2014 Year in Review

USDEC

December 2014

Better Prepared than Ever With investments in plants, personnel and products geared specifically for export, U.S. dairy suppliers continued to pursue global markets in 2014, recognizing their critical role in the overall health of the U.S. dairy industry. Those investments are tangible indicators of the long-term focus on developing and sustaining international markets, with the acknowledgement that success demands commitment and a consistent presence. It’s an attitude that served the industry particularly well in the volatile year that was 2014. In the first half of the year, U.S. dairy export value averaged $654 million per month, 26 percent more than 2013’s record pace. We are certain to set a record for cheese exports in 2014 (the fifth straight record), with volume on pace to exceed 350,000 tons. Skim milk powder shipments are tracking to exceed 500,000 tons for the second straight year. At the same time, as the year progressed, global market conditions toughened significantly. While global dairy consumption continues to grow, trade suffered some slowdowns due to early-year heavy over-stocking in China and Russia’s import embargo, which allowed robust production to outpace new demand. International commodity prices declined steadily, and U.S. prices remain at a premium over international prices. U.S. exports were hit hard. Monthly export data fell short of 2013 comparables from August through October—a trend expected to continue through year-end. While conditions are serious and the outlook going in to 2015 remains challenging, all indicators suggest the downturn will reverse itself as dairy markets find equilibrium. The recurring steady pressure of demand growth on a cumulatively insufficient supply response over time will not only drive the current market recovery but also create conditions for long-term growth. The United States is still well positioned to take advantage, and U.S. suppliers are making moves—including infrastructure investment—to maintain their advances in export markets. Membership at the checkoff-funded U.S. Dairy Export Council (USDEC) reached more than 120 companies and organizations in 2014—a record high and a number that could grow by year-end.

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USDEC will publish a summary on the final 2014 export numbers in February when USDA releases the data. That report will be available at www.usdec.org.

The U.S. Dairy Export Council is primarily supported by Dairy Management Inc. through the producer checkoff that builds on collaborative industry partnerships with processors, trading companies and others to build global demand for U.S. dairy products.

Highlights of 2014 To keep the U.S. dairy industry optimally positioned as market conditions evolve, USDEC activities—directed and carried out in tandem with the industry—remain squarely focused on the medium- and long-term. USDEC programs in 2014 concentrated on improving U.S. competitiveness, opening new markets, preserving access in existing markets, identifying the best opportunities for U.S. exporters and generally lifting the reputation of the United States as a premier global dairy supplier. The programs exist independent of short-term market conditions, aiming to maximize up cycles and minimize down cycles. Among a full roster of USDEC initiatives in market access, trade policy, marketing, strategic planning and communications, the following stand out as some of the most significant efforts and achievements of the past year. • Chinese market access. China implemented a new dairy plant registration requirement in May 2014 for import suppliers. In addition to ongoing communications with members to prepare them for the change, USDEC staff worked hand-in-glove with U.S. officials to arrange plant audits by Chinese officials. Results were overwhelmingly positive. Through a series of coordinating steps, the U.S. Food and Drug Administration ultimately provided the Chinese government a list of facilities that, once they were posted, effectively cleared exports from those plants. In September, when it became apparent that Chinese certification requirements for other companies who wanted to subsequently join the list were unfeasible, USDEC worked with U.S. and Chinese officials to engineer a system

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by which U.S. suppliers could self-certify until a more permanent solution for list management is established. Such efforts—a microcosm of USDEC market access and regulatory affairs activity around the world—helps to keep government bureaucracies moving at a pace that facilitates the continuing flow of U.S. dairy goods to a critical and growing export market.

• Common food names. The European Union’s (EU’s) aggressive push to monopolize the use of common food names is relentless. The damage to U.S. cheesemakers both overseas and here in the United States is real and escalating. With a global membership base, the independent Consortium for Common Food Names (CCFN), founded and staffed by USDEC, runs point on fighting the EU threat. In 2014, CCFN worked successfully to focus a much-needed spotlight on the issue. CCFN helped orchestrate three high-profile, bipartisan letters from Congress to U.S. Department of Agriculture (USDA) Secretary Tom Vilsack and U.S. Trade Representative (USTR) Michael Froman reiterating the need to defend common food names, both around the world and during Transatlantic Trade and Investment Partnership (TTIP) talks with the EU. Those efforts generated widespread mainstream media coverage, crystallizing the severity of the threat to industry, government and consumers alike, many of whom were unaware of its significance. USDEC reached out to other food and beverage sectors under threat, here and abroad, helping to build a coalition. That coalition met with congressional offices, USTR, USDA, the Pan-American Dairy Federation (FEPALE), government ministries in countries targeted by the EU and local industries in many nations to continue education efforts on common names. Due to CCFN advocacy, officials in several countries in Central and South America upheld the generic status of a number of common cheese names, preserving the right for cheesemakers in the United States and elsewhere to use them. In addition, USTR cited geographical indications-related barriers to U.S. cheese trade in its 2014

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December 2014

Highlights of 2014 National Trade Estimate report and called out geographic indications as a problem area in its annual Special 301 Report on intellectual property issues. The battle will continue going forward. USDEC cited numerous ongoing threats to common names in November in comments for the next USTR National Trade Estimate Report on Foreign Trade Barriers. • The Trans-Pacific Partnership (TPP). USDEC, in close collaboration with the National Milk Producers Federation (NMPF), has represented the industry at TPP negotiations since day 1, advocating for comprehensive market access, fully enforceable sanitary and phytosanitary rules, a response to the New Zealand government’s monopolistic dairy policies and better protections for common food names. TPP has the potential to be the biggest boon to U.S. dairy trade since the North American Free Trade Agreement.

USDEC

In 2014, agricultural market access talks between the United States and Japan emerged as the biggest barrier to progress in TPP negotiations. Japan clung to demands to deny any significant new market access for five protected agricultural sectors, including dairy, an issue of particular importance because Canada will likely base its TPP dairy access positions on Japanese commitments. USDEC and NMPF maintained the call for U.S. negotiators to reach an ambitious outcome, holding multiple meetings with members of Congress, USTR ambassadors and USDA personnel, and initiated a letter from 39 dairy companies to USDA Secretary Vilsack and USTR Froman emphasizing the need to secure meaningful dairy market access to Japan and Canada, in addition to the other policy issues mentioned above.

• Crisis preparedness. Over the past year, USDEC, as part of the industry’s multi-association Dairy Communications Management Team, aggressively pursued a program to strengthen the capabilities of our industry to respond to an international crisis. A food safety issue in a major dairy import market, such as China, can massively affect global dairy trade and, if U.S. dairy ingredients were involved, can quickly ricochet and damage consumer confidence in dairy here in America. Both could have serious repercussions on the entire U.S. dairy chain to the point of destabilizing U.S. milk prices. Multiple food incidents in recent years—some real, some perceived—have shown the critical need for U.S. suppliers to make sure they have the skills to respond in an experienced, coordinated manner to protect public health, restore confidence in U.S. dairy and work toward market recovery. In 2014, that effort focused on assessing the threats and vulnerabilities of the U.S. dairy industry and starting to build and strengthen a platform for reactive communication. Initiatives included creating a crisis-response infrastructure in China, a country highly sensitive to food safety risks, and engaging in a pilot crisis preparedness program to strengthen crisis response capabilities of major U.S. suppliers providing product to the country.

• Why U.S. Dairy. The U.S. dairy industry has redefined itself as a consistent, customer-centric global business partner, but negative perceptions still linger. USDEC spent the past year-plus developing the new “Why U.S. Dairy” industry positioning to proactively control our image and elevate the U.S. industry on the global level, thereby clearing the way for our suppliers to implement their own individual business plans. “Why U.S. Dairy” will reach current and potential buyers and end-users across a wide range of “touch points”— from a new customer-focused website to advertising and advertorials to in-person meetings—to provide a cohesive voice reinforcing the U.S. dairy story: our resources, capabilities, quality, commitment, investment in innovation, and other unique elements that the United States brings to the table. continued on next page

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Highlights of 2014 In 2014, USDEC began soft-launching parts of the new brand positioning—including some new imagery, banners and print materials—at customer-focused events. The program aims to help the global marketplace recognize our industry for its many benefits and ultimately expand U.S. suppliers’ global opportunities. • Vietnamese cheese program. Vietnamese demographics are extremely favorable for foodservice and cheese consumption growth. But Vietnamese consumers and industry professionals alike have historically had limited knowledge of cheese tastes and applications—and of the United States as a supplier. This year, USDEC upgraded its focus on cheese in Vietnam, starting with a supplier mission—including one-on-one meetings with the local trade and a culinary seminar—and trade media coverage to initiate industry visibility. In addition, efforts such as seminars, contests, workshops and 1-on-1 consultations continued throughout Asia and the Middle East to drive utilization of U.S. cheese at foodservice and extend the reach of local distributors. • Portfolio expansion. USDEC continued to partner with member/suppliers to help identify and capitalize on global opportunities by driving portfolio expansion that enabled U.S. suppliers to meet customer needs. In the first half of the year, before pricing disparities made U.S. products less competitive, U.S. exports of whole milk powder (+131 percent vs. the prior year), milk protein concentrate (+57 percent) and fluid milk, including extended shelf life and ultra-high temperature (+16 percent) were all significantly above year-ago levels. U.S. suppliers inaugurated new plants and new capacity specifically to address global needs.

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• Market research and insights. Identifying the best opportunities and strategies to capitalize on rising world demand is critical to success in an increasingly competitive global dairy export environment. USDEC built its research capabilities to deliver one-of-a-kind insights on overseas market conditions, prospects and tactics exclusively for members. In 2014, analysts compiled more than a dozen reports, significantly expanding the USDEC research library. The studies dissected dairy opportunities in Vietnam and Colombia, the cheese and UHT milk markets in China, processed cheese growth in the Middle East and Asia, affordable dairy products to serve Sub-Saharan Africa, dairy ingredient use in medical nutrition, the impact of EU quota removal on world dairy markets and other topics.

• Milk powder quality. For many years, end users have been critical of the specifications and consistency of U.S. milk powder. USDEC has been a leader in framing and addressing the problem. Working with the producer checkoff through Dairy Management Inc. (DMI), USDEC continues to collaborate with the processing sector to improve spore control. Low spore counts in milk powder are critical for high-value, highgrowth emerging market dairy sectors, such as infant formula and recombined dairy beverages. Research and analysis work led to a September 2014 seminar, organized by USDEC and DMI. It showcased the latest breakthroughs in helping manufacturers control spore-formers through in-plant procedures, equipment and technology, and cleaning. It also demonstrated the impact of test methods on spore counts. That seminar not only unveiled new options for controlling spores, it showed that U.S. processors are building on these foundations and implementing new practices to increase the volume of low-spore, high-spec milk powder. Commitments to product differentiation represent a shift in the industry’s approach towards manufacturing to meet customer needs and ultimately improve the U.S. industry’s global competitiveness.

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December 2014

Highlights of 2014 • Testopedia. U.S. export suppliers continue to face risks that their product may be flagged by import inspectors for quality or safety concerns. One cause of such concerns stems from product test methods used by foreign regulators and dairy buyers that vary from country to country and company to company. That’s where USDEC’s new and improved Testopedia is helping. The members-only Testopedia is the only reference that collects and catalogues test methods used by overseas regulators and customs authorities. In 2014, USDEC not only expanded Testopedia, it created mobile tablet versions to improve its convenience. Testopedia currently contains dairy product test methods used by 10 major dairy importing nations, allowing U.S. suppliers to cross-check their in-house test procedures. In doing so, USDEC members can lower their transactional risk by facilitating customs clearance, and develop a more valued supplier relationship by growing more aware of a buyer’s needs. • Groundbreaking whey protein research. USDEC and DMI have supported research into identifying the nutritional and functional benefits of whey protein ingredients for more than a decade. In 2014, the prestigious Journal of the American College of Nutrition and The BMJ (British Medical Journal) published research results that delivered hard evidence that 1) whey proteins are superior to other proteins in achieving improved body composition (including leaner body mass and weight control) and 2) whey proteins improve

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the level of success for HIV treatment and boost immune system recovery. The Whey Protein Research Consortium, a pre-competitive, international group of whey suppliers, global customers and associations, including USDEC and its members, backed the latest research and is currently researching acceptable wording for a health claim on package labels that could further energize the already hot whey protein sector. The HIV study, funded by USDEC and DMI, is part of a multi-year strategic plan to deliver science to help determine the exact, efficacious dose of dairy ingredients and nutrients that benefit the world’s most vulnerable groups. The studies lay the groundwork for greater whey protein utilization in both the developed and developing worlds.

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Highlights of 2014 USDEC MEMBERS Abbott Nutrition

DairiConcepts LP

International Ingredient Corp.

Agri-Dairy Products Inc.

Dairy Management Inc.

INTL/FCStone

Agri-Mark Inc.

Dairy Farmers of America Inc.

Iowa Farm Bureau Federation

Agriculture & Livestock Industries Corp.

DairyAmerica

James Farrell & Co.

Darigold Inc.

JM Smucker Company

Davisco Foods International Inc.

Joseph Gallo Farms

Alouette Cheese USA LLC American Casein Company

Ecoval Dairy Trade Inc.

American Dairy Products Institute

Elanco Animal Health

Agropur Inc.

Erie Foods International Inc.

Kraft Foods Inc. La Belle Associates Inc. Lactalis American Group Land O’Lakes Inc.

Farmdale Creamery Inc.

APS BioGroup

Foremost Farms USA

Arla Foods Ingredients

Fort Forwarding Inc.

Arthur Schuman Inc.

FrieslandCampina USA

BelGioioso Cheese Inc.

Gavilon Ingredients LLC

Maryland & Virginia Milk Producers Cooperative

BIOTWO Corp.

General Mills

MCT Dairies Inc.

Blimling and Associates Inc.

Gerber California Inc.

Mehusa Inc.

Bongards’ Creameries

Glanbia Nutritionals USA

California Dairies Inc.

Grain Millers Dairy Products

Michigan Milk Producers Assn.

California Dairy Research Foundation

Grassland Dairy Products Inc. Great Lakes Cheese Inc.

Minnesota Department of Agriculture

California Milk Advisory Board

Halal Transactions Inc.

Mitsubishi International Corp.

Cayuga Milk Ingredients Inc.

Hershey Company

Mitsui & Co. (U.S.A.) Inc.

Challenge Dairy Products Inc.

High Desert Milk

Commercial Creamery Company

HighGround Dairy

National Milk Producers Federation

USDEC

American Farm Bureau Federation

Center for Dairy Excellence― Pennsylvania Department of Agriculture Ceres Dairy Risk Management LLC CoBank Select Milk/Continental Dairy Products CP Kelco Daily Dairy Report

Hilmar Ingredients, div. of Hilmar Cheese Hoogwegt U.S. Inc. HP Hood Idaho Milk Products Inc. Immuno-Dynamics Inc. Ingredia Inc. Interfood Inc. International Dairy Foods Association

Leprino Foods Company Lone Star Milk Producers Lotito Foods Inc.

Milk Specialties Global

O-AT-KA Milk Products Cooperative Inc. Oregon Dairy Products Commission Organic Valley Osage Food Products Otis McAllister Inc. Pacific Cheese Co. PBM Nutritionals–LLC, dba Perrigo Nutritionals continued on next page

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Highlights of 2014 USDEC MEMBERS PepsiCo Inc.

Starbucks Coffee Company

Price’s Creameries

Swiss Valley Farms Cooperative

Proliant Dairy Ingredients P.S. International Ltd. Pure Indian Foods Rabobank International

Talmera USA Inc. TechMix

Ronald A. Chisholm Limited

Tetra Pak Cheese and Powder Systems Inc.

Saputo Cheese USA Inc.

The Artisan Cheese Exchange

Sargento Foods

Thiel Cheese and Ingredients LLC

Sartori Company Schreiber Foods Inc. Scott Brothers Dairy S J Global Group Inc. Sloan Valley of Americas Inc.

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St. Albans Cooperative Creamery Inc.

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T.C. Jacoby & Co. Inc.

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Wisconsin Department of Agriculture, Trade & Consumer Protection Wisconsin Farm Bureau Federation YUM! Restaurants International Inc. Zoetis

Tillamook County Creamery Association Tropical Foods LLC United Dairymen of Arizona Wisconsin Cheese Makers Association

December 2014