FDI in US dairy to open up market for private capital

Growing partnerships between foreign companies and US cooperatives could help shape future opportunities for institutional investors, senior economist Ben Laine tells Agri Investor.

Payment schemes developed amid a foreign investment rush into US dairy processing could address issues that have long kept private investors at bay, according to a CoBank report.

Earlier this week, Ben Laine, a senior dairy economist at the lender, released a paper in which he examined what an FDI influx meant for US dairy. Since early 2017, he noted, foreign investors have pursued mergers, acquisitions and joint ventures with dairy cooperatives so as to access US supply and target the burgeoning value-added dairy product market.

Such deals have included the acquisition of WhiteWave Foods by France’s Danone, the purchase of a facility from Southeast Milk by Canada’s Saputo and a cheddar-focused joint venture between Arla Foods of Denmark and the Dairy Farmers of America cooperative in New York.

About 15 percent of US milk is currently processed in facilities with at least partial foreign ownership, according to CoBank. Canadian companies such as Saputo and Agropur have established the largest positions in the market.

Laine told Agri Investor that foreign investor interest stems in part from changes in the global dairy industry brought about by the end of EU production quotas in 2015. Because the system had previously limited each nation’s allowable production, he said, dairy companies in the region focused on efficiency, processing technologies and product development, while their US peers concentrated on increasing output.

Price and profit

Laine said dairy’s volatility and singularity compared with other ag sectors have meant that it has not traditionally been a private equity favorite. US dairy prices, he noted, are currently driven by interactions between a complex federal marketing order system and a number of dominant cooperatives.

In seeking to bring cooperatives into vertically integrated partnerships, Laine argued, the current wave of foreign investment in US dairy processing could establish models of price negotiation and profit sharing that private investors could use.

“The industry has historically been dominated by cooperatives. Maybe we start to see that change”

“If some of these joint ventures and partnerships change the way that some of these deals are structured and how some of the payments flow, that might help reduce some of the volatility and open up new opportunities,” he said. “The industry has historically been dominated by cooperatives. Maybe we start to see that change, down the road, but I think that’s been among the hurdles for private investment.”

In the report, Laine wrote that tie-ups between foreign companies and US cooperatives could also support the latter’s efforts to expand market share outside the US, at a time when the industry is increasingly focused on exports.

“Growing incomes and a growing middle class in Southeast Asia have been on the radar for a while, but they’re still a pretty big topic,” Laine said.

“The other region to watch is Sub-Saharan Africa, where there are growing populations for sure. The question is going to be how to supply that market in a way that’s affordable and what kind of appetite they’re going to have for dairy.”