Chapter1 analysis of trends in global dairy market

Before we start talking about increasing the competitiveness of dairy products, it’s necessary to understand if there are any prospects for the development of the dairy industry at all. Otherwise, most of the efforts and investments may be futile, which is critical for the economy of the Republic of Belarus. It is doubly important for our country because of an urgent need of expanding new markets. For the analysis we turn to the data of international companies, as they can cover a bigger volume of information.

The Dairy Index, an annual report by the global packaging and processing equipment supplier Tetra Pak, states that global demand for milk is set to surge by 36% in the next decade, largely due to population growth, rising prosperity and urbanization in Africa, Asia and Latin America. So, these markets play the most important role for Belarus too.

But, according to the report released in October 2014, milk supply and demand is imbalanced across the world. The rising demand in emerging dairy markets is unlikely to be fulfilled by locally produced raw milk, while developed dairy markets producing a milk surplus face the challenges of competing for exports and responding to falling domestic consumption.

As Dennis Jönsson, president and CEO of Tetra Pak Group, says, he predicted surge in global demand offers a huge opportunity for dairy companies in developed markets like the U.S. to export powder and ambient liquid dairy products to growing economies. But, to ensure long-term success, the producers need to balance the ‘quick wins’ of export against the requirement to continue to grow their domestic markets.

However, although there are significant opportunities to export, producers must not lose focus on the domestic market. Product diversification, innovation and brand differentiation will be crucial in the face of changing consumer demographics, behaviors and lifestyles. That conclusion is not fully acceptable for Belarusian enterprises, which face with the state policy of strict price control.

In Europe and in North America, for example, changing lifestyles and dietary requirements have caused a significant shift in traditional consumption habits. White milk consumption in Western Europe has fallen 0.8% in the last three years. The prospects here are not so awesome.

To maintain a viable business in these markets, and drive value into the sector, dairy producers are shifting towards value-added products that deliver extra nutrition, flavor or other lifestyle benefits, which have greater consumer appeal.

To sustain high quality raw milk supply, the companies are reaching out to the export countries to form partnerships. At the same time, however, with competition for raw milk becoming ever-more fierce and traditional milk exporting countries reaching production capacity, developing nations are coming under increasing pressure to invest in greater self-sufficiency. In doing so, of course, they will need to address challenges related to the environment, natural resources and the availability of expertise.

Several markets have already begun that journey. For example, despite its hot and arid climate, more than half of Saudi Arabia’s domestic milk consumption is now met from local supply, and it has built a strong export business to countries across the Middle East. Thus, our producers must pay particular attention to the competitiveness of products just for gaining access to these markets.

Global white milk consumption is forecast to rise by 1.8% CAGR (compounded annual growth rate) between 2013 and 2016, from around 212 billion liters to around 223 billion liters, exceeding the growth of 1.2% CAGR between 2010 and 2013. However, the expected increase in demand from places like India, China, the Middle East and Africa is unlikely to be met locally, with production in these markets predicted to rise more slowly.

What’s more, supplies from traditional milk export countries will struggle to keep pace with this growing demand, creating a supply/demand gap within the next decade. Through this period, dairy companies will continue to enjoy major growth opportunities. However, the rising demand for healthy, nutritious and convenient products, together with the squeeze on milk supplies and inevitable price-rise consequences, points clearly to the need for greater product innovation.

As top milk exporters in developed countries reach their production and processing limits, developing countries reliant on imports will also need to invest more to boost their milk self-sufficiency. In doing so, they must overcome the challenges of climate, limited availability of land, water, feed and cattle and dairy expertise.

Meanwhile, in an effort to make milk stretch further and get more value per liter sold, dairy companies will need to make the most of milk’s versatility by using it in innovative ways in new products and formulations. This will include combining milk with other ingredients such as juice and cereal, and tapping into milk alternatives, such as whey.

In an indication of how the situation is evolving, between 2011 and 2013 global milk supply was slightly ahead of demand. However, by 2018 supply will struggle to meet demand due largely to growth from Asia and Africa, where production is limited by physical constraints such as the climate. It’s an additional chance for Belarus.

The global import of liquid and powdered milk (excluding trade among the EU countries) is expected to be driven by China during 2014-2024. This is based on the fast increasing domestic demand and trust in the quality of imported products. China is poised to double its share of global milk imports in the next 10 years.

However, it is expected that a focus on “home-grown” milk in China could emerge over the coming years, with the industry and the government encouraging the consumption of locally produced dairy products. This barrier could pose a future risk to markets which are currently heavily reliant on exports to countries like China.

With white milk increasingly viewed as a commodity due to aggressively low pricing by retailers, dairy companies are looking for new ways to add value, such as differentiated packaging and highlighting functional and nutritional benefits. These factors are important parts of product competitiveness.

A good example is the United States. There are promising growth in functional and differentiated dairy products that meet people’s health and lifestyle needs, including organic milk, dairy alternatives and dairy products with a value-added nutritional focus. Smoothies, lattes and breakfast shakes are also creating opportunities for growth. Among functional products, demand is growing for sports milk and drinks designed to help people manage their weight. Protein-enhanced nutritional drinks sold in portion packs are targeting health-conscious adults.

Dairy processors also are focusing on innovation and developing other liquid dairy products (OLDP), which are predominantly targeted at younger adults, who are more likely to be open to new products, especially at a time when their milk consumption is lower than other groups.

Of course, it’s obvious that Belarusian companies don’t have so many resources for improving product competitiveness as, for example, American firms. But if we look at other countries, it becomes clear that the right strategy is the base of success. Brazil, by investing heavily in research, has turned itself into the first tropical farm giant, joining the ranks of the temperate-food superpowers such as America, Europe and Canada. It did so in a single generation, thanks mainly to big commercial farms. Vietnam, through policy changes (especially freeing up small-scale private agriculture), turned itself from one of the world's largest importers of rice into the world's second-largest exporter.

Or take the example of maize seed. According to Pioneer, a big seed company, central Ghana has some of the best maize land in the world, yet only 3% of the country's seed is the hybrid kind that can take full advantage of it. In contrast, Brazilian land is less good, but 90% of its seeds are hybrid ones. The country is now the world's third-largest exporter. If Ghana bought more hybrid seeds, it could presumably achieve something closer to Brazilian yields.

Another main source of growth will consist of spreading a tried and tested success: the “livestock revolution”. This consists of switching from traditional, open-air methods of animal husbandry, in which chickens and pigs scratch and root around the farm, eating insects, scraps and all sorts of organic waste, to closed “battery” systems, in which animals are confined to cages and have their diet, health and movement rigorously controlled. This entails huge losses in animal welfare, and European consumers are reacting against the system. But there are also gains in productivity and sometimes even in welfare, by reducing losses from diseases and predators that in traditional systems can be distressingly high.

Improving livestock farming is important because of meat's growing share in the world's diet. That is just partly connected with milk industry, but takes a significant place in Belarusian exports. As researchers say, meat consumption in China more than doubled in 1980-2005, to 50 kg a year per person. Between now and 2050, meat's share of calories will rise from 7% to 9%, says the FAO; the share of dairy produce and eggs will rise more.

This will make some difference but the change likely to generate the biggest yield gains in the food business — perhaps 1.5-2% a year — is the development of “marker-assisted breeding” - in other words, genetic marking and selection in plants, which includes genetically modifying them but also involves a range of other techniques. This is the most important source of growth.

The public debate on plant genetics focuses almost entirely on the pros and cons (mostly cons) of genetic modification — putting a gene from one species into another. A gene from a soil bacterium, Bacillus thuringiensis, for example, when spliced into maize, makes the plant resistant to herbicides; this enables farmers to plant maize, spray the crop with a weedkiller and end up with a field of nothing but maize. In Europe it is illegal to plant such maize. The biggest advantage of genetic selection, however, is probably not that it makes it possible to grow transgenic crops, but that it allows faster and more precise breeding.

Imagine the genetic material of plants as a vast library, with billions of books. This library has no catalogue, and none of the books has an index or table of contents. It is still possible to discover what is in the library by reading every volume. That is roughly what plant breeders have done in the past, painstakingly planting hundreds of varieties of a single species and discovering traits by breeding numerous generations from them.

How does it influence on competitiveness of products? The fact is that these technologies become cheaper, so now they are available to a wide range of manufacturers. Growing production volumes lead to its lower prices, and the price is one of the main instruments of product competitiveness.

Let’s turn to other research projects. A study, this one by a Swiss-based equipment and packaging firm, concluded that “the world is set for a decade-long boom in milk consumption, with demand for liquid dairy products set to surge by around 30% from 2010 to 2020, driven by economic growth, urbanization and the rising purchasing power of Asia’s middle class.”

The forecast, by Tetra Pak, Vernon Hills, Ill., also states that by 2014, packaged milk will outsell “loose” (unpackaged) milk in the developing world for the first time.

The Innovation Center for U.S. Dairy, Rosemont, Ill., worked with the consulting firm Bain & Co. and concluded that growth prospects remain intact. The IC sought to update the research to determine if fast-changing international dairy market conditions since the 2008 global financial crisis altered the initial findings, conclusions and recommendations to the dairy industry. Over the last three years, China, India, Southeast Asia and the Middle East/North Africa have shown continued demand growth, the report noted. More than 75% of the projected increase in world non-fluid dairy consumption from 2010-15 is expected to come from these four regions.

The Tetra Pak research stated that by the end of the decade, India and China are expected to account for more than a third of the world’s total liquid dairy products consumption, with the Asia-Pacific region alone continuing to consume more than the rest of the world combined. Asia-Pacific, Latin America and Africa are all forecast to record double-digit growth in demand for liquid dairy products in 2010-2020.

The IC said that Russia’s dairy production dipped and potential low-cost producers such as Brazil and Ukraine failed to develop their supply capabilities. Other sources such as Argentina and Belarus have good potential but are relatively small. Despite modest production increases, New Zealand and the European Union will be unable to keep up with emerging market needs, the 2011 report update concludes.

Demographics, economic growth and sustainability are fuelling six fundamental developments or “mega trends,” which will shape the future of the dairy value chain, Tetra Pak forecasts. Demographic change will be characterized by a growing population increasingly living in cities. Economic growth, particularly in emerging markets, will spur development, boost the ranks of the middle class and speed up globalization. Sustainability will become a key issue as demand for resources puts pressure on the environment and increases the need for technological innovation. The six resulting “mega trends” are:

1. Increased demand for packaged food

2. Greater diversification of consumer needs

3. Changing dynamics in food manufacturing and retailing

4. More food safety awareness

5. Rising competitive pressure

6. Acceleration in green solutions as a “must have” for businesses

These trends can help in defining guidelines for an increase of competitiveness. The Innovation Center even created recommendations for staying competitive. They were developed for the USA, but that could be interesting in comparison with methods in Belarus.

In the original 2008 report for the IC, researchers identified a number of structural weaknesses that could prevent the United States from capitalizing on the global market opportunity. As a result, the IC board recommended a series of pre-competitive industry initiatives to help the U.S. industry improve its competitiveness and stake a position as a globally consistent supplier. Those recommendations include:

• Reform of U.S. pricing and risk management policies

• Increased access to international markets

• Improved responsiveness to serving product needs of global buyers.

The Globalization Operating Committee will continue work programs in seven strategic areas: price risk management, quality and traceability, product standards, sales and marketing capabilities, innovation, as well as monitoring of industry efforts in pricing reform and trade treaties.

As we see, the measures include both direct ways of improving competitiveness, as quality, innovations, marketing etc., and government influence, as some price regulation, subsidies and others. The ways used by state are usually indirect, but in the Republic of Belarus they have a special place because almost all dairy manufacturers are in public ownership. So, there is a big interest of government in making Belarusian dairy products competitive. In chapter 2 we will analyse if state interference may be useful or not by using international examples, and what our companies can take into account for better cooperation with the government in subsequent increase of product competitiveness.