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  • Dairy exports still challenged by global headwinds in June; What does the second half hold?

    By USDEC Staff August 9, 2023

    USDEC’s market analysts weigh in on the export outlook for H2.

    June’s export data looked fairly similar to the past several months. Total export volume in June unfortunately trailed prior year levels by 13%, or -28,260 metric tons (MT) on a milk solids equivalent basis (MSE), while value continued to be hampered by lower prices, resulting in a 28% drop for the month (-$74 million). A significant portion of the total export decline can be traced to weak purchases from China dampening low-protein whey exports (-35%, -19,861 MT) as well as low European prices undercutting U.S. cheese exports, resulting in a 19% decline (-8,368 MT) for the month of June.

    Positively, though, June’s cheese exports did rebound compared to May, WPC80+ volumes continued to impress (+19%, +1,104 MT), and Mexico’s demand is still surging, which has helped NFDM/SMP exports hold steady (+2%, +1,392 MT).

    The mixed performance in June mirrored the first-half results. Through June, U.S. export volume fell 5% and value declined 10%, driven by declines in low-protein whey (-17%) and cheese (7%), even as NFDM/SMP held steady (-1%), lactose moved (+8%) and WPC80+ volumes rebounded sharply (+15%).

    Chart Final Final (2)

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    When looking at the U.S. export data, several key trends stand out from the first half:

    • Cheese exports were hampered by cost differences compared to Europe;
    • WPC80+ regained demand with prices rebalancing;
    • A strong peso and robust consumer demand supported Mexico’s import surge;
    • Reduced pork prices in China dented sweet whey and permeate purchases; and,
    • Heightened competition and economic headwinds slowed U.S. exports to Southeast Asia.

    Given that these trends will be key drivers for U.S. dairy export performance through the rest of the year, we’ll dig into each of them to assess whether they are likely to persist or reverse in the second half.

    U.S. cheese exports were hampered by cost differences compared to Europe

    As we’ve mentioned in past reports, low prices for European cheeses towards the end of 2022 and into 2023 undercut U.S. cheese exporters (even as U.S. prices declined as well). The data in the past few months of trade data reflects this disparity.

    Chart Spot Cheese (2)

    While the U.S. has still been able to maintain its position in the Americas (or strengthen in the case of Mexico), U.S. market share has come under pressure in markets where there is more competition, like Korea, Japan and Saudi Arabia.

    For example, U.S. cheese exports to Korea fell 19% (-18,949 MT) year-to-date (YTD), largely on account of low-priced European product entering the market – though total imports were weaker as well. According to Korean import data, European mozzarella in June was about $1,000/MT (or $0.45/lb) below mozzarella imports from the U.S. This disparity in price in the U.S.’ second largest cheese market has naturally impacted the U.S.’ overall cheese export performance and has been mirrored in other highly competitive markets.

    Given the sharp drop in U.S. spot cheese prices for much of June and July, we should expect exports to rebound in Q3. But the recent rally at the CME (which is certainly welcome news!) as well as futures prices for Q4 never fully getting competitive with Europe even when spot prices fell will likely mean cheese exports later in the year will remain challenged. However, if European milk production slows sharply and international prices rally (or less positively, U.S. spot prices fall again in Q4 – something we certainly don’t want to see happen), we could still see improvement towards the tail end of the year.

    Verdict: Cheese exports likely to improve in July and August, though prepare for reversion in Q4

    WPC80+ regained demand with prices rebalancing

    On the flip side, U.S. exports of WPC80+ have surged in 2023. As shown in the chart, over the past seven years, the only significant drop in WPC80+ exports came when prices surged last year to record levels. However, prices today have returned to more normal levels even if still elevated compared to 2020.

    Chart Price Sensitivity (2)

    The market rebalancing has had a positive effect on demand as U.S. WPC80+ exports are up 15% YTD (+4,715 MT). Japan, Brazil and China have been particularly active – albeit for different reasons. U.S. WPC80+ exports to Japan climbed 11% year-to-date (+730 MT) as protein has become increasingly mainstream within the country, which allowed demand to weather the high prices better than most markets. Similarly, Brazil is quickly becoming a major market for U.S. exporters (+21%, +893 MT), but that growth is largely thanks to the growth of sports nutrition in the market. Alternatively, demand in China is rebounding sharply in 2023 after a weak 2022 (+43%, +1,992 MT YTD), likely driven by infant formula manufacturers rebuilding inventories.

    With less price volatility, end users in international markets are more likely to launch new products highlighting protein and reformulate in favor of dairy proteins. As such, we anticipate export growth to continue through the end of the year even as protein prices have firmed of late given that they remain within a historically normal range.

    Verdict: WPC80+ export expansion to continue through the end of the year

    A strong peso and robust consumer demand supported Mexico’s import surge

    Mexican demand remains a bright spot for U.S. dairy exports amidst the wider slowdown in global demand and increased competition from other origins. In the first half of this year, U.S. dairy exports to Mexico jumped 25% (+65,490 MT MSE) – tremendous growth on its own, but even more impressive compared to lackluster demand out of other major U.S. trading partners like China (-7%, -15,477 MT) and Southeast Asia (-22%, -69,853 MT). Mexican demand continues to be strong with no indication yet of slowing down.

    Chart Mexico Mexico (2)

    Looking at the product mix, the country’s import surge has been widespread. U.S. NFDM/SMP exports to the country climbed 21% (+6,472 MT) in June and are up 39% YTD (+62,842 MT). Cheese has also seen consistent growth – up 11% (+1,252 MT) in June and up +14% YTD (+8,554 MT). Interestingly, lactose also joined the party with June volume up 69% (+1,880 MT) and YTD volume up 22% (+3,834 MT).

    Within Mexico, rebounding consumer demand along with bouts of drought and high input costs pressuring domestic milk production has necessitated greater imports. Alongside those forces, softer global prices and a strong peso also supported the affordability of imported products. All these factors are expected to remain through the second half of the year.

    Verdict: Trend expected to persist, but deceleration in imports possible given the exceptional pace achieved thus far in 2023

    Reduced pork prices in China dented sweet whey and permeate purchases

    U.S. exports to China continued to lag in June, driven by the mixed, but overall weaker demand environment within China. Total U.S. dairy exports to China in June dropped 29% (-12,299 MT) exacerbating the YTD decline of 7% (-15,477 MT). The primary driver of the overall decline has been the country’s lighter volume of low-protein whey (-16%, -20,772 MT YTD) given that low-protein whey exports to China are critical for the U.S. with roughly half of all U.S. low-protein whey exports bound for China.

    As mentioned in past reports, a useful leading indicator of Chinese whey demand remains price movements within the pork industry. Positively, Chinese pork prices appear to be finding a floor just above 20 ¥/kg. Unfortunately, 20 ¥/kg is still well below the prices that typically foretold a pork production surge, and therefore whey import surge as shown in the graph (the trade data is adjusted 9 months to better show the correlation as there is about a six- to nine-month lag between pork price movements and whey export changes).

    Chart5 (2)-Aug-08-2023-07-16-20-1847-PM

    All this to say, pork prices, while stabilizing, will need to rally in order to see whey markets rebound. Additionally, given that the trade data lags as well, we anticipate China’s whey imports to struggle through the end of the year and thereby U.S. whey exports to China to struggle as well.

    Verdict: Weaker volumes unfortunately expected to continue through end of the year

    Heightened competition and economic headwinds slowed U.S. exports to Southeast Asia

    Another topic that we’ve mentioned in past reports has been the challenges in Southeast Asia – both from an overall demand perspective given the economic challenges as well as stiffer competition with New Zealand rerouting product previously destined for China to SEA and Europe having additional supplies given their rebound in milk production.

    These twin headwinds have naturally impacted U.S. dairy exports to the region, which lag 2022 by 22% YTD (-69,853 MT MSE) with declines in most of the major products: NFDM/SMP (-33%), low-protein whey (-10%) and cheese (-39%).

    Chart SEA (2)

    Looking ahead, competition will remain fierce. New Zealand milk production saw a tremendous finish to their 2022/23 milking season – up 3% over the last six months. Additionally, while China’s demand is returning on SMP, cheese and high-protein whey, whole milk powder has lagged and is likely to continue based on recent Global Dairy Trade (GDT) auction results. Both factors will contribute to additional focus on cheese and SMP from New Zealand manufacturers as well as a preference towards Southeast Asia given shipping advantages.

    Additionally, while inflation is cooling and the global economy has stabilized, an economic rebound in the region taking place in the near term still appears unlikely. As such, U.S. exports to Southeast Asia are expected to remain challenged for the remainder of the year even as plenty of long-term potential in the region remains.

    Verdict: Slower exports likely to continue barring a rebound in China’s demand, poor milk production season in New Zealand and/or an economic revival.

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