November 4, 2020

Exports Could be Headed for Choppy Water

 |  By: Ben Laine

Amid the market disruption and volatility the COVID-19 pandemic has left in its wake, trade emerged as an unexpected bright spot for dairy. Elevated export levels helped alleviate the pressure from the extra milk left on the market when domestic demand slowed. However, dairy trade might not be all smooth sailing as we head into 2021.

Since April, skim milk powder (SMP) and whole milk powder (WMP) exports out of the world’s major regions have been up 10% year over year (YOY), but that was not the case in early 2020. In the first quarter, milk powder trade was down 8% versus first quarter 2019. Following the initial lockdowns and the pandemic’s spread, exports to some regions slowed, while others surprised to the upside.

A collapse in the Mexican Peso against the U.S. Dollar in March made U.S. products more expensive to Mexico. As a result, Mexican imports slowed. U.S. exports of SMP and nonfat dry milk (NDM) were down 14% through August. Rabobank expects continued volatility and strength in the Cheese exports to Mexico – a smaller share of Mexican trade volume – struggled earlier in the year but have improved since May.

Meanwhile, China and Southeast Asia stepped up purchasing. Indonesia and the Philippines each increased their purchases of SMP and NDM from the U.S. by more than what was lost in sales to Mexico YOY through August. Uncertainty about the future of the pandemic and the risk of supply chain disruptions likely motivated these import-reliant regions to build larger stocks of product for food security.

China, the world’s largest buyer of dairy products, has also been actively importing. Whey has been the primary driver of Chinese import growth as the country rebuilds its hog herd following the major impacts of African swine fever. China also appears to be building more extensive stocks and rapidly building up its own dairy herd. The buying spree is likely to cushion supply chains in case of another COVID-type disruption occurs, to protect against geopolitical risk and take advantage of favorable prices during volatility.

Food security has been a driver of strong imports in Southeast Asia, but once inventories are built, purchasing could slow to more normal levels. Between China’s efforts to grow its milk production and its current stock building, Rabobank expects its import needs to slow in the medium-term.

Trade helped make up for some of the slower domestic demand for dairy caused by COVID in 2020, but most of that strength will not carry into 2021. Global trade will still provide growth for the industry in the long run, but volatility will prevail in the near to medium-term.