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China's thirst for milk gives U.S. dairy farms a boost

American dairy farmers see an opportunity as demand booms in China. In a Nevada town, a new factory will produce milk powder just for export.

March 15, 2014|By David Pierson

FALLON, Nev. — The dairy plant with its tangle of stainless steel pipes rises out of the parched landscape here like a beckoning oasis.

Perched on the outskirts of this desert town dotted with small churches and roadside casinos, the factory represents a potential lifeline for nearly two dozen nearby dairy farmers.

In a few weeks, every drop of milk collected from the surrounding farms will be brought to the plant and converted into fine powder inside a towering heating chamber specially made for the $85-million facility.

But instead of being delivered to U.S. stores, the milk powder will be trucked nearly five hours away to the Port of Oakland and then loaded onto ships to China in bags emblazoned with the American flag.

It's all part of a plan to claim a foothold in a country whose growing thirst for milk is shaking up almost every corner of the global dairy industry — even remote communities such as Fallon, 60 miles east of Reno.

"It's the global economy being brought home to a small city in western Nevada," said Bob Shriver, Fallon's director of economic development.

Rising incomes and a burgeoning appetite for richer protein has led to a boom in Chinese milk demand that can be quenched only with more foreign supplies.

China is the world's top dairy importer. Revenue in the country's dairy market reached $40 billion last year, a fivefold increase from a decade ago, according to market research firm Euromonitor.

Some of the biggest demand is for milk powder such as the kind to be produced in Fallon, starting next month. Parents in China depend heavily on powdered milk to deliver protein and calcium to infants and young children. Breast feeding is unpopular, and fledgling distribution networks mean the availability of cold, fresh milk is limited.

Many Chinese parents hesitate to give their children domestically produced formula. They remain wary after a 2008 scandal in which milk laced with the chemical additive melamine killed at least six children and sickened 300,000. Subsequent safety lapses have done little to restore faith.

"We don't trust Chinese brands," said Zhang Jun, 27, a Beijing father who buys French formula to feed his infant daughter. "We fear our children will be sick if they take melamine-tainted milk."

That has opened opportunities for foreign producers to peddle their dairy products to Chinese consumers at a premium price. Germany, New Zealand and France have ramped up production. Now the United States is getting into the act.

With U.S. dairy consumption flat, American dairy exports are growing at a record clip. Shipments to China alone grew to $706 million last year, up from $137 million in 2009, according to the U.S. Dairy Export Council in Virginia.

Overseas demand is driving up milk prices in U.S. supermarkets. The average retail price for a gallon of whole milk was $3.55 in January, the highest in more than a year. Wholesale prices for milk used to make cheese hit a record high in February at $23.35 per hundred pounds. That trend could continue as dairy farms struggle to increase production amid one of the nation's worst droughts.

"There's fresh demand from regions of the world that haven't traditionally been dairy consumers," said Eric Meyer, president of the dairy division of HighGround Trading Group, a Chicago brokerage firm. "So you either build more capacity or you continue to have high milk prices."

Those new international markets are helping change the fortunes of U.S. farmers, including those in Fallon, a city of 8,500 in the Lahontan Valley that has been favored by generations of dairy farmers for its mild winters and cool summer nights.

Dairy farmers here have long trucked their milk to processors in California. But they were unsure how long that would last. The California Milk Advisory Board promotes a "Real California Milk" marketing seal that could one day exclude producers around Fallon.

"We basically have been functioning in a system where we were one call away from being out of business," said Bill Christoph, who operates Liberty Jersey Farm in Fallon.

In 2011, the Dairy Farmers of America, a national cooperative with 13,000 members, floated the idea of building a milk powder factory in Fallon for exports.

The organization, based in Kansas City, Mo., had been exploring the idea for years. In 2007, it hired Jay Waldvogel, formerly an executive at New Zealand dairy giant Fonterra, to lead its international business development.

Waldvogel linked the Dairy Farmers of America to Chinese buyers and helped find a New Zealand firm to design the whole-milk powder facility, the likes of which had never been built in the United States.

"The problem in China is they've got 22% of the world's population but only 7% of its farmable land," Waldvogel said. "They have to make a conscious choice about what to grow and what to import. If it's a choice between pork, corn and dairy, I think dairy falls pretty low. It's more efficient to buy milk produced in the U.S."

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