Cheese Exports are "Stuck in the Mud"

August dairy export and import data are now available.   In order to increase producer milk prices, cheese inventories must be reduced.  Domestic cheese consumption grows every year at about 2% annually.  However, cheese production is geared to also provide cheese for export in increasing amounts.  That is not happening.  For a review of the importance of the cheese price on producer milk prices, see the later half of this post.

Chart I below shows cheese exports over the last 19 years.  From 2004 to 2014 cheese exports were on a very nice growth curve.  Then the bottom dropped out and cheese exports declined dramatically.  They recovered some in 2016, but have not grown since then.

Chart I - Cheese Exports Since 2000

Chart II shows cheese exports by year for the last five years.  There is no growth.  In fact the current year is lower than the prior year and lower than 2014.

Chart II - Cheese Exports by Year

Chart III compares cheese exports by country.  There is some minor growth in cheese exports to South Korea, Japan and a few other countries, but there is essentially no significant growth in cheese exports to any country.  Overall, cheese exports are not seeing any growth.

Chart III - Cheese Exports by Country

NDM/SMP has seen continuing export growth (Chart IV).  The growth is nothing new.  It has been steady for nearly 20 years.  With increased consumption of butter, more nonfat milk is available for drying and there always seem to be a market if the price is right.  As covered in the prior post,  the price of NDM/SMP has been in a slump for the last three years,

Chart IV - NDM/SMP exports Since 2000

Most of the NDM/SMP goes to Mexico (Chart V).  It does not require refrigeration and is very inexpensive.  Can more be absorbed in Mexico?

Chart V - NDM/SMP Exports by Country

Comparing cheese and NDM exports, there are some similarities but also major differences.

• Mexico is the biggest buyer of both U.S. cheese and NDM/SMP.
• Cheese is relatively expensive and cannot be afforded by many Mexican citizens.  It also requires refrigeration, which is not available in parts of Mexico.  The Mexican market may be saturated with expensive cheese.  
• NDM/SMP is very inexpensive and does not require refrigeration.

Chart VI - Butter Exports by Country

Butter exports remain miniscule.  Domestic consumption demand for butter leaves little available for export.  What is exported does not have far to travel as most all butter exports go to Mexico or Canada.

Exchange rates are always a factor in international trade.  A weak currency improves a country's competitive position.  

The exchange rates for the two largest international dairy competitors, Europe and New Zealand, are both showing a strengthening of the USD.  In 2018, the USD has strengthened by more than 10% against the NZD, giving New Zealand a more competitive position in commodity sales.  The USD has also strengthened by slightly less than 10% against the Euro.

Chart VII - Exchange Rates for USD/Euro

Chart VIII - Exchange Rates for USD/NZD

When selling to our two biggest dairy customers, Mexico and Canada, the USD is also showing increased strength of about 5%.  This makes products sold to these countries 5% more expensive. 

Chart IX - Exchange Rates for USD/Mexican Peso 

Chart X - Exchange Rates for USD/CAD

There are lots of headlines about the impact of 25% tariffs, but in reality, exchange rates can have a bigger impact.  For instance, in 2008/09, when the USD strengthened by over 50% vs. the NZD, U.S. producer milk prices fell from $20/cwt. to $10/cwt.  Exchange rates don't make headlines, but they can be very impactful.