larger perspective [through the] ups and downs.” Talbot credits Chinese consumers’ growing tastes for pizza as really opening the door for California’s fluid milk exports to China. “Pizza has introduced dairy to the Chinese,” he emphasizes. What’s next for Project Milkman? Talbot proj- ects that cheese and butter as the next value-added dairy products heading to China bearing the “Real California Seal” … once the fluid milk exports are mov- ing smoothly. “Fix the Mix” is a catchy phrase that Talbot uses to summarize CMAB’s export strategies – that is, shifting exports to higher-valued consumer products (fluid, cheese, and butter), while creating less dependence on large vol- umes of lower-valued, commodity exports such as Skim Milk Powder. Covering all the logistical bases … China’s population of 1.4 billion, during the past three-plus decades, has witnessed virtually unprecedented economic growth. And one of the biggest sin- gle measures of improved wealth for China’s citizens is the growth in demand for western-style diets – including meat and dairy. The Chinese government is

10 — The Milkweed • October 2019