ECONOMIC REPORT

VARIOUS TRADE AGREEMENTS COULD MEAN GOOD NEWS FOR U.S. DAIRY IN 2020

BY GARY LATTA A s this article is being drafted, President Donald J. Trump and Chinese Vice Premier Liu He are in Washington, D.C., signing the long-awaited Phase One trade deal in an elaborate ceremony at the White House. The agreement ends a long, 19-month U.S.-China trade war that has been costly for both sides. During the ceremony, the U.S. and international stock markets were jumping to new record highs. All this was taking place while at the same time impeachment proceedings were underway across town in the House of Representatives. While there is plenty of optimism surrounding the deal, there are skeptics who understandably question whether China can fulfill all its obligations established under the terms. China has agreed to purchase a minimum of $200 billion in U.S. products and services over the next two years. There are four basic areas of focus in Phase One of the agreement, which China has agreed to purchase from U.S. suppliers: 1. Manufacturing purchases will expand an additional $77.7 billion over two years from the 2017 baseline level. The new agreement is for an additional $32.9 billion increase in 2020 and an additional $44.8 billion increase in 2021.

2. Energy purchases will expand an additional $52.4 billion over two years beyond the 2017 baseline level of $9.1 billion. This will be an additional $18.5 billion in 2020 and an additional $33.9 billion in 2021. 3. Services purchases will expand $37.9 billion over two years. The breakdown is an additional $12.8 billion in 2020 and $25.1 billion in 2021 above the 2017 baseline. 4. Agricultural purchases will grow an additional $32 billion over the next two years. From the 2017 baseline of $24 billion, China has agreed to purchase an additional $12.5 billion in 2020 and $19.5 billion in 2021.

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Adding the projected annual incremental increases to the baseline of $24 billion, we can see how Trump and his administration came up with a total of $80 billion — or $40 billion per year in total agricultural sales to China.

For its part of the commitment, the U.S. has agreed to roll back by 50% the tariff rate imposed on China in September 2019. The new, lower U.S. tariff rate will be 7.5% on about $120 billion of products from China. However, U.S. tariffs that were put in place before September will remain in effect to serve as leverage in successfully negotiating Phase Two of the agreement and to ensure that China lives up to its promises under Phase One. Under the terms, $250 billion of Chinese products will remain under a tariff of 25%. Phase Two negotiations are to begin immediately. Tariffs from both countries, which were to go into effect Dec. 15, 2019, have been suspended.

Details of just how much of an impact the U.S.-China Trade Agreement will specifically have on dairy are sparse at this time. The U.S. Department of Agriculture and Office of the President have published some fact sheets that briefly outline a few of the components specific to dairy and infant formula products. These fact sheets touch upon the rising incomes of the Chinese population and the growing demand for high-quality

animal proteins that include dairy. The Chinese have viewed U.S. dairy products as high quality and very safe compared to other sources. In years past, and, of course, during the recent trade war, strict Chinese regulatory requirements have been an impediment to U.S. dairy product exports. Phase One of the new deal specifically addresses many of these limitations. Under the new terms, China will supposedly recognize U.S. dairy systems for food safety and oversight. In years past, China’s tough restrictions on U.S. dairy served as an impediment to sales there. The USDA believes the Phase One terms will serve to open markets for infant formula, extended shelf life milk, dairy permeate, ultra-filtered milk and other U.S. dairy products. Under the terms, China will relax its inspection, audit and approval requirements, which should help streamline the export process.

Phase One hopefully puts an end to much of the trade tension that weighed heavily on both economies. Many agricultural leaders see Phase One as a significant step torward what should further open the door to more dairy exports negotiated under Phase Two. It is important that dairy leaders and dairy trade organizations exercise their influence with the president’s administration early in the development of Phase Two.

USMCA TO ENHANCE U.S. DAIRY EXPORTS

The United States-Mexico-Canada Agreement is another trade victory finally approved by the House of Representatives on Dec. 19, 2019. The USMCA has passed over to the Senate, where it was approved 89 to 10 and sent to the president’s desk. Sadly, eight of the 10 senators that voted “no” on USMCA were from the Northeast states.

USMCA replaces and improves the North American Free Trade Agreement and will enhance and expand U.S. dairy exports to Mexico and Canada. Under the terms of the new agreement, rule changes aimed at eliminating some distorting policies in Canada, such as the Class VII program, should benefit the U.S. USMCA relaxes the restrictions on U.S. dairy exports to Canada that should provide access to an additional 3.6% of its market. To our south, Mexico is our top destination for U.S. dairy products, particularly cheese, followed by Southeast Asia and then Canada. The International Trade Commission reports that U.S. dairy exports are projected to increase by more than $314 million per year under USMCA.

NEW DEAL RENEWS ACCESS TO JAPANESE MARKETS In late September 2019, the U.S. and Japan reached an agreement to further enhance trade between the two countries. This new deal, officially called The U.S.-Japan Trade Agreement, renews access to the Japanese market that became at risk when the U.S. withdrew from the Trans-Pacific

Partnership in 2017. Until this renewed agreement was made, other countries exporting dairy products to Japan were receiving preferred treatment. This new agreement levels the playing field to ensure U.S. dairy has equal access to the growing Japanese market. Japan remains another top lucrative market for cheese. According to the U.S. Dairy Export Council, Japan’s purchases of U.S. cheese have tripled in the last decade. Two competitors for the Japanese cheese market in recent years have been Australia and New Zealand. Both countries are currently facing difficulties with milk production due to severe weather issues.

SIGNS OF HERD EXPANSION, NORTHEAST APPEARS TO HAVE HEALTHY GROWTH

Last year, milk production growth slowed in the U.S. and globally, while surplus inventories in storage were trimmed, bringing them into better balance. While the number of U.S. milk cows continues to fall, per cow production is constantly growing. Individual states and regions report varying degrees of change in milk production depending on herd sizes and per cow productivity. The latest USDA Milk Production report shows January 2020 production up 0.9% in the U.S. but up 1.2% in the top 24 states. While the U.S. was down 6,000 cows from this same time last year, the top 24 states were up by 16,000 cows.

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So, at least among some states in the top 24, there is herd expansion still going on. A couple of the presenters at the January Cornell Agribusiness Outlook Conference mentioned that dairy herds are not always eliminated via slaughter when farms exit but are sold to neighbors who expand their operations and continue to milk them. Northeast milk production varies by state but appears relatively healthy overall. Among the top 24 states in this latest report, the USDA shows New York up 2.2%, Ohio up 2.6%, Vermont down 1.7% and Pennsylvania down 0.8%.

The USDA reports that 2019 annual milk production was up just 0.4% from 2018 in the U.S. Total annual milk production has increased 13% from 2010. Production per cow averaged 23,391 pounds in 2019, up 241 pounds from 2018. The average annual production per cow in the U.S. has grown 10.6% from 2010, while the average number of cows on farms increased 2.3% from 2010.

Class prices turned upward rather sharply last year, especially during the second half. Northeast Federal Milk Marketing Order One reported January 2019 Class I fluid prices at Suffolk County, Massachusetts (Boston), at $18.37 per hundredweight. After January, Class I fluid milk prices steadily rose throughout the year, hitting a peak of $22.58 in December, an increase of $4.21 from the start of the year. Much of the increase in fluid milk price was driven by national cheese prices, which also climbed steady throughout 2019. With cheese prices dropping off near the end of the year, the January and February 2020 Class I price rescinded to $22.26 and $20.80 respectively.

Butter prices were somewhat steady throughout 2019, with a modest trend down during the second half. Cheese and non-fat dry milk prices climbed steadily pretty much throughout 2019 and served to drive the skim component of both Class IV and Class III prices.

USDA is forecasting 2020 milk prices higher than 2019 but has scaled previous forecasts back just a bit due to uncertainty surrounding the coronavirus impact on international agricultural markets. Recently, global dairy market prices have been feeling downward pressure over coronavirus concerns. Dairy market prices in the U.S. may not be as robust until China and the rest of the world get this outbreak under control. The number of individuals infected climbs daily and is at 79,000 as this is written. That’s about 77,000 of these infections in China and 2,000 outside China.

The Chinese economy has slowed considerably with widespread disruption in shipping and supply chains. Transportation and travel have been restricted in many Chinese cities. Numerous eating establishments have closed or reduced the number of hours of operation. Chinese food manufacturing facilities that utilize dairy-based components are operating on reduced schedules or have shut down altogether. Obviously, this is eroding sales of agricultural products including dairy. How much the coronavirus outbreak will impact China’s ability to import dairy products remains to be seen.

Individual country opinions concerning the impact of coronavirus on dairy on exports varies among experts and observers. Some reports from New Zealand and Australia indicate they

expect the impact of the virus on agriculture to be modest and short-lived. Other countries, like Ireland and the U.S., are showing more concern. Global dairy markets have shown some softness in reaction to the outbreak, and the U.S. wonders what the impact will be on Phase One of the U.S.-China Trade Agreement. So far, China has not indicated it intends to back off from the large agricultural purchase commitment it made under the terms of the trade deal.

The USDA’s latest product price forecast shows cheddar cheese prices higher in 2020, especially during the first two quarters. Lat year, cheddar cheese prices averaged $1.759 per pound and are estimated to average $1.790 in 2020. These estimates have been revised downward from the previous month due to changes in global markets. Butter prices are expected to weaken in 2020 and average $1.910, down from the average of $2.243 in 2019. Non-fat dry milk is expected to see sizable increases in 2020. Strong domestic and global demand is driving U.S. non-fat dry milk to higher levels. Nonfat dry milk is now estimated to average $1.255 per pound in 2020, up substantially from last year’s average of $1.042. Dry whey is estimated to average $0.345 per pound in 2020, down from $0.380 last year.

Dry whey prices have trended down in 2019 and the USDA expects this to continue. U.S. whey prices could potentially

climb higher than indicated if China reverses its struggle with swine flu and gets control of coronavirus. Dairy component prices could be driven higher as a result of newly signed trade deals and the potential for depressed milk output from exporting countries like New Zealand and Australia. At this time, there appears to be good demand for U.S. nonfat dry milk that could lead to further exports in 2020.

The latest USDA dairy forecast shows U.S. milk production to grow 1.69% in 2020. Some industry observers believe this much growth in production is optimistic. It is possible that growth in output per cow may not be as robust if feed quantity and quality are less than optimum. USDA now estimates 2020 Class III prices to average $16.95 per hundredweight, compared to $16.96 in 2019. Class IV is forecast to average $16.70 in 2020, compared to $16.30 last year. The all-milk price is forecast to average near $18.85 in 2020 compared to $18.60 in 2019.

Gary Latta is a dairy product specialist consultant for the Northeast Dairy Foods Association, Inc. He has more than 30 years of experience in providing economic analysis, statistics and information to the dairy processing industry.

Consumers don’t stop at the dairy case anymore. Who drinks milk anyway? There are too many other beverage choices. Dairy is dying. You hear these platitudes all the time, but are they fact or fiction? When you look at the data, much of it is fiction. The trouble is that consumers often believe what they hear and make their choices accordingly. The industry, as a whole, needs to counteract these misconceptions with facts, innovation and effective messaging in and around the dairy case. Of course, there’s no denying that various factors have negatively impacted dairy. Yes, the price of raw milk has been fluctuating, which has put a real challenge on many in the industry. Sales of fluid cow’s milk have been on the decline for more than a decade, and the recently announced bankruptcies of both Dean Foods and Borden have also fueled the idea that the dairy industry is in trouble.

In most instances, the size of the dairy case has not really expanded much for most retailers in years, but the number of products has exploded with everything from almond “milk” to endless choices of yogurt for every taste. This makes for a tight squeeze and some highly competitive shelf space. But there’s good news, too. Fluid milk is still found in the refrigerators of most American homes in one form or another. Retailers know this and continue to capitalize upon it. In some cases, retailers use milk as a loss leader, knowing that a great price on milk will bring shoppers into the stores for other items. In fact, statistics show that consumers who have milk in their shopping carts tend to spend more overall at the register.

Retailers have no intention of giving up on the sale of fluid cow’s milk. According to Dave Damrath, COO, American Dairy Association North East, 77% of all fluid milk is sold at retail stores, while the remainder goes mostly to food service and schools. He believes that the demise of fluid cow’s milk is “largely exaggerated,” stating the 94% of U.S. households still keep some kind of milk on hand. Yes, this is a decline, but only by 1% — from 95% to 94% — hardly the dramatic decrease that consumers have been led to believe.

Fluid milk is still found in the refrigerators of most American homes in one form or another. Retailers know this and continue to capitalize upon it.

Statistics from Dairy Management Inc., as of Dec. 29, 2019, seem to back this up. Overall, retail milk sales volume was down 3.9%, in part due to rising prices that were up 8% in the last four weeks of the year compared to 2018. The gallon size has definitely taken a hit, posting losses of 5.6% in 2019 compared to the previous year. It is still the most popular size with almost 75% of the market share. However, that pertains to the size of the milk container, not the product itself.

Damrath noted that the decrease in milk sales and the size of the container purchased may be more of a reflection of the evolution of the American lifestyle than on retail choices. “Many of us grew up at a time when you had breakfast and dinner at home every day with a glass of milk,” he said. “That just doesn’t happen anymore. Families are smaller. They are on the go. Many people rarely sit down to eat at the dinner table every night. People aren’t suddenly hating on dairy. They just aren’t having the demand or occasion-based ability to drink large quantities of milk all at once like we used to do.”

The U.S. Department of Agriculture backs this up, citing that the average person now drinks approximately 18 gallons of milk per year. In contrast, in the 1970s, the average American drank close to 30 gallons per year, mostly because (continued on next page)

milk was regularly consumed in the morning breakfast cereal or was the only beverage option at dinner.

So, 94% of households do keep milk in the refrigerator today, but not necessarily in the quantity or type they used to. According to the USDA, other types of milk are growing in popularity. For example, flavored whole milk jumped almost 9% in sales from January 2019 through October 2019 (the most recent data available). In the same period, organic milk sales increased by 4.4%, and lactose-free or lactose-reduced milk sales grew by more than 11% — with no signs of stopping. While this could be seen as a rejec

tion of whole white milk, it may also simply be a shift as consumers weigh choices, patterns and quantities. In the end, however, the Dairy Management, Inc., report states that while whole milk did flatten in 2019, the segment still continues to be the top performer in the retail category at 40% volume share nationally.

KEEPING THE DAIRY CASE RELEVANT

Certainly, the industry is keeping a close eye on consumer buying habits, as the dairy case continues to offer more and more options – many of which are not actually dairy products.

The American Dairy Association North East has established the Dairy Aisle Reinvention Program to make sure people can’t help but be drawn to the dairy case. The goal of the program is to assist retailers in contemporizing the look of the dairy case as a place with fresh, tasty products and on-target messaging, which, consequently, encourages shoppers to spend more time in this section examining the various choices. Some of the American Dairy Association North East’s efforts include three-dimensional signage that calls out nutritional benefits, offers dairy recipes and clearly categorizes dairy with labels like “snacks” or “probiotics” to make it easy for consumers to find what’s on their list (and more!). In addition, the program also features appealing photography that promotes the idea of locally-sourced dairy products.

COMPETITION IS FIERCE

The average grocery store carries approximately 2,500 beverage items. That sounds like a really big number until you consider that there are approximately 80,000 non-alcoholic beverage choices out there. If beer, wine and other alcoholic beverages are included, that number jumps up to a whopping 150,000! Just a decade ago, there were less than one-third of the options that exist today. Milk’s real competition, however, isn’t really sports drinks, fruit juices or soda — or even more trendy items like oat milk, kombucha or cold brew; it’s water. In fact, 53% of fluid milk volume loss can be attributed to consumers choosing water to quench their thirst. Of course, there’s no ignoring the fast-growing plant- (continued on next page)

based beverages category. However, it may not be growing as quickly as marketers may want consumers to believe, according to the American Dairy Association. In fact, overall growth in 2019 actually slowed to single digits (less than 6%) and continues to decelerate. Almond “milk” remained the favorite, representing nearly 80% of the plant-based beverage category (and a 7.6% increase in the past year). Soymilk is not nearly as popular as it once was, but it remains a contender, as some consumers drink it to avoid milk and nut allergies. The verdict is still out on the relatively new oat “milk,” although, at present, it seems to be a very popular trend and saw an astronomical 662% increase in sales last year.

Still, milk sales far surpass plant-based alternatives. While plant-based products do represent a respectable 302 million total gallons in U.S. retail (about $1.9 billion), they cannot compare to the 3.5 billion gallons of cow’s milk (about $12 billion) sold at retailers each year.

Bottom line: Consumers are still buying milk. Yes, they may purchase it in smaller amounts at one time or choose organic or lactose-free over traditional whole white milk, but, in the end, it’s still milk. So, the next time someone tells you that no one drinks milk anymore, remind him or her that, in fact, most people still do, and, in all likelihood, they will continue to do so.

MORE KIDS ARE SAYING NO TO SODA, SWEETENED DRINKS

A report released in 2019 from the U.S. National Health and Nutrition Examination Survey of the American Journal of Preventative Medicine states that children are actually drinking less soda and surgary beverages — and that’s good news for kids’ health and the dairy industry.

This research was based on information collected from more than 15,600 children and teens in the U.S. The data indicated that children from higher income levels showed a 14% drop in sugary drink consumption. In contrast, children from lower incomes families, particularly those enrolled in the Supplemental Nutrition Assistance Program, also known as SNAP, fell only slightly more than 8% in the same time period. While any decrease is a step in the right direction, the news isn’t all good. The report shows that 61% of all children and teens still consume some type of sugary beverage — particularly sports and energy drinks — on a daily basis, too, which translates into empty calories and no nutritional value.

EDITOR’S NOTE ON DAIRY STATISTICS This issue of Northeast Dairy contains a multitude of statistics from a variety of reliable sources. We acknowledge that some do not match up exactly but hope you will consider that these discrepancies are a reflection of research and data that may have had slightly different parameters. In the end, the Northeast Dairy editorial staff chose statistics that were similar enough, even if not exactly the same, in an effort to give you an overall picture of the various points made in this issue. We welcome your feedback.

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In February, the Pennsylvania Department of Agriculture offered state milk processors new labeling advice and the opportunity to rebrand whole milk thanks to the flexibility in federal milk labeling requirements, according to a memo put out by Agriculture Secretary Russell Redding. At the request of the industry, the Bureau of Food Safety issued a guidance memo clarifying Food and Drug Administration requirements and highlighting the opportunity to label whole milk as 3.25% fat.

“We’re living in a society where people want to know where their food comes from and what’s in it,” said Redding. “This memo provides clarity to the industry on labeling requirements and offers an opportunity to rebrand Pennsylvania’s state beverage.”

Whole milk has traditionally been labeled as such because it is unaltered from the cow before processing. No fat has been removed from the naturally occurring average of 3.5%. “While this clarification may offer a new opportunity to the industry to possibly improve their market for whole milk, we are hopeful that they fully realize the need for a re-education of consumers,” Redding added. “For generations, consumers have been trained to look for skim, 1%, 2% or whole.”

The Pennsylvania Farm Bill’s Pennsylvania Dairy Investment Program has made funds available for marketing and promotion campaigns. To date, more than $800,000 has been awarded for 11 state-specific marketing campaigns through this program. The Commonwealth Financing Authority has made a total of $10 million in grants available through the program, as well, for value-added processing, research and development, organization transition assistance and marketing and promotion. Pennsylvania processors interested in making changes should contact the state’s Bureau of Food Safety and Laboratory Services to make sure potential changes do not conflict with federal labeling regulations. PENNSYLVANIA OFFERS MILK PROCESSORS OPPORTUNITY TO RE-LABEL WHOLE MILK

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The dairy case is filled with plant-based “milk” alternatives — almond, cashew, soy, coconut, etc. — and the industry seems split on whether it’s a positive or a negative. Many, including the Northeast Dairy Foods Association, take issue with beverages that do not originate from a cow (or other mammal) being labeled as “milk.” Some of our members see plant-based options as damaging to the sales of fluid cow’s milk, while others see it as an opportunity to leverage consumer interest and further profits and their overall brands.

HP Hood LLC, a member of the Northeast Dairy Foods Association and a leader in the dairy industry, has taken the leap into what is considered one of the newest and trendiest products in the dairy case right now, oat milk, branded by the company as Planet Oat. Northeast Dairy interviewed Hood’s Vice President of Marketing Christopher Ross to get some insight into why the company decided to venture forth with this new product.

NED: Why did Hood make the decision to add oat milk to its brand? How has it been received by consumers, and why do they like it? Ross: We’ve done extensive listening and talking to consumers about what they want in the beverage space and know that Planet Oat is an extension of what consumers are looking for today. With so much innovation and choice in the plant-based category, consumers are leaning into that innovation and looking into what’s next. Yet, despite all of that innovation, we also heard that, while consumers love or have learned to love plant-based milks, they aren’t always satisfied. Both of these things told us there was room for oat milk. We connected the dots, did more consumer work and decided moving forward was the right thing to do.” NED: Some in the dairy industry have a difficult time with plant-based alternatives because they believe these are taking away from traditional fluid cow’s milk. However, it seems that more and more companies are starting to offer both. Why do you think offering this type of product is a good decision for both Hood and the industry? Ross: Hood has been launching milks — both dairy and non-dairy, in all iterations — for a long time now. Even in our earliest days, our company was committed to making sure the consumer was receiving the best possible products for their needs. It’s been a part of our DNA as a company for the past 170-plus years. Superior quality checks, high-quality processing, working with the best farmers and suppliers — that discipline has been nurtured for generations. With Planet Oat, we’ve created an unbelievable product that eliminates those tradeoffs consumers are forced to make — our oat milk tastes delicious, is rich, creamy and full-bodied, is versatile and is sold at a reasonable price point. It can be used by everyone, every way, every time.

NED: How are plant-based alternatives helping to keep dairy relative for consumers? Ross: What we are hearing from consumers about the potential for oat milk to fill a void is what drove our decision to enter. We champion products that meet consumer needs. That’s at the heart of innovation. There’s always going to be room for dairy milk, and there’s going to be room for what consumers need next. HOOD: New Oat Milk Is Answering Consumer Need