Dairy Processing - May/June 2023 - 74

COMMODITIES
Necessary exports
Moderate growth in production has given the US plenty to send elsewhere.
by Nate Donnay | nate.donnay@stonex.com
E
xports are no longer optional for the US dairy industry.
You either export, or you're swimming in product. In
2022 the US exported 70% of the NFDM/SMP produced,
54% of the dry whey and 82% of the WPC and lactose.
Cheese and butter exports only accounted for roughly 7% of
production, but the exports are still important to absorb the
growing supply with a third of new truckloads of cheese made
last year headed for the export market. The US even exported
about 4% of the yogurt produced in 2022.
While US milk production growth hasn't been
overwhelming, it is still growing. Headline milk production
over the past 12 months is only up 0.6% from the prior
12 months. But the amount of fat and protein in the milk
continues to grow, so after adjusting for components, milk
solids production is up 1.7%, which is a little faster than the
long-run average growth. That has led to some build-up in
inventories, primarily in powders and butter. So the US has a
decent amount of product to export.
EXPORTS OUTSIDE THE US
The next part of the equation is how much supply is available
to export from other countries? Short-term, there is a lot.
Record high milk prices in Europe have encouraged
more milk production in the region with component adjusted
production in the second quarter expected to be up about 2.5%.
High inflation and slowing economic growth have been slowing
domestic demand inside Europe, which is also freeing up some
product for the export market. The weather in New Zealand
has been much better than normal for grass growth, which is
giving it a strong end to its milk production season. Milk solids
production could be up more than 5% in April and May and
weak demand from China has left extra product sitting in New
Zealand and looking for a home. With that, the US is facing
some significant competition in the export market.
The third part of the equation is how much do the
importers actually want? The primary long-run drivers on
demand are population and income growth. While there is
74 MAY-JUN 2023 | DAIRYPROCESSING.COM
a long-run slowdown in population growth, the big demand
fluctuations are really driven by economic conditions. Central
banks around the world have been raising interest rates for
more than a year to intentionally slow economic activity and
bring inflation down.
It has taken some time, but their efforts are starting to
bare fruit and economic growth is slowing down (and inflation
is too). The IMF is still relatively optimistic about income
growth in developing countries, forecasting real GDP up 3.93%
in 2023, which is only a little weaker than the pre-pandemic
average of 4.6% (2014-2018). Consumption growth in many of
the importing countries is likely a little weaker than " normal "
but isn't terrible.
BALANCING IT OUT
The last part of the equation is: what price will it take to
balance all of this out? There is plenty of supply available with
multiple sellers trying to clear product. Consumption should be
doing OK, but not gangbusters. That argues for relatively low
prices, which is what has developed over the past six months.
However, the low dairy prices are feeding back to the
dairy farmers and milk production growth across the major
exporters should be slowing down in the second half of the
year. That will tighten supply and allow prices to rise with
the caveat that we're dealing with only moderate demand
strength. Once buyers feel like the market has bottomed
we could see some aggressive buying as they try to load up
at cheap prices, but once prices move higher buyers could
become more skittish.
Overall, the export outlook is mixed. Exports in the
second quarter have been a struggle, but as production
growth slows down and buyers sense a bottom is near for
prices, we should see a surge in demand and a tighter market
in the second half of the year with good volume movement.
Nate Donnay is the Director of Dairy Market Insight at
StoneX Financial Inc.
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