USDEC looks at the principal market factors influencing dairy import demand and trade in the year ahead. 

With full year 2023 data finally released, we can turn our attention entirely to 2024 and what lies ahead. As is tradition, the U.S. Dairy Export Council has summarized the key “signposts” that our analysts will be watching in the year ahead that will determine the direction of U.S. dairy exports and global markets, particularly in this uncertain environment.

China

It should come as no surprise that China remains the first major variable likely to influence the direction of U.S. dairy exports and global markets. Despite contraction in 2022 and stagnation in 2023, China remains the largest dairy importer in the world – a position it is likely to retain for the foreseeable future. However, China’s future growth trajectory remains murky.

On the economic front, the outlook for China is pessimistic. Both consumer confidence within China and investor confidence regarding China are at their lowest levels in years; a deflationary housing market has eroded household wealth; and the International Monetary Fund (IMF), World Bank and other macroeconomic forecasters are all expecting a marked slowdown in the country’s GDP in 2024.

Weaker economic performance is likely to weigh on China’s dairy consumption growth again next year, particularly at foodservice. Pizza sales have performed relatively well, but that success has been in part due to Pizza Hut China pitching low-cost options. Whether sales volumes can keep growing remains to be seen, especially in other segments like bakery, where dairy ingredients are prevalent. Additionally, the slower economic growth (combined with a stagnant population) has damaged pork consumption within the country and thereby hindered whey-for-feed demand.

Ultimately, with demand growth questionable, the abundance or scarcity of local milk supplies will play a major role in determining dairy import needs. As we’ve seen the past several years, the Chinese industry has made significant investments in boosting their local milk production. The expansion is primarily due to vertical integration of the major processing companies, with most local milk production going toward fresh milk, which has reduced the need for imported fluid milk or whole milk powder. With lackluster consumer demand, low milk prices and high input costs, this would theoretically hamper milk production. But with the industry’s vertical integration and the Chinese government’s self-sufficiency goals, it is unclear to what extent normal economic fundamentals apply to China. In which case, further expansion and commercialization may still be on the way, further depressing imports until dairy consumption in the country rebounds.

Because of the uncertainty in both consumer demand and local milk supply, the range of outcomes for China’s 2024 dairy imports is wide. However, even with the uncertainty, we believe it’s likely that China is headed for another largely flat year of imports, at least in the first half of the year, with fluid milk and WMP, in particular, remaining weak. Ultimately, China’s import mix is evolving away from fresh milk and WMP toward cheese, dairy fats and specialty ingredients – products that aren’t made locally. This evolution may open up more opportunities for U.S. dairy in the long run, but for now, China could have a bumpy road ahead in 2024.

Mexico

Gratefully, not all markets have been as bleak as China. 2023 was an exceptional year for U.S. dairy exports to Mexico. U.S. suppliers shipped a record high 631,511 metric tons (MT) in milk solids equivalents (MSE) to our neighbor to the south, up an astonishing 13.5% compared to the same period in 2022. These strong volumes were critical in compensating for slower exports to other major demand destinations.

Several factors drove the surge in volumes. While economic growth in much of the world sputtered, the Mexican economy outperformed expectations as GDP rose by an estimated 3.2%, according to the IMF. Falling unemployment, a resurgence of tourism, and a wave of foreign investment boosted the desire for consumer products, including dairy. As demand soared, strong economic results drove the Mexican peso to an eight-year high, increasing the purchasing power of Mexican buyers and further bolstering consumer confidence. At the same time, dairy products in the U.S. were moderately priced, creating an ideal buying opportunity. Mexican importers capitalized on these conditions, importing 16% more nonfat dry milk/skim milk powder (NFDM/SMP) and 20% more cheese than in 2022, the previous record year.

While Mexico will almost certainly continue to be the top destination for U.S. exports in 2024, it may be difficult to keep up the breakneck pace seen last year. Indeed, recent performance of NFDM/SMP exports to Mexico suggest a slowdown may already be underway.

The IMF is predicting that GDP growth will slow materially this year as high interest rates persist and public investment slows. Its current forecast suggests an increase of 2.7% compared to 3.4% in 2023. However, the agency, as well as many other banks and rating institutions have recently increased expectations in light of last year’s stellar performance and stronger growth in key trading partner economies like the U.S. In addition, presidential elections are scheduled for June of this year and guarantee a change in leadership as incumbent Andres Manuel Lopez Obrador cannot run due to term limits. Last-minute initiatives in the lead-up to the election could stimulate consumer activity and dairy demand. But even so, a cloud of uncertainty hangs over the second half of the year.

Mexican consumers and importers proved their love of dairy in 2023, buoyed by strong economic performance. Though many are keen to see the party stretch into 2024, time will tell if impending challenges slow the pace of U.S. dairy shipments south of the border. For now, we anticipate import growth rates to moderate, particularly for NFDM/SMP, but the outlook for Mexico still looks relatively bright in a world of uncertainty.

The global economy

Beyond just China and Mexico, the global economy is going to need to pick up if U.S. dairy exports are going to rebound in 2024. As we’ve seen this past year, there is a clear connection between economic wellbeing and dairy consumption. With so many markets battling inflation and reduced purchasing power this past year, global dairy demand suffered. Conversely, those markets that had strong economies and currencies, like Mexico, dramatically overperformed expectations.

The good news is that brighter days ahead are expected for the global economy, even though obstacles remain. For instance, the IMF is forecasting global GDP to grow by 3.1%, which is below average (3.8% on average between 2000-2019), but still up from earlier forecasts. The upward revision reflects growing, albeit tentative and moderated, optimism.

One of the leading factors supporting modest optimism is easing inflation, which in many cases has cooled faster than anticipated. One of the major concerns with high inflation levels is entering a wage-price spiral (a vicious cycle of competing wage and price escalations often resulting in higher inflation) – which, positively, we seem to have avoided in most major economies. Inflation peaked globally in 2022 at roughly 8.7%, eased to 6.8% in 2023 and is expected to fall to 5.8% in 2024. That continued easing alleviates economic pressure and supports increased consumer demand.

With inflation retreating, many banks have hinted at easing restrictive monetary policies this year which should support economic growth. But lowering interest rates too quickly risks a resurgence in inflation, meaning that central banks will likely take a conservative approach in lowering rates in the near-term, thus limiting some of the economic upside in 2024. Overall, achieving a “soft landing” appears within reach for many major economies, but how countries handle their monetary policies in the coming year will determine their success.

Unfortunately, cooling inflation does not mean the global economy is without risk. The war in Ukraine, the war in Gaza and conflicts in the Red Sea threaten both the supply of commodities, energy availability and the reliability of the global supply chain. At the same time, China’s economic instability poses spillover risks to other economies in Asia. On top of that, the prevalence and number of trade restrictions increased over the last two years. Countries imposed roughly 3,200 new restrictions on trade in 2022 and around 3,000 in 2023 – up from roughly 1,100 imposed in 2019 according to the IMF.

Still, despite the obstacles, the global economy as we move into 2024 is not looking quite as bad as we thought. While the obstacles to growth are real, the global economy is weathering inflation better than anticipated, and inflation is expected to continue easing with nearly 80% of global economies anticipating lower inflation this year. Global dairy trade is unlikely to rebound to its pre-inflation level overnight, but growing incomes are a prerequisite to demand getting back on track.

Milk production in Europe and New Zealand

Even if Chinese demand improves, Mexico’s appetite remains strong, and the global economy picks up, the U.S. will still have to compete with well-established competitors – as we did in 2023. Adjusted for components, EU27+UK milk production grew by 1.2% and New Zealand expanded by 2% through November 2023. That rise in milk production combined with weakness in China increased competition with U.S. exporters in many key markets and products. As such, milk production in both Europe and New Zealand will be a critical variable to U.S. export performance next year.

Looking first at Europe, the bloc’s rapid milk production expansion and more recent contraction is primarily caused by volatility in farmer margins. European farmers benefited from sky-high milk prices in late 2022 and early 2023, with the average EU milk price reaching nearly 60 € cents per liter in December 2022 (just below $28/cwt). The rapid rise in prices created the incentive to increase production, especially through better feed quality, which dramatically boosted components. When milk prices returned to a more normal level in the middle part of the year, European milk production growth quickly slowed, most noticeably in Germany, the Netherlands and Ireland.

New Zealand output, on the other hand, remains primarily driven by weather. Given that the dairy herd in New Zealand has been on the decline since 2015, milk production relies on improved genetics and good weather to grow. With exceptionally supportive weather to finish the previous season and relatively minor effects from El Niño in the current season, milk production in the country was robust in 2023.

Looking to 2024, the growth outlook is relatively modest. EU milk prices are in a more balanced position, but with the late-year weakness in milk production, payouts have started to rise again, suggesting the cycle could begin again if demand doesn’t materialize to support a price enhancement. However, with the dramatic rise last year in component tests, it remains unclear if such gains can be repeated as European milkfat and protein levels do not grow nearly as consistently as in the U.S. By contrast, in New Zealand, forecast farmgate payouts are the lowest in four years, with concerns over drought as New Zealand moves into autumn, which could potentially be an even bigger obstacle than reduced margins.

On top of the near-term challenges, policy uncertainty is likely to hamper significant growth potential for both the European Union and New Zealand by tempering on-farm investment and moderating output in 2024 and beyond. All told, we expect slight gains for EU27+UK milk deliveries in 2024 (around +0.5%) and New Zealand holding steady with weather as the ever-present variable. For the U.S., this modest growth from the EU and New Zealand is likely to mean continued competition with the two largest dairy exporters in key markets around the world, but the two are unlikely to be as aggressive on price as they were in 2023 to clear excess milk. That could potentially open the door to U.S. export growth, provided that global demand and U.S. milk supply are conducive to expansion.

U.S. dairy’s expansion appetite

Regardless of the external factors, the financial well-being of the U.S. dairy farmer will be critical to U.S. export success in 2024. For the past several years, farmers’ margins have tightened as input costs have remained elevated, limiting milk production expansion in 2022 and 2023. Higher feed, energy and labor costs led many farmers to make tough management decisions, one of which was culling herds as record-high beef prices competed with depressed milk prices. Though feed prices have recently started easing and cull numbers are tapering off, costs are likely to remain high and may limit farm expansion.

On the feed side, USDA is projecting global coarse grains production, which includes feedstuffs like corn and sorghum, to increase to over 1.5 billion MT, up 4% from the previous season. Similarly, global oilseed production is also projected to increase by 3.5% in the coming season. These higher projections have resulted in a recent price drop in corn and soybeans. Though input costs are still elevated compared to pre-2021 levels, margins are not expected to be as tight in 2024 as they were in 2023, which is good news for U.S. dairy farmers and would normally suggest expansion may be on the way.

However, while costs are expected to stabilize, building a new farm or expanding an existing facility is likely to be a challenge. For one, replacement heifers are hard to find. Feeder cattle prices reached record highs in 2023 and breeding beef on dairy crosses was an attractive management decision for many farmers facing tight margins. Additionally, high interest rates and an uncertain market environment have cooled some of the appetite for expansion in the U.S.

With on-farm costs staying elevated, a smaller replacement heifer herd and a volatile investment landscape, 2024 is not expected to see significant milk production expansion until perhaps later in the year as several new processing facilities across the country come online. The level of milk production in the U.S. will have significant impact on U.S. export performance in 2024 as another tight year on the farm will likely limit exportable supplies – even as the United States’ long-term trajectory remains clear.

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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.