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U.S. Dairy at a Global Crossroads
Don Blayney, Mark Gehlhar, Chris Hilda Bolling, Keithly
Jones, Suchada Langley, Mary Anne Normile, and Agapi Somwaru
Economic Research Report No. (ERR-28), November 2006
Current dynamics in world dairy markets and the potential for
global and domestic trade policy reform are bringing the U.S.
dairy sector to a new crossroads as it faces competitive forces
from outside its borders. Those forces—demand for new
products by consumers in industrialized countries, changes in
technology, rapid economic growth in emerging developing countries,
particularly in Asia, and the increasing role of multinational
firms in domestic and global dairy markets—are leading
to increased dairy consumption, more opportunities for dairy
product trade, and foreign direct investment benefiting both
U.S. consumers and producers. As global demand for milk and
new dairy products expands, the roles of policies that support
prices are diminishing, while the roles of flexibility and innovation
aimed at improving competitiveness are growing.
Most dairy sectors worldwide, including the U.S. sector, have
been cast as heavily protected with limited exposure to global
competition. However, current dynamics in world dairy markets
and the potential for global and domestic trade policy reform
are bringing the U.S. dairy sector to a new crossroads as it
faces competitive forces from outside its borders. Those forces—demand
for new products by consumers in industrialized countries, changes
in technology, rapid economic growth in emerging developing
countries, particularly in Asia, and the increasing role of
multinational firms in domestic and global dairy markets—are
leading to increased dairy consumption, more opportunities for
dairy product trade, and foreign direct investment benefiting
both U.S. consumers and producers. As global demand for milk
and new dairy products expands, the roles of policies that support
prices are diminishing, while the roles of flexibility and innovation
aimed at improving competitiveness are growing.
What Is the Issue?
Government intervention designed decades ago for improving
dairy market performance has evolved into a means of producer
support and protection from foreign competition. Yet, the benefits
of government support can be modest and, in the long run, can
distort market signals and discourage producers from pursuing
new opportunities. The changing characteristics of world dairy
markets have implications for the competitiveness of U.S. and
international dairy industries and the role of policies in a
global context. Understanding how the U.S. dairy sector might
respond to liberalization of global dairy trade policies given
the dynamics of current market forces will aid in assessing
future domestic and international trade policy reforms.
What Did the Study Find?
In response to changing global markets, the U.S. dairy industry
is positioning itself to compete worldwide through innovation,
expansion, and consolidation of firms and dairy businesses.
Competition worldwide has given rise to increasing dairy consumption.
In high-income countries, per capita consumption and population
growth have subsided and demand for dairy products is growing
at about 2 percent per year, driven primarily by consumption
of higher value-added dairy products rather than volume increases.
In many low-income countries, dairy consumption is growing at
more than 10 percent per year; in China, for example, consumption
is expanding at 15 percent per year.
As a sign of the worldwide dairy industry’s vibrancy,
dairy product launches more than doubled from 2000 to 2004,
compared with the previous 5 years. New markets have developed
for dairy ingredients such as milk proteins and lactose (milk
sugar) used in both dairy and nondairy products. Global competitiveness
is also fueled by new uses for milk-based ingredients, rising
demand for cheese variety (including brands), an increase in
niche product markets, and increased shelf-lives for products.
Globalization has tended to emphasize the strength of multinational
dairy firms. As international dairy companies recognize the
prospects for demand growth around the world, they are repositioning
themselves to produce and sell milk and milk products from multiple
locations. Foreign investors find the United States, with its
large domestic market, particularly attractive for this purpose.
Foreign companies such as Nestlé, Unilever, Bongrain
SA, and the Fonterra Co-op Group now have a significant presence
in the U.S. market.
The three dominant dairy trading areas today, as in the past,
are the European Union (EU), Australia, and New Zealand. Australia
and New Zealand, both with low-cost milk production and industries
actively involved in international marketing, are prominent
suppliers to the Asian markets for cheese and dry milk powders.
The EU focuses on nearby traditional markets and North America,
mainly exporting premium cheese. Product differentiation and
consumer preferences play major roles in shaping global dairy
product demand and trade flows. For example, all high-income
countries import EU cheese. The largest dairy trade flow worldwide
is cheese from the EU to the United States, even though milk
production costs in the EU are higher than in the United States.
Dairy policies still influence the flow of products globally.
For individual countries, providing an adequate supply of milk
to satisfy domestic market needs is often the first priority.
Thus, domestic dairy policies and programs are generally mechanisms
to promote milk production, but in some cases they promote surplus
production above domestic needs. Those surpluses are available
for export and, in some countries, such as in the EU, Canada,
and the United States, they have been subsidized. Additionally,
almost all countries have trade policies in place that impede
dairy imports.
Based on two independent simulation models, global liberalization
of dairy policies would lead to increases in world market prices
and the value of dairy product trade. For the United States,
the effect would reduce dairy sector production by less than
2 percent. However, these results do not reflect recent globalization
of the industry—new products, growing demand in emerging
developing countries such as China and India, technological
innovation, and the increasing role of multinational firms in
domestic and global dairy markets. If the U.S. dairy sector
continues to make gains in efficiency as it has in recent years,
particularly with an open trading system, U.S. dairy producers
and manufacturers could benefit from trade liberalization. Accordingly,
U.S. consumers and producers would benefit from greater access
to markets and higher international prices accompanying trade
liberalization.
How Was the Study Conducted?
The study was conducted in two parts. First, we performed a
comprehensive analysis of changing global dairy markets. International
data sources were used to examine patterns in dairy consumption,
production, trade, foreign direct investments and evolving firm-level
partnerships. Second, we used two formal trade models to measure
the impacts of hypothetical dairy trade and domestic policy
reforms. The first model, the Partial Equilibrium Agriculture
Trade Simulator, explicitly captures the effects of interactions
with nondairy agricultural sectors. The second model, the University
of Wisconsin World Dairy Model, characterizes milk and dairy
products in considerable detail and incorporates detailed specifications
of dairy trade and domestic policies.
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