June 18, 2018
US Dairy: Sheltered and rebounding strongly - if politics doesn't interfere
A large expanding home market shielded producers from the dairy market crash's full impact. Even so, a trade war could spoil optimistic long-term projections.
By Eric J. Brooks
An eFeedLink Hot Tpoic
After an impressive fifteen years and a three-year interruption, America's dairy sector is picking itself up and resuming its long-term momentum. Expanding by 1.7% to 99.473 million tonnes this year (from 97.84 million tonnes in 2017), milk production is on its long-term growth path.
After expanding by 2.0% annually in the 14 years up to 2014, US milk output adjusted to lower world market demand, rising an average of 1.6% annually over the last five years. That, however, is merely an adjustment to the export market's slower growth.
Over the short-term, bad weather made Q1 and early Q2 milk production come in below expectations. After late 2017's slack milk demand, this firmed up farmgate milk prices, though not enough to offset more costly corn and alfalfa, which have risen by more than 15% from last year's lows.
Notwithstanding short-term narrower short-term profit margins, there is a greater long-term accomplishment. US dairy production continues to grow while that of leading EU nations has long been stagnant. America's dairy sector has emerged from the world dairy market crash relatively unscathed.
Over the last five years, it never suffered large financial losses or mass cullings endured by Australian and New Zealand dairy farms. Whereas Australia and New Zealand produce less milk today than before the dairy market crash, American milk production kept growing –and grows at twice the EU's pace.
It is able to do so because of two exceptional features: First, exporting rivals Australia and New Zealand lack a large domestic population to cushion the blows of the volatile international market. Second, in theory, the EU is a larger dairy market than America. In practice, Europe's dairy sector is highly fragmented and largely stagnant. The US is the only leading supplier that can fall back on a large, integrated and growing domestic market –and that latter point has served it well over the last three difficult years.
From 2004 to 2014, the volume of American dairy exports more than doubled while their value quadrupled. From under 5% of production in the mid-1990s, US dairy exports totaled 15% of its output by the early 2010s.
In retrospect, US dairy producers leveraged decades of farm consolidation and strong productivity gains just in time for world dairy demand to take off. By the mid-2010s it had overtaken Australia to become the second largest dairy exporting nation after New Zealand.
Thereafter, a world dairy market crash coincided with a newly deregulated EU dairy sector and a 15% fall in the Euro's value. That resulted in surplus European dairy commodities flooding Asia just in time for its dairy demand to fall.
Consequently, American dairy exports fell by volume and wilted by value: 2015 export earnings fell a whopping 30% from their 2014 peak. Even then, with over 85% of output consumed with America's vast domestic market, stable domestic revenues enabled the industry to ride out the world dairy crash far better than export-dependent rivals in Australia and New Zealand.
Dairy demand in America was growing at its strongest pace in years and helped offset export losses. In particular, the downturn years of 2014-16 inclusive saw large increases in the domestic consumption of butter (+7.3%), cheese (+7.9%) and WMP (+42.8%), along with the volume of fluid milk used in dairy production and by food processors (+9.3%).
America's vast domestic market transformed incremental annual rises in dairy demand into large volume consumption increases. This more than offsets a dairy crash-induced fall off in export volumes.
For example, with the EU and New Zealand undercutting US cheese in 2015 and 2016, exports fell by 81,000 tonnes or 22%. EU, New Zealand, and Australian cheese exports increased by 79,000 tonnes, 77,000 tonnes and 16,000 tonnes respectively over these two years. –Even so, with US domestic cheese consumption increasing by 392,000 tonnes over these same two years, US cheese demand minus exports rose by 311,000 tonnes –close to double the 172,000-tonne collective increase in EU, New Zealand and Australian cheese exports.
Similarly, American butter exports fell a whopping 63.5%, from 74,000 tonnes in 2014 to 27,000 tonnes in 2016. Over that same time, New Zealand exported 6,000 tonnes less butter and consumed 6,000 tonnes more. Australia did much the same, with butter exports falling 14,000 tonnes and consumption rising 13,000 tonnes. –America, by comparison, more than offset the lost 47,000 tonnes of butter exports with a 58,000-tonne increase in domestic butter consumption over the same two years.
A similar story can also be told with dairy powders. US WMP exports stayed nearly flat, rising a mere 1,000 tonnes between 2014 and 2016, as most of its shipments were destined for Southeast Asia or Mexico, which were not impacted by falling Chinese demand.
With a large portion of New Zealand's WMP going to China, its WMP exports fell by 71,000 tonnes. By comparison, US dairy producers could ignore flat WMP exports, as domestic consumption of this dairy powder increased by 42.9% or 12,000 tonnes over those same two years.
Geography also came to the US dairy industry's assistance: The world dairy crash was caused by falling Chinese demand, with Australia and New Zealand sending a high proportion of their exports to this country. During those same years, the US was able to significantly boost its tariff-free dairy exports to Mexico. It imported US$1.3 billion of US dairy goods in 2017, more than Southeast Asia (US$690 million) and China (US$577 million) combined.
Even in the only dairy line to have declining domestic consumption, America got lucky. Domestic SMP consumption fell 2.2% or 10,000 tonnes but with demand rising in Mexico, it boosted SMP exports by 9% or 49,000 tonnes over those two years.
With domestic market growth more than offsetting export losses, the 2015-16 dairy crash downturn saw US milk production rise 3.1% even as output in Australia (-3.6%) and New Zealand fell (-2.2%). More importantly, farmers were able to boost domestic production without suffering the financial losses endured by their southern hemisphere rivals.
Best of all, with the world dairy crash now over, US dairy exports have resumed their long-term growth path. Alongside recovering world dairy demand, in 2017 the US dollar was 20% below its 2014 peak against the Euro, New Zealand, and Australia dollars.
2017 dairy exports increased 6% by volume, totaling 1.935 million tonnes of dairy powders, cheese, butterfat, whey, and lactose. A partial rebound in world dairy prices helped transform 2017's export volume rebound into a 14% revenue increase, totaling US$5.48 billion, from US$4.81 billion the previous year. It was driven by large increases in the value of dairy shipments to China (+49%, US$0.58 billion), Japan (+50%, US$0.29 billion), South Korea (+21%), the MENA region (+21%) and Mexico (+8%, US$1.3 billion)
Whey and SMP rebounded to achieve new record volumes. Partly due to the dairy market crash, partly to the EU's coincident dairy market liberalization, cheese exports had fallen to 287,000 tonnes in 2016. Partly thanks to a lower dollar, in part due to Mexican demand, cheese staged a partial recovery, rising 18% to 339,000 tonnes in 2017.
Value wise, Mexico led, importing US$391 million of US cheese and 8% more than last year's US$362 million). Second to Mexico in cheese imports was South Korea (US$213m, 25%) followed by Japan (US$143m, +22%), Australia (US$116m, +97%), MENA (US$88m, +29%), the Carribean (US$76m, +12%) and Southeast Asia (US$71m, +52%).
At 357,000 tonnes, cheese exports increased 19%; still 10,000 tonnes below their 2014 high but are on track to break their old record in 2019. Collectively, SMP, cheese, and whey account for 67% of dairy exports. Their revival is a bellwether of the industry's resurgent trade performance.
Moreover, this revival in export momentum has carried over into 2018. In both March dairy exports were at an all-time and that record was subsequently broken in April, with total volumes of SMP, WMP, butter, cheese up 31% over the same month in 2017, with whey and lactose exports also at monthly all-time highs. Dairy exports accounted for 18.8% of milk production –a momentum which if maintained would itself set a new record.
After lagging in 2017, April SMP exports to Southeast Asia were buoyed by a lower US dollar and up 70%, with those to Mexico up 30%. That put April SMP volumes at an all-time high, 37% of last year's volume. Based on current numbers, there is reason to believe that current USDA forecasts for exports of cheese (+5.3%), fluid milk (+4.1%), WMP (+17.6%) and SMP (+6.7%).
--But as the case with many American agribusiness commodities, trade now has a dark cloud on its horizon: Mexico absorbed 28% of all 2017 US cheese exports by volume (96,413 tonnes) and 75% of its cheese imports come from the United States. Valued at US$391 million, cheese accounts for 30% of the US$1.3 billion of dairy goods Mexico imported from America in 2017.
--But in retaliation for US tariffs on its exports, early June saw Mexico unveiled a 15% on US fresh Cheese, which will jump to 15% tariff on July 5. Popular European style cheeses including Parmesan, Reggiano, Gouda, Havarti, Fontina along with all shredded and powdered cheeses entering from the United States would be initially taxed at 10%, with the import duty rising to 20% in early July. All other cheese types imported from America were taxed at 15% from immediate effect and at 25% from early July onwards.
In a similar vein, after lowering tariffs on a wide range of US dairy goods in 2017, China retaliated against US import duties on its goods. Effective July 6, Beijing will impose a 25% tariff on a wide swath of US dairy good including WMP, SMP, fluid milk, cream, milk powder, butter, cheese yogurt, and whey.
Collectively, China and Mexico absorb a third of US dairy exports by volume and 34.6% by value. Should policymakers fail to find a negotiated solution, US dairy exports could fall by 10%. That would give the industry its worst performance since 2015, when the world dairy market crash's full impact was felt.
On one hand, with the vast majority of their dairy goods being consumed in a large domestic market growing twice as fast as that of the EU, America's dairy industry is better positioned to ride out any trade war than its competitors in Europe, Australia or New Zealand.
On the other hand, it would jettison this year's promising trade forecast and halt the industry's renewed, export-led growth. With Europe having recently signed a free trade agreement with Mexico and having plenty of surplus dairy products on hand for Asia. In a worst-case scenario, it could result in a permanent loss of Amerca's share of the Chinese and Mexican dairy markets.
Hence, as is the case with pork, soybeans, beef and other agribusiness goods, the US dairy industry's fortune is tied to that of its government more than it is the weather or the world market.
All rights reserved. No part of the report may be reproduced without permission from eFeedLink.