Cheese and Butter Exports and Imports for 2019

Dairy export and import data for 2019 was recently released by the United States International Trade Commission (USITC).  It was a tough year for exports in general as new trade agreements were being negotiated.  In particular, the "trade wars" with significant tariffs being levied by both sides in the trade negotiations impacted exports to Mexico, Canada, and China.  This post will review cheese and butter exports and imports as they are the most important commodities used in pricing producer milk.

The highlights are as follows:  All comparisons are 2019 vs. 2018.

• Cheese exports are up by three percent.
• Cheese imports are up by one percent.
• Therefore, cheese net exports are up by five percent.
• Butter exports are down by 46 percent!
• Butter imports are up by 10% percent.
• Butter net exports (really net imports) more than doubled on weak exports and strong imports of butter.  The U.S. imports twice as much butter it exports.

CHEESE EXPORTS

Cheese exports showed growth in 2019 in spite of a difficult environment as trade negotiations with Mexico, Canada, and China resulted in significant changes in tariffs.  The largest percent increase over the prior year came in the first quarter before trade negotiations "heated up."  The last three quarters produced almost no gain (Chart I).

Chart I - Cheese Exports YTD for 2018 and 2019

Table I below shows the details of the full year changes in exports.  

Mexico is by far the largest importer of U.S. cheese.  For 2109, these exports were down by 1.2 percent.  The largest volume and percent decline in exports came from China with a 54.3 percent drop in volume.

However, there were two amazing offsets to the "trade war" impact.  First of all, there were significant gains in cheese exports to South Korea and Japan.  Secondly, there were very nice gains from the 106 countries that are smaller customers.  Those smaller export markets make up only 20 percent of the total export volume but contributed a 9.3 percent gain over the prior year.

Table I - Cheese Exports by Country

Cheese imports are significant and contribute to the domestic supply of cheese in the U.S.  These imports are about 50 percent the size of exports, so they do have a significant impact on total U.S. cheese supply and availability.  Cheese imports did grow in 2019 compared to the prior year, but only by one percent.  Chart II below shows the YTD growth of imports over the prior year.

Chart II - Cheese Imports YTD for 2018 and 2019

These imports came primarily from the five countries shown below in Chart III.  Together, these five countries make up over 50 percent of cheese imports to the U.S.  Italian cheeses are by far the most popular imports and showed significant growth.

Chart III - Cheese Imports by Country

Total cheese exports less cheese imports is defined as net cheese exports.  Because the imports contribute to the available supply of cheese for U.S. consumption, they lessen the amount of U.S.  produced cheese needed for consumption which in turn lessens the amount of milk needed for cheese. Because cheese exports grew by three percent in 2019 and cheese imports grew by just one percent, the net cheese exports grew by five percent as shown in Chart IV below.

Chart IV - Cheese import YTD for 2018 and 2019

A growth of five percent in net exports amounts to just 0.1 percent impact on total U.S. cheese demand.

BUTTER

Butter exports took a plunge in 2019, down 44 percent from the prior year as shown in Chart V.  That is a huge drop!  The first quarter had a very small decrease and the remainder of the year had decreases of over 50 percent compared to the prior year.

Chart V - Butter Exports for 2018 and 2019

Most of the butter exported from the U.S. goes to Mexico and Canada.  The trade war had a huge impact as shown in Chart VI.  Butter exports to Mexico fell by 75 percent and exports to Canada fell by 33 percent.

Chart VI - 2018 and 2019 Butter Export by Country

Butter imports increased again in 2019, this time by 10 percent over the prior year as shown in Chart VII. 

Chart VII - Butter Imports for 2018 and 2019

The imports were again driven by U.S. demand for Irish butter.  The demand for Irish butter is not price driven.  It is driven by a uniqueness of taste and excellent marketing.  Irish butter has grown by 25 percent in 2019 vs. the prior year.  In 2019.  Irish butter imports were 30 million pounds or about 50 percent of total butter imports.  Very importantly this in not commodity butter subject to competitive pricing, but branded and unique butter.  It has now gained a market share of roughly three percent of total U.S. butter consumption.

Chart VIII - Butter Imports by Country

Chart IX shows the growth of Irish butter in the last five years.

Butter consumption in the U.S. is growing at around 2.5 percent annually and Irish butter imports are grew at 25 percent in 2019.  At this time, the growth of total imports of butter satisfy about one third of that growth.  That leaves only two thirds of the consumption growth for U.S. produced butter.

Chart IX - Growth of Irish Butter Imports

SUMMARY

Exports can drive demand for U.S. dairy products.  With declining domestic consumption of fluid milk, yogurt, and ice cream, increased exports of dairy products are desperately needed.  There have been significant improvements in trade agreements in 2019 and there is hope for more new trade agreements in 2020.  

Also driving exports is price competitiveness in the global markets.   There are two things that can make U.S. dairy products financially attractive in the international markets.  Exchange rates are an important factor in exports, but there is little that can be done within the dairy industry to manage exchange rates.  But, being a low-cost provider is extremely important and can be managed by producers and processors.  The year of 2019 has been very harsh on less productive producers.  That said, the harsh realities of the capitalistic system are the key to survival.

What will the China Trade Agreement do for Milk Producers?

On January 15, 2020, the U.S./China Trade agreement was signed.  This is what is popularly known as Phase-one, implying that other phases are coming.  There are many general topics that cover all import and export issues and there are sections covering specific areas, like dairy.  This post will cover the general topics briefly and then cover the specific items for dairy.

THE GENERAL ISSUES

The areas covered are listed below:  There are enforcement measures defined for these categories.

1. General obligations of intellectual property rights
2. Trade secrets and confidential business information
3. Patent protection
4. Piracy and counterfeit goods
5. Trademark rights and copyright protection
6. Technology transfer

There are two phrases repeated many times in the trade agreement.

The term "China shall" is repeated 88 times.  This is used in sentences like "China shall require",  "China shall establish", "China shall permit", etc.  All of these sentences imply that China does not have in place policies and procedures to control many of the items listed above.

The term "The United States affirms" that existing U.S. measures afford treatment equivalent to that provided for in this agreement, is used 27 times.  This suggests that binding policies and procedures are currently in place in the U.S.

SPECIFIC ITEMS FOR DAIRY

In all cases, dairy products exported by the U.S, must be manufactured in a facility listed by the FDA and carry a sanitary certificate issued by the Agriculture Marketing Service (AMS).   The U.S. will provide a list of these facilities and update them regularly.   China will allow imports of U.S. Dairy products that meet this criterion.

Specific dairy products included in the agreement are listed below:

1. Extended shelf life milk
2. Fortified milk
3. Ultra-filtered milk
4. Dairy permeate powder
5. Infant formula

The first three items listed are approved for importation in China and will be labeled as pasteurized milk conforming to China's "National Food Safety Standard".  They must be manufactured in facilities listed by the FDA and AMS as stated above.

Dairy permeate powder is specifically listed. China has in the past imported whey permeate primarily for their swine industry.  Dairy permeate is very similar to whey permeate.  Both products are primarily lactose with trace minerals and ash.  Whey permeate is essentially whey from cheese manufacturing with the proteins removed.  Dairy permeate is a co-product of ultra-filtration and contains a similar profile to whey permeate.  Both are low value co-products of milk processing for cheese and ultra-filtration separation of solids. The ultra-filtered milk is typically used in cheese manufacturing. 

The dairy permeate listed in the trade agreement must be approved for human consumption.  As more cheese is made from ultra-filtered milk, more dairy permeate is available.  Specifically listing this in the trade agreement will hopefully provide an export market for dairy permeate.  However, like whey permeate, dairy permeate is a co-product that is removed from the milk used for cheese manufacturing and does not increase the overall demand for U.S. producer milk.

Infant formula has been a major issue in China since the Chinese production of infant formula was manufactured with added melamine. Melamine was added to provide a higher nitrogen value which is typically used to measure protein.  Melamine was never intended as a food ingredient. Unfortunately, many Chinese children were killed by drinking formulas with melamine.  There is a need for infant formulas with high safety standards that comes from a trusted supplier.  While this agreement will hopefully bring additional exports for infant formula from the U.S., infant formula is a small category in the overall use of the U.S. milk. 

THE BOTTOM LINE

It is doubtful that any of these products covered in the U.S./China trade agreement will bring a significant increase in U.S. milk demand.  The first three items listed above are niche fluid milk products.  The fourth product listed, dairy permeate, is a fractionated element of milk components and is primarily lactose that is left over from ultra-filtered milk prepared for cheese production.  Infant formula, the last dairy product covered in the agreement, is a relatively small volume item in the long list of dairy products.

It is difficult to quantify the impact of the general items listed at the top of this blog.  However, they are certainly a step in the right direction for improving equable trade with China.

The agreement brought no major reductions in tariffs as a result of the signing of the trade agreement.  However, some threatened tariff increases were postponed, and a few reductions were made prior to the signing as a "good will" gesture.   Hopefully more tariff reduction will occur as U.S./China relations improve.  The recent outbreak of the Coronavirus will no doubt slow the implementation of the agreement.