Exports are no longer optional for the US dairy industry. You either export, or you’re swimming in product.
In 2022 the US exported 70% of the NFDM/SMP produced, 54% of the dry whey and 82% of the WPC and lactose. Cheese and butter exports only accounted for roughly 7% of production, but the exports are still important to absorb the growing supply with a third of new truckloads of cheese made last year headed for the export market. The US even exported about 4% of the yogurt produced in 2022.
While US milk production growth hasn’t been overwhelming, it is still growing. Headline milk production over the past 12 months is only up 0.6% from the prior 12 months. But the amount of fat and protein in the milk continues to grow, so after adjusting for components, milk solids production is up 1.7%, which is a little faster than the long-run average growth. That has led to some build-up in inventories, primarily in powders and butter. So the US has a decent amount of product to export.
Exports outside the US
The next part of the equation is how much supply is available to export from other countries? Short-term, there is a lot.
Record high milk prices in Europe have encouraged more milk production in the region with component adjusted production in the second quarter expected to be up about 2.5%. High inflation and slowing economic growth have been slowing domestic demand inside Europe, which is also freeing up some product for the export market. The weather in New Zealand has been much better than normal for grass growth, which is giving it a strong end to its milk production season. Milk solids production could be up more than 5% in April and May and weak demand from China has left extra product sitting in New Zealand and looking for a home. With that, the US is facing some significant competition in the export market.
The third part of the equation is how much do the importers actually want? The primary long-run drivers on demand are population and income growth. While there is a long-run slowdown in population growth, the big demand fluctuations are really driven by economic conditions. Central banks around the world have been raising interest rates for more than a year to intentionally slow economic activity and bring inflation down.
It has taken some time, but their efforts are starting to bare fruit and economic growth is slowing down (and inflation is too). The IMF is still relatively optimistic about income growth in developing countries, forecasting real GDP up 3.93% in 2023, which is only a little weaker than the pre-pandemic average of 4.6% (2014-2018). Consumption growth in many of the importing countries is likely a little weaker than “normal” but isn’t terrible.
Balancing it out
The last part of the equation is: what price will it take to balance all of this out? There is plenty of supply available with multiple sellers trying to clear product. Consumption should be doing OK, but not gangbusters. That argues for relatively low prices, which is what has developed over the past six months.
However, the low dairy prices are feeding back to the dairy farmers and milk production growth across the major exporters should be slowing down in the second half of the year. That will tighten supply and allow prices to rise with the caveat that we’re dealing with only moderate demand strength. Once buyers feel like the market has bottomed we could see some aggressive buying as they try to load up at cheap prices, but once prices move higher buyers could become more skittish.
Overall, the export outlook is mixed. Exports in the second quarter have been a struggle, but as production growth slows down and buyers sense a bottom is near for prices, we should see a surge in demand and a tighter market in the second half of the year with good volume movement.
– Nate Donnay is the Director of Dairy Market Insight at StoneX Financial Inc.