2019 December Board Book

ESL Fluid Milk Shipments to China

From 2013 to 2018, the total dollar value of all goods transacted in China through the Cross-Border e-commerce channel has risen from $4.8 billion to $77.4 billion (measured in U.S. dollars). The Cross-Border program is viewed by some as a vehicle for meeting upscale Chinese consumers’ tastes for imported goods, while maintaining strict government oversight. The critical requirement under the Cross-Border program is that products be marketed directly to Chinese consumers – in order to qualify for the relatively low tariff rates on such imported goods – has compelled CMAB officials to es- tablish partnerships with Chinese businesses along every logistical step on the path from the shipping containers’ arrival in the port of Ningbo to purchasers’ residences. One of the most significant hurdles was the lack of perishable prod- ucts and the necessary supply-chain within the cross-border e-commerce channel to support them. CMAB had to work with multiple partners to select a bonded, cold storage warehouse and create the software infrastructure to incorporate per- ishable products. At this time there is only one cold storage warehouse approved under the Cross-Border program. Let’s trace the logistical stepping stones for ESL California milk headed to China under Project Milkman: Deliveries of dairy products to online buyers in Ningbo, China may take place by motorized carts with insulated boxes. Online orders account for about 35% of all retail sales in China.

Developing fluid milk exports directly to China will ultimately enhance California dairy producers’ milk incomes. Why? These exports are classified as Class I (fluid) under the rules of California’s federal milk order, which was inaugurated on November 1, 2018. Project Milkman’s stated goal is to shift in- creased volumes of farm milk from production of lower-valued nonfat dry milk (Class IV) to the highest value – Class I. Every 100 lbs. of additional fluid milk demand for farm milk that would otherwise be processed into nonfat dry milk – represents a boost of approximately $2.10 per hundredweight in the monthly revenue pool for the California federal milk order. (The federal milk order fluid differential in the Los Angeles area is $2.10/cwt. That’s the extra value added to farm milk processed into Class I in the Los Angeles area.) Solving several, complex logistical hurdles … Marketers don’t just sail international containers shipping containers full of fluid milk across the Pacific to China and expect consumers to buy those products. Two long years of logistical work has been necessary to smooth the efficient move- ment of ESL milk from California dairy processors to on-line customers in China. Unexpected strong headwinds – international trade disputes between the United States and China – have arisen in the past year-plus. Even though Chinese cross-border regulations protect shipments of fluid milk to China from additional import tariffs spawned by the U.S./China trade wars, CMAB officials and their Chinese partners have been forced to proceed with extreme caution in recent months, as trade disputes have escalated. Cross-Border e-Commerce program locks in 11.9% tariff rate An existing, multi-national trade channel, Cross-Border e-Commerce, has grown more than fifteen-fold within China over the last six years. The Cross- Border e-commerce platform is a direct-to-consumer business model where over- seas enterprises’ imported products are marketed and sold directly to Chinese citizens. An 11.9% tariff and tax rate is applied to imports within the Cross-Bor- der e-commerce system. SF Best – the biggest delivery firm in China – is CMAB’s partner for fulfilling home deliveries of milk to online customers. Here we see part of SF Best’s delivery vehicles and personnel. Real California Milk ® Icon On Every Quart Sent to China

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There’s no mistaking the source of quarts of milk shipped to China through “Project Milkman.” The “Real California Milk”® icon is prominently placed on every fluid milk container marketed in China. Josh Zonneveld, a dairyman who serves as chair of the California Milk Advisory Board, explains that studies show Chinese consumers have a very high opinion of California, and California dairies. If the e-commerce sales of fresh ESL milk to China expand and hit their goals, more California-sourced dairy products – cheese and butter – will be offered for direct sales to con- sumers in China. Prominent display of the “Real California Milk® icon is part of a wider- ranging, global marketing strategy for a variety of dairy products sourced from the Golden State.

Keeping ESL milk cold is critical for maintaining quality. Distribution of milk to Chinese customers under “Project Milkman” is done in foam boxes full of ice packs.

The Milkweed • October 2019 — 9