2024 March Board Book

Pete Hardin CMAB’s Vision: Exporting Higher-Value Dairy Products

tions grew from $25 million in 2016 to $64 million in 2022. Taiwan a growing fluid market

Several years ago, leaders at the California Milk Advisory Board (CMAB) strategically plotted a long-term policy to boost dairy exports from their state. In a nutshell, that strategy was to aim higher, targeting higher-value exports and spread market development efforts to a wider-range of the highly populated, fast growing economies in Latin America, Asia and Southeast Asia. CMAB’s focus on value added exports relinquished developing bulk commodity sales to other competitors. Let others focus on selling Skim Milk Powder, nonfat dry milk, and bulk Cheddar abroad. Exporting bulk dairy commodities basically yields low-ball returns. These recent numbers bear out the wisdom of CMAB’s export focus on Asia, with particular emphasis on fluid milk and cheese. • The Asian Pacific market is the largest contributor to global dairy markets, generating 41% of international dairy sales revenue in 2021. • Recent years’ per capita dairy consumption in Asia is rising: +5% for fluid milk and +10% for cheese. Logic behind that strategy: Boosting exports of value-added dairy products would generate more net resources coming back to Golden State producers. Flat milk output for big exporters, including California As the nation’s top milk-producing state, California is ideally located to take advantage of the Asian and Pacific Rim markets. Growing tastes for western style foods are perceived as opportunities for United States dairy exporters that can meet those demands. Here’s both the problem and the opportunity. Near-term and future global milk production trends are viewed as flat. In Oceania, New Zealand has hit “peak milk.” Australia’s milk output is seriously down-trending. Several western Eu ropean nations seem content to reduce milk production by paying dairy farmers to get out of business – in response to dairy’s greenhouse gas challenge. Those global milk productions trends open the door wider for California, but with one big “IF.” California has also reached “peak milk.” . Thus, California’s challenge to meet future dairy export opportunities is greatly contingent upon weaning dairy processors away from Class IV (butter powder) output — towards higher-valued milk use: Class I (fluid), Class II (cul tured products), and Class III (cheese, particularly value-added cheeses). Future export growth for higher-value products must force farm milk volumes away from butter-powder production, which corrently uses about 45% of state milk output. Exports: an ever-shifting obstacle course Cashing in on Pacific Rim export opportunities has been easier to strategize than fulfill, complicated by interceding events (such as the Covid-19 pandemic) that shut down much trade with China. Covid-19 shut down much of the Chinese economy. Covid-19 events also plugged up port operations in China and the United States’ West Coast. Those congested port docks delayed export shipments of perishable products. In a nutshell, the “pie” — i.e., milk volumes available for export in one form or another — will remain relatively flat. The challenge CMAB is pursuing is making the export pie’s pieces more valuable. ESL fluid milk boosts exports to Asia Let’s focus on fluid milk exports to Asia — a prime example of CMAB’s value-added strategy. Say what? Skeptics may puzzle over the roughly a four week logistical span to get beverage milk from a California milk plant to Taiwan, for example. That four-week logistics time-clock starts ticking when the packaged milk leaves the fluid milk plant in a refrigerated, inter-modal shipping container that holds roughly 6,000 gallons of milk. Once at dockside in a port, a few days are needed to get that container loaded on board, along with thousands of other con tainers, before the ship heads west across the Pacific. Transit across the Pacific takes about three weeks. International shipping containers filled with perishable foods (such dairy) have refrigeration units that plug into the ship’s electrical system. “Whoa,” skeptics might say. At the four-week point from processing and packaging, that fluid milk has turned rancid. Not so, explains Glenn Millar, CMAB’s director of international business development. Fluid milk exports to Asia require logistical fine-tuning of both dairy pro cessing technology and marketing. Millar is a proponent of Extended Shelf Life (ESL) processing for fluid milk. ESL milk has a refrigerated shelf life of about 90 days. That longer shelf-life means that when ESL milk arrives at an Asian destination and is off-loaded from the ship, about two months remain during which the product maintains its good quality. ESL fluid processing technology yields a superior flavor, compared to the more familiar long-life “cousin” – Ultra-High Temperature (UHT), Millar and many others contend. Another advantage of ESL milk vs. UHT: the packaging may be simpler and less expensive. Currently, the following California-based fluid milk plants are shipping ESL milk to Asia: HP Hood and Rockview. ESL and UHT capacity is tight as many of the alt-dairy products, also low-acid, have migrated to the better technology and squeezed out fluid milk. ESL fluid milk provides greater ability to serve more distant export cus tomers … expanding the distribution arc, Millar contends. He cites the following export markets’ populations as the opportunity to substantially grow the number of customers served by California-sourced ESL fluid milk: Taiwan (24 million), Mexico (130 million), Southeast Asia (600 million), and China (1.4 billion). Generalities aside, more ESL fluid processing logistics need to be in place. In late summer or early fall 2024, California Dairies, Inc. – the state’s largest milk cooperative – is scheduled to begin production at a new fluid milk plant near Bak ersfield. That plant will produce ESL milk, thus adding to the state’s Class I ex port potential. A CMAB chart shows that California ESL fluid milk exports to all destina

Currently, Taiwan is the major destination for California ESL milk exports. During the past year, California’s fluid milk exports to Taiwan have doubled. Cur rently, California exporters are moving about 200 intermodal shipping containers per month to Taiwan. Each refrigerated container holds approximately 6,000 gal lons. (Do the math: 200 containers X 6,000 gallons each = 1,200,000 gallons of Class I milk sales per month. At 8.6 pounds of milk per gallon, monthly exports to Taiwan total nearly 10 million lbs. of Class I sales.) Where’s the value added component? Class I sales generate higher returns — approximately $1.90 per hundredweight more — to California producers than milk processed into butter and dairy protein powders. That’s one way that CMAB leaders strategically add value to the pie. Another factor to consider regarding Class I exports: If per capita consumption of fluid milk in the U.S. is declining, then the challenge is to “find more per capitas” – specifically in the Pacific Rim. Cheese … another value-added strategy Cheese is already a growing opportunity for California. From 2016 to 2022, value of cheese exports increased from $700 million to nearly $1.9 billion. Data provided by CMAB estimates annual, average growth in cheese demand for the following Asian nations from 2022 through 2027: China ..................................................................................(+14.9%) Indonesia ............................................................................(+17.6%) Philippines ..........................................................................(+5.5%) Vietnam ................................................................................(+4.5%) Repeat: That data projects annual growth for the next four years!!! Asia features numerous facilities that cut and wrap (or otherwise process) bulk cheeses. Cheddar and Monterrey Jack are two popular varieties. Singapore is a major destination for “cut and wrap” processing. That’s because cheese processors in Singapore may transform imported commodity cheese to consume-sized or food service-appropriate packaging, and then re-export resulting products to most other Asian nations through multiple “Free-Trade” deals. While volumes of cheese to Asian “cut and wrap” operations may be signifi cant, net returns for U.S. exporters are generally modest because savvy competitors from New Zealand are experts with a long history of serving Asian buyers in their backyard … while generally keeping costs below levels at which U.S. exporters may competitively remunerate their suppliers.. CMAB’s cheese strategies? Push value-added, consumer-ready cheese, through multiple channels. China is a prime example of CMAB’s value-added, cheese marketing thrust. Important to note: China’s acquiring tastes for cheeses (beyond those atop pizza) remains a work in progress. Cheese slices are popular in China, both for food serv ice and in-home use by consumers. Consumer and bulk packages of shredded cheeses are also very popular there. Cheese is a growing niche, both as an appetizer and ingredient in foods. One California cheese brand that is very popular in China is Rumiano. Chinese customers are attracted to Rumiano’s century-old niche of selling quality cheeses. Millar points to one customer buying roughly 60,000 lbs. of cheese slices per month from California. Hilmar Cheese, Leprino Foods, and virtually every major block cheese producer are selling volumes to China. Millar cites one Chinese buyer that has pre-ordered just over $10 million worth of California cheese for deliver y in 2024. He explains that much of that Chinese firm’s growth in dairy producat distribution is “post Covid-19” – i.e., new business, not cannibalizing other firms’ volumes. Economic woes shifting China’s food purchases China’s food retail sector is in flux, for many of the same reasons as we see in the United States. “Box stores” such as Sam’s Club and Costco are growing factors in China’s retail food trade. Currently, Sam’s Club has about two dozen stores in China, with another five scheduled to open in 2024. Arch-competitor Costco cur rently operates five stores in China, with two more scheduled to open later in 2024. The business model of Sam’s Club and Costco stores in China is altering Chi nese consumers’ food purchasing habits. Sources indicate that the U.S.-based box stores in China have mark-ups of approximately 12%. That contrasts with other food retailers’ mark-ups of about 30%. There’s no sugar-coating the fact that many Chi nese families face tighter personal finances amid a very troubled national economy. Savings gained from food purchases at box stores is a growth market. Increased food purchases at box stores are just one sign of China’s dramatic shift in consumer habits. For example, YUM Brands – parent firm of Pizza Hut, KFC and Taco Bell – has seen an 11% decline in sales through much of 2023 (vs. 2022). An other example: unit sales by a coffee chain are down 13% in China in 2023. That company operates numerous coffee shops throughout China as well as marketing high-end coffee machines for homes and offices. Sales of high-end coffee and its ac couterments have tanked in China, victims of the sharp economic downturn. Other Asian nations such as Japan, South Korea and Taiwan have far greater westernized tastes for cheese. CMAB leaders perceive nations such as Malaysia, Vietnam, the Philippines, Thailand and Indonesia as future opportunities, given their expanding economies and large number of relatively young citizens. Mexico’s dairy demand solid … California’s “neighbor to the South” is enjoying a very solid economy and demand for dairy products continues growing. Dairy trade with Mexico has a long history, with established relationships and strong transportation infrastructure – both rail and trucking. Mexico has a “free trade” deal with New Zealand. Some New Zealand com modities enter Mexico under that deal and are “transformed” for shipment to the

6— The Milkweed • January 2024

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