U.S. exporters trim decline in October, but global inflation and poor economic growth continue to challenge U.S. suppliers.

Monthly U.S. dairy exports have fallen into a familiar pattern in 2023: a variable lineup of positive results and what look like green shoots of recovery that, in the end, are unable to overcome significant declines in other product categories. In October, we saw some bright spots in whey proteins and cheese and a double-digit spike in lactose shipments negated by broader declines in milk powder, butterfat and other portions of the whey complex. 

The end result was the ninth straight decrease in year-over-year (YOY) milk solids equivalent (MSE) volume, albeit easily the smallest YOY decline since March. U.S. MSE dairy exports fell 6.6% in October after averaging more than 12% declines per month since April.  

Still-elevated global inflation and muted economic growth continue to undercut demand, signs of which can be seen in inconsistent monthly dairy export growth from the United States’ biggest competitors as well. (The U.S., New Zealand and the EU all posted MSE export declines in September, the most recent month where data was available for all three). 

In October, the biggest increase in U.S. sales came in lactose. YOY U.S. lactose shipments jumped 20% (+7,001 MT), led by strong demand from China (+48%, +3,998 MT). (More on lactose below.) 

U.S. WPC80+ continued to shine in October. YOY volume rose 7% (+400 MT), led by Japan (+34%, +376 MT) and China (+30%, +286 MT). And, for the first time since January, U.S. suppliers increased WPC (less than 80% protein) exports as well. Driven by a five-fold increase in sales to Southeast Asia, U.S. WPC (less than 80%) exports jumped 10% (+1,221 MT) over the previous year. Indonesia, Malaysia, the Philippines, Vietnam and Thailand each posted triple-digit gains.  

Unfortunately, WPC’s strength failed to offset sharp declines in U.S. shipments of dry and modified whey, sending overall U.S. whey exports down 12% for the month (-7,128 MT). Reduced demand from China’s pig sector continues to vex overall U.S. whey export volume. 

YOY U.S. cheese sales declined 4% (-1,507 MT) in October, as shipments to Japan and Korea each slipped by more than 40% (-4,652 MT combined). The decline masks a 54% (+4,778 MT) increase in U.S. cheese exports to Mexico and a 145% increase (+870 MT) in volume to China. U.S. cheese shipments to Mexico were an October record at 13,580 MT. 

YOY U.S. SMP exports fell 11%, with declines from all major buyers, including Mexico (-5%, -1,980 MT) and Southeast Asia (-6%, -1,197 MT). And with U.S. butter price escalation from late June through late October, U.S. butterfat exports plummeted. YOY butter volume dropped 72% (-5,158 MT) in October and AMF fell 92% (-1,374 MT). 

For a closer look at cheese and lactose, read on.  

Grated cheese stars for U.S. exporters 

At the start of this story, we mentioned the pattern of select U.S. dairy export growth products and categories countered by larger declines in other products and categories. U.S. cheese exports have been following a parallel pattern: strong double-digit growth from grated or powdered cheese is being offset by declines from other cheese types. Global cheese export codes are often vague, but we can deduce that the majority of the shredded category is mozzarella. 

In October, overall U.S. cheese exports fell 4% (-1,507 MT). But the story shifts when you look below that topline result. 

YOY U.S. grated cheese shipments rose 39% (+3,483 MT) in October. Shipments for all other major cheese HS Codes—cheddar, fresh cheese and other cheese—fell 18% (-4,990 MT).  

That isn’t just a one-month phenomenon. Remarkably, year-to-date U.S. grated cheese exports through October grew exactly the same: +39%. Volume from all other HS Codes fell 16%. 

We are seeing this dichotomy play out most clearly in two key regions: Mexico and China. YOY U.S. grated exports to Mexico rose 283% (+3,974 MT) in October; year to date, they were up 146% (+30,369 MT). U.S. shipments of grated cheese to China were up nearly 7,000% (+1,010 MT) in October and +628% (+3,766 MT) year to date. 

Effectively, given the pricing challenges this year, robust domestic sales of cheddar at retail and sluggish international demand, cheddar and gouda exports have suffered to many major markets. Conversely, with domestic mozzarella sales under pressure this year, exports have helped pick up the slack as pizza sales have grown in several key markets.   

Lactose exports prove surprisingly robust 

One of the more interesting juxtapositions in dairy this year has been lactose – particularly in contrast to low-protein whey. For most of 2023, lactose, permeate and sweet whey prices have been subdued (though all have rallied some in recent months).  

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The weakness in permeate and dry whey prices earlier in the year could be fairly easily explained by poor demand from China’s feed sector as we’ve mentioned in detail in prior months and in our latest International Demand Analysis. Through October, U.S. exports of low-protein whey have fallen 22% (-112,145 MT). In fact, the decline in low-protein whey accounts for roughly 75% of the United States’ total export decline in 2023 on milk solids basis. Given the fact that over half of dry whey is exported, a downturn in international demand naturally has consequences on price.  

Oddly though, U.S. lactose exports have performed comparatively well. Through October, U.S. lactose exports climbed 7% (+24,697 MT) driven by a 24% jump in trade to China (+24,155 MT) – a marked contrast to low-protein whey. Effectively, even as China’s purchases of permeate and sweet whey have fallen sharply, its demand for lactose has never been higher. Examining global lactose exports, one can see that China’s lactose market is acting independent to most other products in China. 

So, what’s driving this?  

The major uses of lactose in China have traditionally been infant formula, confectionary and feed, but none of these seem likely to be the culprits for the sudden surge in demand.  

Shipments of other key infant formula ingredients in China appear relatively unremarkable. While global trade of skim milk powder to China has increased by 11% through September, imports are still well below the country’s 2021 peak. Additionally, WPC80+ demand has fallen 2% and milk protein concentrate purchases have declined by 15%. Perhaps, infant formula or follow-up formula manufacturers in China are pulling proteins from other sales channels, but given the sheer scale of lactose’s jump in contrast to other ingredients needed, infant formula is an unlikely driver.  

Confectionary fails to inspire much confidence either. While sugar prices have increased globally and could incentivize some switching to lactose, it’s not a seamless or easy formulation switch. This would also suppose that China’s confectionary segment is growing at an incredibly rapid pace. Given the economic dynamics within China that would require several logical leaps.  

Feed doesn’t appear to fit either. There would be little economic incentive for pork producers to use lactose versus whey permeate given the price premium for lactose. Additionally, as we’ve seen in the low-protein whey data and in pork prices, demand for carbohydrates in feed is lower today than last year.  

Given all this, we are left with two explanations. First, China could be building large inventories given the relative affordability of lactose. The average export value of U.S. lactose to China in October was half of what it was a year ago. This is certainly possible, but the scale of the increase would suggest that importers are holding 50% more product on hand this year even as the cost of holding inventory rises.  

The alternative explanation is that given the growth of China’s domestic milk production, lactose is needed for milk powder standardization. While this would explain the rapid surge better than any of the other theories, we have yet to see any confirmation of this new application in the market, making this much more of a data-driven theory than a solid explanation.  

There is likely some truth to all of these theories with the latter two explanations the most plausible. Regardless, lactose trade to China is likely to slow or even regress in coming months given higher prices and the fact that Chinese milk production has slowed, reducing the amount of local milk production dried.  

Learn more about global dairy markets:

• U.S. export performance mixed in September

• Global headwinds hamper U.S. dairy exports again in August

• Slow whey demand in China holds back U.S. dairy exports in July

   

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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.