Dairy Factory Gears Up for Production

Farmers Get a Crash Course in Competing Globally
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In November 2012, when Cayuga Milk Ingredients Inc. broke ground for a $100 million dairy factory, U.S. dairy exports were booming and prices were high.
But now, as the plant completes its first shifts running at full production, buying by key global buyers is slowing and prices are collapsing. “The timing could have been better,” concedes chief executive Kevin Ellis.
Historically, America’s dairy processors have focused on their home markets, but many of them have retooled in the past decade, boosting output to help supply infant formula, cheese and other products to China and other countries with rapidly expanding middle classes. Since 2012, U.S. milk-powder production capacity has increased 25%, according to Tim Hunt, a global dairy strategist for the Dutch banking group Rabobank.
Now, with prices down sharply from the highs reached last year, the companies are getting a crash course in the risks of competing globally and working to improve their use of hedging and other risk-management tools. They’re also trying to tap other destinations, from Mexico to Malaysia, for their products. They have little choice: While prices in the U.S. are generally higher, demand has been anemic.
“We can’t go back” from the international market, says Mr. Ellis. “There aren’t enough people to consume [the dairy products] in this country.” He adds that Cayuga has found foreign buyers other than China and that the company expects to sell an even greater share of the plant’s output overseas than it had planned.
The export boom was driven by several factors, most importantly a 2008 scandal in China in which tainted milk killed six children and sickened about 300,000 others, destroying the faith of Chinese consumers in the nation’s dairy industry.
By 2014, the U.S. market share of global dairy exports had climbed to nearly 20% from 7% in 2003, according to the U.S. Dairy Export Council. Exports now account for the equivalent of about 16% of U.S. milk production, up from 5.7% in 2003.
Demand for U.S. dairy products overseas also stimulated a surge in investment at home, and some of it came online just recently. Dairy Farmers of America Inc., the biggest U.S. milk cooperative with $12.8 billion in 2013 sales, opened one of the world’s largest milk-powder plants in Nevada in April. In November it agreed to invest at least $70 million to build a similar plant in Kansas with China’s Inner Mongolia Yili Industrial Group Co.
The boom has even drawn interest from industry outsiders. Former Detroit Lions star running back Billy Sims and his business partners plan to spend $150 million to build a milk-powder plant in Michigan geared to Chinese consumers, say Mr. Sims and David Tomby, who are co-chairmen of the venture.
Other countries have also added production. In Europe, dairy farmers are increasing supplies ahead of the lifting of milk-output quotas this year. And in New Zealand, milk output is rebounding after dairy farms suffered through a 2013 drought that depressed production.
Meanwhile, though, growth in import demand from China has slowed as it has built up ample supplies at home. U.S. exports to China of nonfat-dry-milk powder slipped 5% to $165 million between January and October 2014, compared with a year earlier, according to the U.S. Census Bureau. In addition, Russia’s import ban on U.S. and European food, including dairy products, has reduced global demand.
Since February, prices for milk powders on Global Dairy Trade, an influential auction platform, have declined more than 50%, though they showed signs of stabilizing in the first auction of the year. U.S. Class III milk prices on the Chicago Mercantile Exchange, which tend to lag behind international trends, have fallen 35% since mid-September to $16 per hundred pounds.
U.S. dairy exports have held up, increasing 9% to a record $6.16 billion between January and November 2014 compared with a year earlier, according to the U.S. Agriculture Department.
Still, “we’re in a stage where it will take more time than expected for the extra supply to find a home,” says Gabriel Sevilla, a vice president at Proliant Dairy Ingredients, a unit of privately held Lauridsen Group Inc. “When someone gets an idea about a new market, they usually think they’re the only ones with the bright idea. So instead of one factory expanding production, we tend to have three or four.”
California Dairy Inc.’s response to the market volatility has involved building an internal risk-management group, which is trading more milk contracts on the Chicago Mercantile Exchange to help the company weather global price swings as it boosts exports, says Andrei Mikhalevsky, chief executive of the second-largest dairy cooperative in the U.S. California Dairy expects global milk prices to stabilize by late summer as global stockpiles dwindle. “Then,” he says, “we’ll be back in business going after export markets.”
Beset by a 5% to 10% decline in orders from China in recent months, Peter Gutierrez, a vice president at Lawrence, Mass.-based Agri-Mark Inc., is trying to find different buyers for the whey his company exports. In December, he met with representatives of Indonesian, Malaysian and Philippine dairy processors. They expressed interest and have received some samples, he says.
Cayuga has already found success with new foreign buyers, Mr. Ellis says. In 2008, 28 dairy farmers in upstate New York began raising $100 million to build a processing plant close to home that was originally expected to produce only for U.S. customers.
But the design evolved with an eye toward foreign sales. The plant is a tangle of metal tubes that send milk into equipment to separate its fat, dry the rest, and concentrate the proteins in a powder. To assuage international customers’ concerns about food safety, Mr. Ellis increased plant cleanings and removed three of the 10 heating surfaces that could nourish bacteria.
By the November 2012 groundbreaking, Mr. Ellis figured the plant would export as milk powder the equivalent of about 27% of the milk it processed. But he has continued to find new export customers. He says he now expects to ship the equivalent of 79% of the plant’s milk intake as powdered milk and concentrated-protein products to countries including Mexico and Saudi Arabia this year.
Long term, he says, “There’s plenty of opportunity in the global market.”
 
 
Source: WSJ

Mirá También

Así lo expresó Domingo Possetto, secretario de la seccional Rafaela, quien además, afirmó que a los productores «habitualmente los ignoran los gobiernos». Además, reconoció la labor de los empresarios de las firmas locales y aseguró que están «esperanzados» con la negociación entre SanCor y Adecoagro.

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