In milk solids equivalent (MSE) terms, April U.S. dairy exports had their worst year-over-year decline in exactly four years. The softness in April exports impacted virtually all the major product categories. Cheese, nonfat dry milk/skim milk powder (NFDM/SMP), low-protein whey, lactose, butterfat, whole milk powder (WMP) and fluid milk/cream all lagged prior-year levels. Of the major products only WPC80+ rose and even that was only by 1%.
What drove April’s downturn?
At its simplest, global dairy demand has weakened in 2023 at the same time that competition has increased from Europe and New Zealand.
On the demand side, China remains the biggest drag on the global market. Last year, global trade to the largest dairy import market dropped by 22%. This year, while imports have stabilized, they remain subdued, growing by just 2% in the first quarter as a large portion of WMP and fluid milk imports have been displaced by increased domestic production. More recently, weaker margins for pork producers in China have dampened the country’s appetite for whey for feed, which directly impacts U.S. exports.
In addition to the direct impact on U.S. exports, continued weakness in China’s import demand has also sharply increased competition from New Zealand in other key U.S. markets (Southeast Asia, Japan) and products (cheese, SMP), as the Oceania exporter pivoted away from WMP to China. To illustrate this, despite New Zealand production and exports declining in 2022, the decline in China’s WMP purchases effectively increased supply available to the rest of the world by 15% in milk solids equivalent.
However, the challenges in the international environment are not limited to China and New Zealand. Inflation and economic headwinds have dampened consumer demand globally with particularly severe impacts on developing markets in Asia and Africa. Reflecting this weaker demand, U.S. sales to Southeast Asia – still the United States’ second largest market by volume – lagged 2022 volumes by 19% through April.
Compounding all of this, European milk production picked up sharply late last year (+1.2% year-over-year from October 2022 to March 2023) as weather improved and record high milk prices (that persisted even after product prices eased) incentivized additional production. With weak demand within the EU, the surge in milk production was directed towards gouda and mozzarella as well as butter and SMP, leading to a sharp drop in European product prices, effectively undercutting U.S. exports in many key markets.
Expectations moving forward
Clearly, there are headwinds to U.S. dairy exports. Indeed, we’ve highlighted the challenges U.S. dairy exports would face this year for several months. But was April just a singular blip or should we expect further declines?
We expect the next several months of trade data will show similar results, particularly on shipments to Asia, where competition has been particularly fierce and the demand headwinds the strongest.
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