USDEC examines the factors shaping international dairy supply and demand for the upcoming year and what they mean for U.S. suppliers.  

With 2024 data fully published, our attention can now turn to a myriad of supply and demand factors coalescing to create the conditions that foster or discourage U.S. dairy exports. Every year at about this time, USDEC’s Economics team comes together to discuss what it sees as the most consequential of those factors for the upcoming 12 months. We call it our “signposts” story: a quick analysis of the top five markers for dairy export growth or contraction.

For the five signposts below, we’ve done our best to outline the current state of affairs, the potential outcomes and where we think these signs might ultimately point—with a heavy dose of humility given the uncertain economic and policy landscape.

Will Chinese dairy imports finally come back?

While all dairy suppliers would like to see China make that long-awaited return to a more aggressive dairy purchasing posture, the outlook for 2025 is clouded with contradictory signals.

The current state of China’s dairy farm sector does provide some potential tailwinds to import demand given Chinese farmgate milk prices have declined for 24 months straight due to oversupply—a function of aggressive dairy sector expansion and an extended period of weakened domestic demand (that continues today). For the first two-thirds of that period, Chinese milk production continued to rise, contributing to historically high whole milk powder (WMP) and skim milk powder (SMP) inventories. But since July, year-over-year Chinese milk production has declined every month, with drops as great as 7% from the previous year, which has helped pull milk inventories to multi-year lows.

While slower milk production may encourage stabilization within China, a broader import revival remains contingent on other key factors, most notably the country’s economy rebounding. China's economy continues to be challenged on multiple fronts—a real estate crisis; elevated youth unemployment; underfunded local governments; deflation; and disappointing GDP growth—not to mention potential fallout from trade battles with the U.S. Economic worries are one reason consumers have clamped down on spending, and dairy consumption has been one of the casualties. While fiscal stimulus may help, few analysts are bullish about a dramatic recovery in China’s economy, suggesting dairy consumption’s sluggish growth is likely to continue.

If the Chinese government’s efforts fall flat and dairy demand fails to rebound, not only will it impact U.S. shipments to that country, it will also heighten U.S. competition around the world by forcing New Zealand and Australia to target prime U.S. dairy export markets.

While we are confident that it is only a matter of time before Chinese dairy consumption returns to a growth trend, we are less confident that will happen in 2025, given the magnitude of the economic challenges. In addition, with the domestic milk production sector having shown it can grow quickly when needed, its response to a demand rebound needs to be closely monitored and could limit the size of the import response. Regardless, whether China contracts further, stabilizes or rebounds will certainly have a significant influence on U.S. dairy exports and prices.

Can Mexico and Latin America continue to grow?

Amid a year of mixed overall results, U.S. dairy exports to Latin America were a notable bright spot in 2024. Mexico garnered particular attention as shipments across the southern border of the U.S. soared to record-high levels, spurred on by relentlessly strong cheese exports. Mexico’s booming demand, growing by nearly 45,000 MT in 2024, has been a welcome development for the U.S. dairy sector, especially given the fact that U.S. domestic sales declined last year by roughly 25,000 MT.

Still, Mexico wasn’t the only geography with positive results as exports to Central America, the Caribbean, and South America all bested prior-year levels. In 2024, exports to Latin America accounted for 41% of all U.S. dairy exports in milk solids terms, the largest share ever recorded and 2% more than in the same period in 2023.

Looking ahead, Latin America should continue to form a cornerstone of the U.S. dairy export panorama. Geographic proximity, favorable trade arrangements, and cultural integration should work to support trade with the region. Furthermore, demand prospects are positive as long-term demographic and economic trends should support dairy consumption.

But while the fundamentals are encouraging, risks to the outlook persist. Beyond the possibility of tariffs, which could slow GDP growth in Mexico and spur retaliatory measures against U.S. exports, multiple economic factors could also signal cooler import demand from key markets. For one, remittances, or the transfer of money out of the U.S. to friends or family abroad, are anticipated to fall with reduced immigration into the U.S. and the implementation of new taxation schemes. Remittances represent a critical source of capital flow in many Latin American countries, representing 2.3% of GDP across the region.

Even with potential economic risks in the short term, Latin America still represents a critical partner for U.S. dairy. The question for 2025 is whether the region will continue to power U.S. export growth, especially in cheese, as it did in the last two years.

Will we see the global economy improve?

Looking beyond China and Latin America, global demand elsewhere is likely to be heavily influenced by the global economic environment. The drawn-out, inflation-plagued recovery from the COVID-19 pandemic has weighed on global dairy demand for the past two years. And while many challenges will continue to confront U.S. dairy suppliers in 2025, slow improvements in certain key parameters could bolster overall demand—and dairy demand in particular as diets continue to shift toward more and higher quality protein.

On the positive side, overall inflation should continue to ease, although country-by-country expectations vary significantly, with emerging markets still struggling more than developed economies. The International Monetary Fund expects inflation to slide to 4.3% in 2025, still higher than the 3.4% average seen from 2009-2020 but another important step down from the 2022 high of 8.6%. However, inflation remains stickier for lower and middle-income countries and is likely to continue undermining the purchasing power of consumers in major markets like Brazil, Vietnam, Egypt, India and a large portion of Sub-Saharan Africa.

In addition, GDP growth is projected to be steady to higher on a global basis, with improvements expected for key U.S. dairy buyers like Mexico, Central America and the Middle East-North Africa. The growth could be amplified if countries like China can successfully navigate their delayed post-pandemic soft landings. Additionally, the ceasefire deal in the Middle East and expected reopening of Red Sea shipping routes should benefit dairy and the general economy around the world.

These relatively small, expected improvements in key macroeconomic measures bode well for improved dairy demand.

Unfortunately for exporters, the U.S. dollar is expected to continue to strengthen in 2025, making imports more expensive for international consumers. Transportation costs also increased at the end of 2024, though this was partially caused by a surge in pull-forward import demand prior to the new year. While a higher U.S. dollar relative to other currencies and higher transport costs will create headwinds for expanding exports to Southeast Asia and other global growth destinations, those factors are unlikely to be so insurmountable as to slow the positive fundamentals within the market.

Overall, global conditions are improving as we turn the calendar to 2025 despite headwinds from high inflation baselines. Both consumers and U.S. dairy exporters should be cautiously optimistic about 2025 while acknowledging that demand is unlikely to boom and real downside risks remain.

How strong will Southeast Asia’s dairy appetite be in 2025?

While supply and demand factors continue to paint Southeast Asia (SEA) as a solid long-term driver for international dairy imports, the region’s degree of growth in 2025 and how much volume U.S. suppliers will be able to capture depend on factors like regional economic performance and Chinese demand.

The global inflation spike in 2022 significantly undercut SEA dairy demand and imports in 2023, and recovery has been slow, as inflation rates proved stickier that expected. Slower GDP growth in 2023 did not help the cause. By the end of 2024, inflation had moderated to a little over +3%, an improvement but still elevated compared to the average of +2.3% from 2015-2021. Positively, GDP growth rebounded to +4.6% last year and dairy demand is beginning to look up.

How much of that demand the U.S. can capture hinges on several factors, but one of the biggest is China’s dairy appetite and its impact on New Zealand. Sharp declines in Chinese whole milk powder (WMP) demand starting in 2022 (Kiwi WMP shipments to China fell by nearly 430,000 MT from 2021-2024 as a result) necessitated that New Zealand shift its dairy product mix (channeling more raw milk into SMP/butter) and increase its focus on SEA—which is the second-largest market for U.S. NFDM/SMP. New Zealand SMP exports to SEA rose 62% (+77,248 MT) from 2012-2024, setting a record of 202,035 MT last year. U.S. shipments fell 31% (-97,972 MT) over the same period.

On the positive side, SEA economic growth is forecast at 4.7%—slightly up from 2024—and inflation should continue to ease. In addition, China’s dairy imports finished 2024 on a high note and could preoccupy more of New Zealand’s milk supply in the months ahead.

Moreover, even with less-than-ideal buying conditions in Southeast Asia the past couple of years, U.S. suppliers who have invested in the region continue to see success in certain key categories. U.S. low-protein whey exports to SEA jumped 12% in 2024 to a record high of 128,532 MT. Year-over-year high-protein whey rose 12% (+480 MT) and cheese increased 13% (+1,871 MT). Both high-protein whey and cheese posted solid growth on the back of improved economic conditions, but have a much higher ceiling as proven by pre-inflation U.S. export volumes and SEA’s overall rising dairy import needs.

Will U.S. milk production rebound?

Finally, underpinning the entire conversation is whether the U.S. will have significant exportable supplies given the limited milk production growth for much of the last two years. As we look ahead, we anticipate 2025 to be a rebound year for U.S. milk output, with growth incentives likely to outweigh the hurdles pushing back on expansion.

Looking to 2025, margins are expected to remain positive for dairy farmers, with the average DMC milk margin over feed costs for the year forecast above $14/cwt based on current futures markets. Strong profitability will undoubtedly bring new milk online throughout the country and not just around new plants. But given the tight supply of heifers due to the rise in beef-on-dairy, the speed of the expansion is the primary question.

   
Top dotted line is maximum coverage level. Bottom dotted line is minimum or "catastrophic" coverage. 

Additionally, the U.S. dairy industry is in the middle of a significant processing expansion, with roughly 55 million lbs. per day of new capacity expected to come online from 2023 through 2026. As new plants get up and running this year, milk production must expand to keep pace with demand.

“New” milk, however, will not need to fill all that new capacity. We expect that some older, less-efficient plants will close, freeing up supply, and milk currently channeled to other products may be diverted to supply these new facilities. Plus, not all new plants (nor older ones competing in the same milk shed) will run at full capacity while milk is at its tightest. In some cases, milk around these new facilities will take time to ramp up. Ultimately, given these factors, the new processing capacity is unlikely to be fully utilized in 2025. Even so, the U.S. will undoubtedly see an increase in the production of cheese, proteins and extended shelf-life milk, with the export market expected to be a key customer for the first two.

All told, with a rebound in U.S. milk production and a global market that is finding its footing again after several years of economic turbulence, U.S. dairy exports are poised to succeed in 2025 even as downside risks remain.

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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.