But export value dropped and bearish demand signals show up in the data.

After a surprisingly strong January, U.S. dairy exports came back down to earth in February. On a milk solids basis, U.S. dairy export volume gained just 0.8% (+1,430 MT MSE), but that increase was driven almost entirely by lactose, which surged (+32%, +9,322 MT), along with some help from WPC80+ (+9%, +472 MT) and MPC (+34%, +965 MT).  

On the other side of the ledger, low-protein whey products exported under HS code 0404.10 declined by 9% (-3,837 MT), as did fat-heavy products like butter (-32%, -1,615 MT), anhydrous milkfat (-82%, -1,377 MT) and whole milk powder (-41%, -1,332 MT) – finally reflecting the reality that U.S. butter prices ran well above the world market for much of 2022.  

Running in between the two extremes, NFDM/SMP and cheese were virtually flat (-1%, -342 MT for NFDM/SMP and -0%, -82 MT for cheese). However, the steady nature of the topline numbers for both products belies the significant variation by market, as Latin America demand proved particularly reliable in contrast to the challenges faced in Asia.  

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U.S. export value declined for the first time in over two years as lower dairy product prices and a higher proportion of the export portfolio supported by lactose pulled down the average unit value. In general, weaker dairy product prices will likely result in depressed export value performance relative to volume in the year ahead, especially given the challenging environment for cheese and butter exports. 

In general, we should not be overly surprised by the slower (but still positive) performance. Strong competition from Europe and New Zealand combined with weaker economic performance around the world is creating a challenging environment for U.S. dairy, particularly in Asia. And yet, as we’ll talk about below, Latin American performance is providing significant support to U.S. dairy exports.  

As we look ahead, we expect these dynamics to continue through the middle part of the year, when we expect 1) European milk production to slow significantly as lower product prices are passed onto farmers, 2) China to continue its recovery post-lockdown, and 3) global economic activity to recover.  

For this month’s deep dive, let’s focus on the contrasting trends in Latin America and Southeast Asia (SEA).   

Challenging conditions in SEA 

Year-over-year U.S. MSE exports to SEA declined 20% in February—a sizable drop for the No. 2 U.S. dairy market. Product volumes fell for all key product categories except for lactose.  

The challenge facing U.S. suppliers in the region is three-pronged: lagging demand, heightened competition from New Zealand and Europe and a less favorable pricing environment.  

Most SEA economies recorded stellar GDP growth in 2022, and while economists predict solid gains again in 2023, expansion is slowing. Concurrently, inflation remains stubbornly high—and even rose to start the year in the Philippines, Vietnam and Singapore.  

On top of that, milk flows from New Zealand and the EU27+UK have improved significantly compared to the start of 2022, boosting our competitors’ capacity to serve markets and helping drive down prices. The EU27+UK is on a five-month milk production growth streak and New Zealand posted its first back-to-back monthly milk production gains since mid-2021. While tightening margins will eventually take their toll, both competitors appear well placed (at least for the short term) to continue posing heightened challenges to U.S. suppliers in the region. In addition, poor WMP demand in China has pushed New Zealand to shift its product balance (boosting SMP and butter production) and focus more on regions like SEA. 

The effect is clear in the February numbers, particularly in NFDM/SMP. Year-over-year U.S. NFDM/SMP exports to Southeast Asia fell 37% (-9,730 MT) to 16,806 MT. We saw sharp declines to Vietnam (-74%, -3,088 MT), the Philippines (-28%, -2,815 MT) and Malaysia (-56%, -2,504 MT). It was the lowest U.S. February volume to SEA since 2017.  

On the other hand, New Zealand SMP shipments to Southeast Asia grew 60% (+10,359 MT, remarkably close to the U.S. decline), with triple-digit gains to Vietnam and the Philippines. New Zealand SMP shipments to Malaysia also declined, which speaks to the demand portion of the equation.  

U.S. suppliers ran into trouble in other significant product categories as well: year-over-year whey shipments to SEA fell 14% (-1,430 MT) in February and cheese declined 40% (-937 MT). (Note that New Zealand butter shipments to SEA grew 1,210 MT in February.) 

On the plus side, the United States increased lactose exports to Southeast Asia by 44% (+2,537 MT) in February, compared to the previous year. But until inflation eases and/or supply tightens, U.S. exports could continue to face further short-term challenges in Southeast Asia. 

Latin America forges ahead  

In contrast to Southeast Asia, U.S. exports to Latin America continued to show strength in February, rising 23% (+15,963 MT) for the month. U.S. logistical advantages to the region, steady demand and, in Mexico, the strongest peso in years provided support to U.S. suppliers. 

U.S. exports to Mexico (+28%, +13,219 MT) in February grew across most categories, with NFDM/SMP (+43%, +10,619 MT) and cheese (+11%, +1,018 MT) leading the way. Similarly, in Central America and the Caribbean (+17%, +1,981 MT), U.S. exports of NFDM/SMP (+95%, +1,748 MT) and cheese (+14%, +574 MT) also rose significantly. Dairy shipments to South America increased 8% (+764 MT) overall, primarily due to a huge increase in lactose (+240%, +1,319 MT) and strong growth in whey (+31%, +392 MT). 

Roughly a third of all U.S. dairy exports are destined for Latin America making it an incredibly important region for U.S. trade. The U.S. has an inherent edge by virtue of geographic proximity. But U.S. suppliers will have to navigate some headwinds to maintain that kind of growth. 

Latin America is facing economic challenges in 2023, much like the rest of the world. Inflation continues to be a concern. Countries like Mexico (+5.7%), Chile (+6.9%), Colombia (+9.5%), Costa Rica (+6.9%) and Argentina (+8.3%) are all facing anticipated inflation rates in 2023 that are comparatively higher than the last two decades (although more or less on par with the global inflation forecast of 6.6%).  

Like Southeast Asia, GDP expectations for 2023 are a step down from 2022. Nearly all major countries are projecting a growth rate below the global average of +2.2%. That said, they are commensurate with growth in other regions like the U.S. (0.5%) and the OECD (0.8%).  

While we don’t have a clear picture of consumer confidence in Latin America as a whole, we do know that consumer confidence in the No. 1 U.S. market of Mexico, importantly, is up. 

Bringing the macroeconomic outlook together and comparing it with positive trade data provides a more-or-less positive outlook for Latin American trade in the year ahead. That’s not to say parts of Latin America won’t struggle more than others. But in terms of U.S. major product exports to the region (particularly cheese and NFDM/SMP exports to Mexico, Central America and the Caribbean), trade with Latin America is likely to fare better than other areas and provide overall support to U.S. dairy export growth in 2023. 

Learn more about global dairy markets:

• U.S. dairy exports start strong in 2023

• U.S. dairy exports finished record 2022 on a high note

   

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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. How to republish this post.