8 Variables That Will Impact Dairy Trade
With processors at capacity and more milk in the pipeline, exports of dairy products play an integral role in moving supply and supporting milk prices. Over the years the amount of dairy products exported on an annual basis amount to around 15% of the nation’s milk supply. Last year the U.S. Dairy Export Council (USDEC), working with their members, develop a plan to lift U.S. that export percentage to 20%, an initiative they are calling The Next 5%.
Mark McKnight, USDEC chief operating officer, offers the following eight signposts to gauge market strength and direction and help monitor progress of U.S. dairy export growth in the year ahead.
1. U.S. trade policy
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.
In 2017 U.S. dairy export volume to China grew more than 25% through the first 10 months (compared to January-October 2016). Chinese milk powder stocks are estimated at just 50,000 tons, and dairy import growth is at about 14%.
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% increase in 2018) will test whether 14% remains the norm.
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% in 2017. Canadian skim milk powder (SMP) exports more than tripled to more than 61,000 tons through the first 10 months of 2017, in large part due to changes to the nation’s milk pricing system. It has a resurgent export program, and the pricing scheme’s potential impact on U.S. and world markets is significant.
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 have been far below current EU and world prices. Even the EU admits it might end up holding the aging SMP 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 up EU and Oceania butter prices remain in play: Strong global demand, 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% 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.
The International Monetary Fund (IMF) forecasts GDP growth in oil exporters will nearly double from 1.5 to 3% in 2018, and GDP growth in oil importers in the region will rise to 4.3%. 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. 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% in the third quarter of 2017, and will likely be up more than 4% 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.
USDEC estimates New Zealand output will rise 1-2% 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% in the back half of 2017. USDEC calculates global demand can only support milk production growth from the major exporters of about 1.5%, year over year.