Eight Dairy Export Signposts for 2018

A look at the key variables that will impact dairy trade this year. 

In the immortal words of science fiction writer Douglas Adams, “Trying to predict the future is a mug’s game.”

The pace of change in today’s world is so quick that the expected outcomes can shift from one day to the next. At the same time, knowing where we are headed as an industry is essential to ensuring that we have a place in that future.

That’s one of the reasons USDEC, working with members, devised and implemented a plan to lift U.S. exports from the equivalent of 15 percent of U.S. milk solids to 20 percent—a goal we are calling The Next 5%.

What follows are not predictions of what we expect to achieve in 2018, but rather eight signposts to gauge market strength and direction and help monitor progress of U.S. dairy export growth in the year ahead.

The push to complete NAFTA renegotiations continues. At stake is preferential access to the No. 1 U.S. dairy export market (a market in which overall dairy import demand is expected grow 20 percent over the next five years) as well as resolution of Canada’s unfair Class 7 milk pricing scheme and its destructive impact on U.S. and global dairy markets.

As it aggressively did so in 2016, USDEC’s trade policy team will continue to address these issues.

In addition to threatening U.S. access to Mexico, research by Fitch Ratings, Moody Analytics, Bloomberg Intelligence and others suggests withdrawal from NAFTA would reduce Mexican economic growth, lead to Mexican job losses and increase consumer prices, all of which would lessen buying power and hinder dairy demand. And that would impact all dairy companies supplying Mexico—U.S. and otherwise.

On a broader scale, while the United States continues to focus on revisiting existing deals like NAFTA and the South Korea-U.S. Free Trade Agreement, U.S. dairy export competitors pushed forward on new market-opening pacts in 2017. USDEC will continue to work to bolster U.S. competitiveness in 2018, stressing to policy-makers how critical it is that the U.S. get back in the game of negotiating new agreements with key agriculture-importing countries.

2. China's dairy appetite and the U.S. ability to capitalize.

This year will offer some insights on how two 2017 achievements—the U.S.-China plant registration Memorandum of Understanding and China’s move to reduce cheese tariffs—might benefit U.S. competitiveness. We have some momentum coming off of a strong 2017 in which U.S. dairy export volume to China grew more than 25 percent through the first 10 months (compared to January-October 2016).

Furthermore, the Chinese import bubble of 2013-2014 was, in retrospect, an aberration. Chinese milk powder stocks are down to pre-bubble levels (estimated at just 50,000 tons), and dairy import growth is back to about 14 percent—the compound annual growth rate it posted for the decade prior to the buying spike.

However, Chinese import buying in both 2016 and 2017 benefited from two years of declining milk production. Population and income growth, urbanization and other factors will continue to drive Chinese demand, but a rebound in domestic milk output (USDA projects nearly a 3 percent increase in 2018) will test whether 14 percent remains the norm in the post-bubble era.

In addition, despite U.S. gains in 2017, the overall U.S. share of China’s dairy import market was down over the past three years, and we face a competitive disadvantage with New Zealand and Australia due to their trade agreements with China, and with the EU and Australia due to the U.S.-yuan exchange rate.

3. Up and coming suppliers.

A handful of smaller but quickly growing dairy exporters are seeking to plant their flags in key global markets. Five years ago, Belarus, Canada, Iran and Turkey exported less dairy than Australia (the world’s No. 4 supplier). Today, they export twice as much.

Canada is most worrisome. Canadian milk production rose about 5 percent in 2017. Canadian skim milk powder (SMP) exports more than tripled to over 61,000 tons through the first 10 months of 2017, in large part due to changes to the nation’s milk pricing system that essentially allow it to undercut world prices. It has a resurgent export program, and the pricing scheme’s potential impact on U.S. and world markets is significant.

This year will test those aspirants. Each faces its own growth constraints—Belarus, for example, has a limited product portfolio and has geared its business to mainly supply Russia. But each country is also actively working to overcome the challenges and expand its dairy export reach.

4. EU skim milk powder stocks.

Not only did the European Union fail to reduce the 355,000-ton mountain of SMP in public storage at the end of 2016, it grew that mountain to about 380,000 tons by the end of 2017. With no buyers in sight, EU SMP output starting to rise and the spring flush on the horizon, ag leaders passed a measure that drastically alters the intervention buying system for 2018. Beginning March 1, 2018 (assuming a rubber stamp from EU ag ministers), the EU Commission will decide what product enters intervention and at what price. No automatic purchasing means no stock buildup (without Commission consent).

Even if the EU successfully avoids increasing its SMP stockpiles, it still needs to reduce them. Recent offers to release product from intervention (as low as US$950/ton) have been far below current EU and world prices. Even the EU admits it might end up holding the aging SMP (most stock is already 18-24 months old) for another 12 months as it continues to adjust to the post-quota environment.

When coupled with U.S. nonfat dry milk inventories, global powder stockpiles cast a sizable shadow on the market.

5. Butter supply and demand.

One of the biggest surprises of 2017 was the ascent of butter prices. This year, the same confluence of factors that drove EU and Oceania butter prices to $8,000/ton and $6,000/ton, respectively, remain in play: Strong global demand (in large part based on more favorable consumer perceptions of butter’s nutritional impact), depleted inventories and few expectations to rebuild them given the ongoing, more favorable economics of cheese production.

We are not likely to see prices surpass—or even approach—last year’s record highs, given the buyer pushback to those prices. The question is how much will EU and New Zealand buttermakers churn out to capitalize on demand despite low SMP prices.

6. A potential economic rebound in the Middle East/North Africa (MENA).

Heading into 2018, we’ve seen some encouraging signals of a gradual recovery in MENA dairy demand. In late November, oil cartel OPEC agreed to extend production cuts until the end of 2018, sending crude oil prices above the $60-a-barrel mark for the first time in more than two and a half years.

Oil accounts for anywhere from 30-80 percent of the GDP for the region’s oil exporters. So when prices began their descent in the summer of 2014—eroding economic growth and consumer purchasing power—dairy import demand followed the downward spiral, declining for three straight years from 2015-2017.

Now, the International Monetary Fund (IMF) forecasts GDP growth in oil exporters will nearly double from 1.5 to 3 percent in 2018, and GDP growth in oil importers in the region will rise to 4.3 percent. At the same time, oil exporters are actively seeking to diversify their national economies.

Whether the oil trends and economic forecasts hold will go a long way to determining whether we see a much-needed rebound in MENA dairy purchasing this year.

7. Intensified cheese competition.

The final numbers aren’t in yet, but U.S. suppliers were on pace to export more than 330,000 tons of cheese in 2017—a double-digit gain over 2016 and an annual volume total second only to the record 368,200 tons shipped in 2014.

Cheese presents some of the biggest potential growth opportunities for the world’s dairy suppliers—and they all know it. Australia, EU and New Zealand cheese suppliers are aggressively targeting global markets. New Zealand, which already added significant mozzarella capacity in 2017, is currently investing in more mozzarella and cream cheese production to target consumer and foodservice cheese opportunities in China, Southeast Asia, South Korea and Japan.

One of the biggest global dairy stories of the past three years has been the EU’s ability to replace 250,000 tons of Russian cheese business it lost practically overnight and find that volume and more in alternative markets in China, Japan, South Korea, Southeast Asia, the Middle East and Mexico. The EU’s uncompromising effort to restrict the use of common cheese names and limit competition via its system of geographical indications also continues full speed ahead.

With cheesemaking offering more attractive returns than butter/powder, there will be no shortage of product in 2018. The question is who will do a better job of building relationships and meeting market demands: the EU, Oceania or the United States.

8. European and New Zealand milk production.

The U.S. dairy sector has pulled back on production and is responding to overall global market conditions. Other regions have been less responsive.

EU production was up more than 3 percent in the third quarter of 2017, and will likely be up more than 4 percent in the fourth. The bloc expects “significant growth” in milk production in 2018, backed by recovering output from Germany and France and further gains from Ireland and Poland.

We estimate New Zealand output will rise 1-2 percent in the 2017/18 season, assuming limited further impact from extreme weather. The nation went from drenched in September to dried up in December, and now faces concerns about an extended La Nina-related drought.

Farmgate prices softened in both regions in the final weeks of 2017, but farmers are still well in the black at current levels. They may very well heed the production greenlight until price signals grow more acute.

Milk production from the five major exporters (Argentina, Australia, the EU, New Zealand and the United States) was up more than 2.5 percent in the back half of 2017. USDEC calculates global demand can only support milk production growth from the major exporters of about 1.5 percent, year over year. When production growth is above 1.5 percent we have too much milk. Below 1.5 percent and the market is in better balance. That balance may not return until the second half of 2018, though the overhang of earlier surpluses will still bear down on the markets.

Matt McKnight is chief operating officer at the U.S. Dairy Export Council.

Subscribe to the U.S. Dairy Exporter Blog    

The U.S. Dairy Export Council fosters collaborative industry partnerships with processors, trading companies and others to enhance global demand for U.S. dairy products and ingredients. USDEC is primarily supported by Dairy Management Inc. through the dairy farmer checkoff. How to republish this post.