US emerging as strong dairy competitor

The US is shaping up to become a significant competitor to Australia’s dairy industry, a global dairy expert has cautioned.

Tim Hunt, Rabobank’s New York-based global dairy strategist, says the US is reorienting towards the global marketplace, attracted by the allure of better returns across some product categories, and could emerge as a competitor to Australian dairy products in international export markets.

“Historically, the US dairy industry lived in a fortress,” Hunt said. “It had a very large, affluent domestic market, which grew strongly and had very high prices. It was protected from the international market by high tariff barriers and had government support.

“But US dairy market growth has slowed in recent years, while the commodity price boom has seen international prices rise above domestic US market prices, making export returns more alluring for US dairy players.”

Hunt said the US dairy industry is becoming more cost-competitive in export markets, due to a number of factors: its large-scale farm operations, easing feed costs and a lower US dollar.

US dairy exports have already begun to grow steadily as a result, Hunt said, with milk powder exports increasing from 300,000 to 500,000 from 2007 to 2012, and cheese exports increasing from 100,000 to more than 250,000 tonnes in the same period.

However, it won’t be all smooth sailing for US dairy players, Hunt says. “With the entire US dairy industry having developed to service the domestic market, they are not aligned to the requirements of exporting dairy,” Hunt said.

“Essentially, they have the wrong plants and they make the wrong products for global market exports. In addition, US regulation makes exporting hard for the industry.

“The US dairy industry doesn’t have good access to several important markets and they also have relatively weak relationships with offshore customers.”

However, Hunt says, plants are being tweaked and new plants are being built to service export markets. In addition, market access is improving and the US is strengthening relationships with offshore customers.

Having largely lost its cost of production advantage in world dairy markets, Australia will be increasingly likely to compete head to head with the US in coming years, Hunt predicts.

“Maintaining Australia’s edge in post-farmgate processing and marketing will be crucial to sustaining returns on farm,” he said.