Wisconsin's China policy: Dairy State looks east for opportunities

Karen Nielsen recalls an eye-opening trip to China in 2000. The director of UW-Madison’s Babcock Institute was there to present the findings of a study on Chinese farms, but the trip coincided with the beginnings of a large influx of government money to expand the dairy industry. The Chinese government wanted to increase the amount of protein in Chinese diets, and it wanted to promote a way for people in the countryside to make a living.

“They thought the dairy industry was something they should promote,” Nielsen said. “So the government started pumping a lot of money into trying to build larger farms. That’s when the dairy industry in China started to take off.”

Wisconsin agriculture has benefited from this commitment, primarily because it’s in a unique position to aid the growth of Chinese agriculture. Fourteen years after Nielsen’s visit, a great deal of cultural exchange, knowledge exchange, and the exchange of goods has transpired.

Overall, China is Wisconsin’s third-largest trading partner, but it’s second only to Canada as the most valuable export destination for Wisconsin’s agricultural products, and the growth is explosive. While increases were reported in 2013 in all five of Wisconsin’s top foreign agriculture markets, “ag” trade to China grew by 63% last year.

Given the agricultural challenges China still faces — challenges that Wisconsin interests can help China overcome — some think we’re only scratching the surface. “There are tremendous plans for future expansion over there,” says Bob Rindo, vice president of sales for Hampel Corp. in Germantown, Wis., a 33-year-old thermoform plastics manufacturer that sells a line of agricultural products in China. “In the next five to 10 years, you are going to see a dramatic expansion of the dairy industry in China. There simply isn’t enough supply in the market at the moment to meet the growing demand.”

Feeding frenzy

Whether or not you believe recent reports that China will soon surpass the United States as the world’s dominant economic power, you have to acknowledge the vast potential of a nation with 1.3 billion people and a rapidly growing middle class. China not only craves Badger State commodities like whey (a byproduct of the cheese-making process) and ginseng, it’s gaining more of an appetite for cheese and dairy products. It’s also buying farm equipment and applying the farming expertise available from the University of Wisconsin-Madison, and is taking advantage of better cattle genetics (semen and embryos) provided by businesses like ABS Global and private farms.

Lora Klenke, vice president of international business development for the Wisconsin Economic Development Corp., said the state’s export strategy is not just to sell commodities, animal feed, and genetics, but also university expertise on how agricultural production works, especially on the dairy development side, and private sector expertise for the technology and services that support what university experts are teaching. Through its own dairy development programs in China and the credibility that state government has there, the state of Wisconsin serves as the glue that binds the other pieces together.

Wisconsin’s Hampel Corp. is helping China improve the health of its cattle, and the volume of its milk production, with better housing for young calves.

“China is one of the markets where it’s essential for a company to have credibility from the state, so we provide and facilitate those connections,” Klenke said. “We’ve done a number of dairy-development seminars within China that have not only said this is how you feed a cow, but this is how your farm should be set up so the cows have comfort, and so they produce more milk.”
The sale of Wisconsin-made industrial machinery to China, a category that includes farm implementation and equipment, has increased by 11% since 2008. Exports of electrical machinery to China, including milking parlors, have increased by 20% since 2008.

State officials also believe that China represents a potentially huge market for processed dairy products, but that’s an area “we are just starting to explore,” Klenke noted. Historically, China and other Asian countries have not been large consumers of dairy, but that is starting to change, especially in large cities. It was only last year that the United States became the largest exporter of dairy products in the world; Wisconsin exported a new record of $3.2 billion in agricultural products, a 9% increase.

“Chinese incomes are rising and it makes dairy product prices much more affordable for them,” notes James Robson, CEO of the Wisconsin Milk Marketing Board. “One area that has changed considerably in China is that U.S. companies in the food service area that have operations in China, Domino’s Pizza for example, are starting to source more of their dairy products, particularly cheese, from the U.S. Some of that will end up being Wisconsin cheese.”

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With the help of the Wisconsin Center for Dairy Research at UW-Madison, Wisconsin companies have learned to tailor agriculture products to suit the preferences of different societies. This is particularly true for cheese, notes Ben Brancel, secretary of the Wisconsin Department of Agriculture, Trade, and Consumer Protection. One thing Brancel has learned in recent trade missions to China is that you have to tailor your products to individual trade partners, and the Koreans don’t necessarily want the same thing as the Chinese.

For example, both might like the flavor of Wisconsin cheese used for pizza toppings, but they might want the cheese to be a different color when it’s finished, or they might want the cheese to take on different characteristics such as stretchable or non-stretchable once it’s cooked. “The CDR was able to help them differentiate methods of production so they would have the same cheese but end up with two different styles — one for each marketplace,” Brancel noted.

Cheese and whey represent more than 85% of Wisconsin’s dairy exports, and whey exports rose 44%, to $158 million, in 2013. In some cases, whey is a food ingredient. In other cases, it’s part of a drink mix, and both of those uses present opportunities to serve more than 1 billion Chinese consumers looking to improve the nutritional value of their diets.

“You think whey is whey, but actually it can be produced in a variety of different methods when you get into the export marketplace,” Brancel noted. “Creamery  Cooperative [Comstock, Wis.] has been engaged in that, as a lot of their product has been going to Asia. Foremost Farms USA is a fairly good-sized company based in Baraboo, and they are selling a great deal of whey and whey-protein-lactose products.”

And then there is ginseng. Wisconsin accounts for 95% of the cultivated ginseng in the U.S. An estimated 700,000 dried pounds of ginseng are produced in Wisconsin annually, and 85% of it is exported, mostly to China and Hong Kong.

China’s challenge, Wisconsin’s opportunity

China is struggling with a lot of challenges, many of which represent opportunities for Wisconsin agriculture and private industry in general. The growth of China’s middle class is “absolutely staggering,” Klenke noted, and the country now is faced with a problem confronting most developing countries — more people want to move from rural areas, where running a profitable farm has been challenging, to urban areas where jobs are more plentiful. That means fewer people want to farm, which impacts China’s desire to grow its agricultural sector.

Farm profitability is an area where Wisconsin expertise can help, and it begins with improved livestock genetics. China certainly isn’t the only nation that’s turning to Wisconsin and the U.S. to improve cattle genetics, but it might have the greatest sense of urgency. Nielsen says the U.S. has the best genetic lines for breeding cattle, so even though China has had genetically poor animals, and even though they have not been bred properly over the years, if the Chinese start to inseminate their animals with quality genetic products, “that improves the genetic line very quickly.”

One consequence of improved genetics is a better quality and volume of milk produced, but cow comfort and feeding issues are also important. At most Chinese farms, Nielsen said, the average milk production per cow is about half of U.S. per-cow production, so even if they improve genetics, they still need to focus on properly caring for their cows.

Enter Hampel Corp., which makes a line of calf hutches under the brand name Calf-Tel. Since 2010, the company has been building a presence in China, which it sees as a key dairy market. Its Calf-Tel line is designed to promote calf health between birth and 8 weeks, and includes a group hutch that serves as transitional housing after weaning, with healthier cows and better milk production as the ultimate benefits.

“We’re really looking at the start of the calf’s life,” Rindo explained. “That is the focus of our product, as is how we can help dairies around the world use that product to minimize their calf losses and their calf-treatment costs.”

As recently as 2010, Hampel had a limited presence in the Chinese market. The company had one dealer there who had a relationship with one of the dairy groups, and it would receive an occasional order from that group. Through the way the market was expanding, Hampel was able to identify more opportunity than it was tapping into, and found a distribution partner with a more active presence on the ground.
It took some time and patience, but Hampel representatives began to visit Chinese farms and engage in product education programs with some of China’s larger dairies. Rindo believes the key to its sales success lies not only in the product, but also in disseminating the knowledge it takes to raise a healthy and productive calf.

“We began with that approach starting in 2010, and 2011 was a beginning year in terms of sales, and things really started taking off in 2012 and 2013,” Rindo said. “As a private company, we don’t disclose actual sales results for competitive reasons, but I can tell you that in this past year, China represented our single largest export market for the Calf-Tel brand.”

Wisconsin has become a more active exporter in the past decade in part because companies that engage in overseas trade perform better. According to the U.S. Department of Commerce, these businesses grow 2.5 times faster than a non-exporting company, they hire four times as fast, and they pay about 18% more than companies that don’t export.

With agricultural trade, foreign countries often take more of a protectionist approach because agriculture tends to be a mainstay of national economies. So there are more nuances to work through, especially with commodities, but when there is a need that can’t be met domestically, fewer trade barriers are erected.

“You have to be patient,” Rindo advised. “It’s important to take the long-term view. In our own effort to expand business over there, it took a couple of years of sowing the seeds before sizeable results began to materialize.”

Some of China’s farmland is contaminated, so if global trading partners are to have confidence in the quality and safety of China’s agricultural projects, the country will have to do a good deal of remediation work to improve its soil and water. Since Wisconsin has positioned itself as a leader in environmental consulting and water quality expertise, this represents another piece of Wisconsin’s holistic trade model. “We’ll say to them, ‘It’s okay to feed your calves this TMR [total mixed ration, a method of feeding dairy cattle], but make sure that the grains and products you are giving them come from clean soil,’” Klenke noted. “That is another issue China is facing.”

Another opportunity comes with China’s increasing labor costs, which are making American bulk commodities and grains more price-competitive in the Chinese market. And since U.S. commodity producers can guarantee quality and safety, their products are very attractive to large-scale Chinese dairy producers that are under government pressure to improve the quality and safety of their farm products.

Klenke cited the Chinese milk and food-safety scandals of the past decade as the primary motivation behind a move to require dairy product manufacturers to own 30% of their own milk supply. “That was to help get rid of some of the issues they were having with milk contamination,” she noted, “so a lot of the major dairy companies within China are having to build these large-scale farms in order to meet that 30% supply chain request.”

More table scraps

With all the momentum for whey, ginseng, and cheese, is Wisconsin leaving any products off the table? Hampel might provide a partial answer, as Brancel believes the state’s plastics industry and its varied product lines can be more active in China. Whether they are producing goblets or straws or different kinds of guns (dispensers) for medications that serve livestock care, plastics manufacturers might benefit by focusing on the Chinese market.

“The thing that is helpful in Wisconsin is that the infrastructure built around agriculture brings so many kinds of products that not only are used here in the state, but produced here in this state,” Brancel said. “For every one of those production facilities, exports could become an opportunity in the future, even when in the past they have not focused on that marketplace.”

Robson noted that the Milk Marketing Board’s dairy promotional activities are focused on the United States, but with growing agricultural exports, the board could someday have an expanded role overseas. “I’ve already been asked by some people about the involvement from the board and whether we prepared to get more involved in that,” he said. “One issue here that directs our efforts has to do with what our manufacturers want us to do, and a lot of our manufacturers right now don’t have production capacity to greatly grow their involvement in the export markets.

“As the capacity in our plants expands, we will by necessity get more involved in exports.”

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Wisconsin's Secret Ag Weapon

The Wisconsin Center for Dairy Research is a difference-maker for Wisconsin agriculture. When cheese producers needed ways to tailor their products to the specifications of foreign markets, the CDR was there. Even before food interests began to emphasize lower-sodium products, the center had developed a whey permeate that reduces sodium in baked goods.

The center’s work might not make banner headlines, but it hasn’t escaped notice among agricultural interests. “I’m always amazed when I go down there and talk with the researchers that specialize in whey, especially with how many different uses there are for whey, or even for components of whey,” says James Robson, CEO of the Milk Marketing Board.

One of those researchers is Kimberlee Burrington, dairy ingredient applications coordinator for the center. An expert on the functionality and use of dairy ingredients in food applications, she has contributed to the CDR’s research on whey-permeate ingredients and worked with food companies in China for U.S. whey and milk producers.

More recently, she’s been working to find uses for a whey protein that is very high in both protein and fat. For that reason, some people call it pro-cream, and manufacturers that buy it refer to it as whey protein concentrate. While it’s not really well defined, it’s yet another whey product the CDR has been trying to characterize through research.

“It’s another stream from whey processing that is a very underutilized food, and we are doing some work with it to understand what its capabilities are,” Burrington said. “We’re doing some work in food applications to see if there are some good uses for it.”

For a source of protein, pro-cream is pretty economical when compared to other whey ingredients, in part because it’s a byproduct. Burrington figures it will be useful as a protein ingredient, but the fats it contains are “kind of unique,” she says. These specific fats are good at emulsifying, so the center is looking at it in ice cream and baked products. It will also try it in protein bars, mainly to replace chemical-based products.
If those experiments succeed, food manufacturers “could make a product with a cleaner label,” she explained, “so it’s removing chemically derived ingredients and replacing them with more natural ingredients.”

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