Sunday, February 16, 2014

Dairy Exports Reach New Highs in 2013

In the prior post, an analysis of exports was promised.   Most 2013 data is now available.  While the USDA-FAS data for 2013 is "projected," comparisons to final 2013 data from the United States Dairy Export Council and the U.S. International Trade Commission indicate that the FAS projected 2013 data used in this post is reasonably accurate.

Dairy products are spreading from regional to national and now international markets.  While the debates go on endlessly, (whether we are discussing energy, off-shore outsourcing, or dairy products), the fact is that most markets are becoming internationalized.  Dairy has been slow to join this evolution because of the short shelf life of products and the high water content.  However, internationalization of dairy is here and growing fast.  There is no stopping or turning back.  It is best to embrace the change and learn how to make it work.

The U.S. dairy industry enjoys some advantages that is making it a world class dairy products supplier.  The U.S. dairy system is loaded with good management, technology, strong finances, and an entrepreneurial sprit to take risks and turn them into opportunities.  This evolution will make the dairy business more volatile, but expansion and economics of scale can be used to keep the U.S. dairy industry modern, profitable, and growing.

In 2013, 15.5% of dairy solids were exported.  This post will analyze the global dairy export market and discuss some of the the U.S. dairy export achievements and opportunities.

As an example of the global dairy environment, while the U.S. exported 15.5% of its dairy production,  New Zealand exported 95%.  Europe and New Zealand are the large dairy exporters that the U.S. must compete with.  The U.S. is in third place with a much smaller piece of the pie than Europe or New Zealand.  The U.S. slice is growing and the size of the pie is growing.  This is a major opportunity for the U.S. dairy industry.

Why is the U.S. in a good position to become a major international player?  There are two major reasons.  U.S. producers are very productive with large modern facilities and good management, and the U.S. dairy system is large enough and easily expansible to supply the increasing international demand.  The chart below shows the average milk per cow.  The U.S. has the highest per cow yield in the world, and the major competitors, Europe and New Zealand are far behind the U.S. numbers.

The EU-28 produces the most milk, but the U.S. is the second largest.  With the current large base, a growth of only a few percent can supply a lot of milk.  Due to the forage model practiced in New Zealand, significant growth will be difficult.  Europe is constrained in some countries by policies intended to maintain the "way of life" for agriculture. 

The U.S. is the leading exporter of Nonfat Dry Milk (NDM)/Skim Milk Powder (SMP).  This the largest export category in volume.  The year 2013 saw significant gains for the U.S. in this category which shows the flexibility and growth potential possible for the U.S. Dairy Industry.

There is one large category where the U.S. is not participating.  There is a significant global demand for Whole Milk Powder (WMP). Because there is essentially no domestic demand for WMP, U.S. milk processors have been reluctant to build facilities to service this market.  International demand can be volatile and is clearly driven by pricing and can be influenced by exchange rates and political events.  For New Zealand, this business is huge and geographically advantageous as much of this business is in the Asia Pacific region.

The chart below shows China's imports of SMP and WMP.  The growth rate is very significant and so is the volume.  China's WMP imports are much bigger than SMP and presents an opportunity for the U.S. dairy industry.  However, there are clear risks to this category.  Expanded sales to other emerging market countries could somewhat reduce this risk.

Cheese is a higher value dairy export and therefore is lower in volume.  Because much of the producer milk pricing is driven by cheese prices, the increased cheese demand provided by exports can have a significant impact on producer milk prices.  From the chart below, the growth in cheese exports from the U.S. have now made the U.S. the second largest supplier behind the EU-28.  Additional growth in this category is very important, but the potential volatility can create significant swings in demand and pricing.  


In addition to the risks of international competition and changing political policies, exchange rates also have a significant impact on exports.  Because most international dairy sales are commodity items, pricing drives demand.  A weak USD helps keep the U.S. competitive, but a strong USD can have a quick and disastrous impact.  Currently, exchange rates between the USD and both the Euro and New Zealand Dollar are neutral to positive for U.S. exports.

The dynamics of exports are quick to change and exports are now large enough that they can have a very significant impact on demand and pricing.  New posts to this blog will continue to follow these events.

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