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Global Dairy eBrief Exclusives

Q&A: Three Dairy CEOs Bullish on Future of Exports


by Margaret Speich      
For California Dairies, Darigold and Leprino Foods, the outlook is cautious optimism as USDEC members embark on an ambitious journey to “The Next 5%.”

In the last 20 years, U.S. dairy exports have gone from less than $1 billion a year to nearly $5 billion. That growth has benefitted everyone in the U.S. dairy industry, including U.S. Dairy Export Council (USDEC) member companies.

At the Oct. 17 USDEC Board of Directors and Annual Membership Meeting at the Swissotel in Chicago, members approved a strategic business plan called "The Next 5%." This plan aims to increase our dairy export volume even more, from about 15 percent of the U.S. milk supply to 20 percent in the next three to five years.

As USDEC's senior vice president of strategic and industry communications, I oversee the planning and execution of these board meetings. This was my 24th such meeting and I consider it one of our most important. We are at a pivot point.

Based on what I heard from speakers and members, I would describe the mood as sunny, but with a sober awareness that storms can emanate from Washington and other parts of the world at a moment's notice, sometimes with long-range repercussions.

The session that best captured the cautiously optimistic outlook for me was a question-and-answer period moderated by USDEC President and CEO Tom Vilsack.

Answering the questions were CEOs of three member companies, listed here by last name, alphabetical order:

  • Mike Durkin, president, Leprino Foods.
  • Andrei Mikhalevsky, president and CEO, California Dairies Inc.
  • Stan Ryan, president and CEO, Darigold.

These three executives have 63 years combined experience in food and dairy. They see things from a unique vantage point. None claims to know the future, but all have adapted from the past.

We recorded the session and made a transcript. Reading the insights of these leaders was almost as good as being there in person. I thought it would be helpful to share what I consider the best of the best comments, for those who could not make it to the board meeting and for those who could, but want to read and absorb what they heard.

Before getting to the Q&A, I would like to make five observations from what I heard and read:

  • All three CEOs are bullish on the future of dairy exports, reflecting the cautious optimism of our industry.
  • Increasing market access is a vital priority, with members relying heavily on USDEC.
  • New growth in the overall dairy industry greatly depends on exports. One CEO said 75 percent of his co-op's future growth is expected to come from exports.
  • U.S. trade policy is in flux, creating uncertainly, with much at stake. Decisions made in the coming months could affect U.S. dairy exports for decades, underscoring the need for USDEC's continued vigilance to protect and expand our industry.
  • The global pace of change is rapid and only getting faster, with our competition continuously innovating. We must do the same, only better.

What follows is my condensed and edited version, about one-third the size of the original Q&A transcript.

Vilsack (USDEC): Could you provide a few remarks in terms of your overall attitude looking into next year, the importance of exports, where things are and where you think they need to be?

Durkin (Leprino): Leprino has been pretty active in the international market for a long period of time. I am trying to think how many years ago we put our first regional office in Singapore, and that really has been the key, I think, to something where we have been able to leverage that quite a bit. So, we are pretty bullish. We are having a great year this year from an export standpoint.

We do not view it as a one-year phenomenon. We have a big investment in sales and supply chain, not just in Singapore but also in a number of different countries in Asia. We are looking beyond Asia to the Middle East, South America and a number of other locations.

We think the U.S. dairy system is the best in the world. We want to leverage that.

Mikhalevsky (California Dairies): From an overall perspective looking at the export markets, looking at the international business, we are very bullish and positive, even though the markets may not seem that way today. Currently, there is a short-term blip in the markets where we see the overhang of product in Europe. However, if you get through that and you look ahead, things come in cycles. This just happens to be a longer cycle than normal.

Moving product out of the state of California is very important to us, whether we are exporting into the other 49 states or exporting outside the country.

We have developed a strategic plan to try to take advantage of the opportunities in the market. One, obviously, is working with USDEC and supporting the efforts that are gaining us market access because we think that is one of the biggest issues today. The second is how do we develop relationships with customers in the different markets? How do you actually develop relationships, get into markets, understand customers, and understand consumers?

Probably the last question is how do you focus on exports with value? Anyone can sell commodities, put nonfat dry milk onto a GDT or just meet demand out in the market, but that is not going to be the future. If you look at what Europe is doing raising the bar with new plants, new specifications, new innovation, new differentiation, it's going to be very important for us to focus in those areas so we continue to raise the bar. So, focusing on customers and markets, raising the bar, getting market access are all very important to us, but we are very bullish on exports and very bullish on the future.

Ryan (Darigold): Maybe just a bit of background on Darigold first. We are in the Pacific Northwest, about 500 member farms split between Montana, Idaho, Washington and Oregon. We have 11 processing facilities. Just over 40 percent of our raw milk equivalent goes overseas today, and probably 75 percent of all our farm growth is targeted to go overseas. So, international markets, for us, are an imperative and not an option. That is core business for us, not side business.

I look at the next year, and I've got a coin with a lot of sides on it.

On a fundamental basis, I think all 35 OECD (Organization for Economic Cooperation and Development) countries are in growth this year—all of them. It's happened like four times in 30 or 40 years. As a result of that, you've got fundamental demand growth in the world.

As you know, dairy is nutritious, it's affordable, and it's really a versatile product that can go into a lot of different applications-and all the ones that we haven't thought of yet.

On the other side, there are threats right in front of us that are really serious... with the trade issues, whether it is (Canada's Class 7 pricing policy), Mexico, NAFTA, KORUS, around the world, it has a compounding effect that's gigantic.

Don't think about the effect of next year. Think about the trajectory it would put us on 10 to 20 years later. And the delta between a really open, free, level playing field so we can compete—not an advantage but a level playing field—versus the disadvantages that we put in place if we do nothing and just stand by. There would be more disadvantages. The difference down the road, I would argue, is more than the 5 percent that we're talking about. And the trade game is right now because our rivals are out pushing it hard. There are other teams out there and they are moving and they are moving hard.

Vilsack: What keeps you up at night, what concerns you the most, and how, as a company and an industry, should we be approaching whatever it is that you are concerned about?

Durkin (Leprino): Mexico is a big market for us. If NAFTA goes away, that is a huge challenge that I don't know how we will overcome.

We talked about it earlier when you mentioned trust. When we start to go after and threaten pulling out of different agreements, we do start to deteriorate the trust. Over time, does that have an impact? I think it does.

Pulling out of agreements and eroding trust is what keeps me up.

Mikhalevsky (California Dairies): I would maybe stress this whole area of market access. We talked a little bit about Vietnam yesterday. Vietnam was one of the top markets for shipping milk powder into, and it has gone away over the last 12 months. Market access is so critical to us. That's the ante that opens the game before we go in, build relationships, and talk to anyone. Really, for us, market access would be the highest on there.

These trade agreements are just so important to us to building our business because without that we cannot do anything else.

Secondarily, what keeps us up at night is we need to make sure we remain competitive in the market. There are many new facilities going in around the world—specifications, spore counts—there are so many things that are going on around the world where products are getting better and better, and we have to continue to invest and innovate and differentiate to make sure we stay on top of that. So, the two big things for us are market access and remaining competitive in the market with the products that we have.

Ryan (Darigold): To echo what you were saying, Andre, I think the pace of change is just getting faster and faster, and keeping our organization on that same pace of change with the current issues—all of the market access issues—is really right on center plate right now.

Mikhalevsky (California Dairies): I think I would add one more point. It is kind of an elephant in the room—volatility in the markets.

Volatility in the markets makes it a very hard industry to be able to manage and make farming sustainable, dairying sustainable. There is just a wild ride going on with pricing in the market. It is an issue.

Vilsack: What suggestions would you have in terms of our staff and our team at USDEC to be of greater assistance to you and alleviate some of the concerns and to reduce some of the risks that you just identified?

Durkin (Leprino): First of all, I want to say "thanks" to you and the team for really putting together what I thought was a really good strategic plan in terms of where we want to go to get "The Next 5%." Most importantly, I think you've listened and I think that was good. It was a great program but you also listened and that was very helpful.

Having (more USDEC representatives in the Asian markets and elsewhere, as called for in The Next 5% plan) and making sure that they have a complete understanding of what is happening in the regulatory environment, the market access components of that, and the impact and the anticipation of what we can do to make sure we can access those markets is very important. I know we would be able to work hand-in-hand, side-by-side with your team to be able to go after that.

Ryan (Darigold): We have a consumer business and an ingredient business as an industry and it sits on top of a commodity, if you will, and it's really volatile, as you had mentioned. Look at the cycles in the last 15 years. They are up and down, up and down.

I'd argue there is one that we could help benefit ourselves structurally and help price convergence and help our price competitiveness—and I think USDEC could play a role in it—would be a revamped CME (Chicago Mercantile Exchange). If we could make the United States the place where people do their forward hedging and buying, and it was truly a neutral contract that represented global products, I think it would help... drive the liquidity to the United States, help make the United States a little bit more of the center of the agriculture world with the production potential to grow faster than other parts of the world.

Vilsack: You all agree with the assumption that I think we operated on in developing The Next 5% plan that production is going to increase in the United States over time? Is that a given? More milk?

Mikhalevsky (California Dairies Inc.): I think you are going to continue to see short-term growth in the milk supply in the United States. In fact, I saw a statistic that other day that if you go back over the last five years, the Europeans have had times where milk production has actually dropped below prior years. New Zealand's had production drop below prior years. What part of the world is the only place that has not had production drop below prior years? It is the United States. We have continued to have steady growth over that period. When you look around the world at the volatility, we have to place some of it in our own camp that we have contributed to it.

However, I would see milk growth in the United States in the short and medium term. I think that there is another factor, I think, which will come into play at some point. That is, if we are going to compete in the world market, people are moving up with brands and more value-added products. It takes a lot of money to be able to do that. We have a very fragmented industry. When you look around our industry, we have a lot of cooperatives; we have a lot of smaller groups that may not have the capital the way we're organized today to be able to take advantage of those opportunities, so I'd say in the short to medium term, I see milk growth.

How we structure the industry, and how we capture those opportunities, will actually be the deciding factor on a longer-term basis on how much milk supply we feed into the world.

Vilsack: As important as price is, where does differentiation/innovation play in terms of being able to position America and U.S. dairy to be as competitive in some of these markets where we have access issues?

Durkin (Leprino): One example might be pizza. We're actually very good at what we do from that standpoint, and being able to differentiate versus our competitors around the world in terms of our knowledge and how to do it and help (customers) grow, not just trying to sell them cheese.

We're also obviously very big on the powder side and the whey side as well. A number of different innovations on the powder side have been extremely important, whether that's native protein or micellar casein. That in our mind is how you innovate and how you differentiate to gain greater access.

Mikhalevsky (California Dairies): There is an awful lot of differentiation that can be done looking at the health benefits and scientific claims that you can make around dairy products. At one time, it was all about protein. It is still about protein. Then, remember, people moved into other areas. They started looking at the nutritional side of fat, and healthy milkfat, and are there things you can do with phospholipids and differentiate there.

There has been very little work done on the carbohydrate side of milk, which is the lactose, and the benefits you might be able to get. We look at it, as bad because it is sugars, but there may be other benefits in there. I think that there are scientific claims that can be made, and we are seeing some of that come out, that will differentiate dairy and help us maybe come up with some unique products that are differentiated in the world market.

We need a two-pronged strategy. The first part is to move closer to customers with what they need. The second part is to continue to build on the nutritional value of dairy and make scientific claims.

Ryan (Darigold): On the value-added end of the business, I'm struck by the versatility of the whole milk complex, what you can do with it that we don't imagine today. It just seems very application-centric. You can make things out of it. I'm not very deep in it, but I never thought I'd hear about cream cheese concoction in tea, and it's a gangbuster in China for example. I had never heard about that before until this past year. I think the things that can come out of dairy down the road from an innovation point of view, from a product innovation are probably really big given that every country has a different set of cuisine and can use these versatile products in different ways that none of us will ever think of.

Vilsack: Is there anything that any of you believe we should be doing as an industry, more broadly, to address that or to really think more, be more forward-looking about the threats (e.g., plant-based proteins) we're facing down the road?

Durkin (Leprino): As Leprino, protein obviously is a big component of what we do on the dairy nutrition side. Absolutely. Are we concerned? Yes. Do we think it's having an impact at least short term? The answer is I do think it's having an impact.

We also happen to think dairy protein is the best, so "What can we do as an industry?" We're working with DMI, the Innovation Center, USDEC, and a number of other folks to develop an action plan on what we need to do to be able to promote dairy proteins, and that to me, is critical, because not unlike other challenges, whether you are talking about rBST or GMOs, if we don't take the initiative and let the narrative be controlled by some other group or some other factor, then in fact we're going to find ourselves behind the eight-ball within that particular area. So, we do view (plant-based proteins) as a threat, but we also happen to think dairy protein is the best, so how do we take advantage of that and how do we gain the foothold here where we're being proactive controlling the narrative?

Ryan (Darigold): If we don't tell our story to the consumer, somebody else will. We need to stand up for dairy.

Mikhalevsky (CDI): I made a comment earlier about scientific claims and being able to claim the benefits of dairy. I feel that is really one of the most important things we can be doing going forward as an industry is looking for areas that dairy helps people. And I'll give you a couple of examples.

It helps people in ways that no other product can. For example, in infants and in all of us, our brains are made up of phospholipids. You get that from mother's milk. That is the best place to get it. Secondarily, after that, is bovine milk. Therefore, if you do not have phospholipids in your diet, you are not going to have proper brain development, and you are not going to be able to think and have the cognitive abilities you need.

Two weeks ago, the University of California at Davis was doing some work on a study we are involved with and proved that there is a protein in milk that helps. I cannot even say the word: immunosenescence. As you get older and you take flu shots (or other medications), they are not as effective as they once were. UC-Davis just proved that this protein in milk actually boosts your body's ability to increase the effectiveness of vaccinations. It is the first time they have ever seen an immune system boost out of a product made of protein. It has to go to peer-review now and then it has to move on. However, all of those kind of things around dairy research and the things that are coming out of that are going to help support our product.

I really think there are benefits in dairy that exist nowhere else in the world.

Margaret Speich is senior vice president of strategic and industry communications at the U.S. Dairy Export Council.

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The U.S. Dairy Export Council fosters collaborative industry partnerships with processors, trading companies and others to enhance global demand for U.S. dairy products and ingredients. USDEC is primarily supported by Dairy Management Inc. through the dairy farmer checkoff. The password-protected article above is intended for USDEC member organizations only and should not be shared with anyone outside your organization.