What is the outlook for U.S. Dairy exports?

If we’re just looking at volume, the export outlook for the second half of 2024 and early 2025 is generally steady, but that isn’t necessarily a bad thing. Exports are a function of how much product is available in the U.S., how much is available from the other major exporters, and the demand for imported dairy products. Growth in U.S. milk production is expected to be weak while the growth prospects for Europe look stronger in Q4/Q1. Combined with global demand that is growing slowly, there isn’t much need for U.S. exports to grow rapidly in the next 12 months. The only exception might be cheese depending on how quickly new processing capacity comes online.

When we look at milk production, we break it down into the number of cows and production per cow. The dairy herd declined through 2023 and bottomed out in January of 2024 due to high feed costs and crimped margins. Lower feed costs and higher milk prices are pushing margins back into profitable territory during 2024 and profitability is expected to stay strong through 2024. However, the number of heifers (new cows ready to come into the dairy herd) are at a multi-decade low as dairy farmers have focused on selling calves into the strong beef market in recent years. That is limiting how quickly the herd can expand, but year-to-date dairy cow slaughter is down 13.6% so dairy farmers are keeping the existing cows longer and we’ve seen a small increase in the size of the milking herd since January. The herd may be able to grow a little in Q4 and early 2025, but the lack of heifers is probably going to continue for at least another year.

Production per cow (PPC) isn’t great either. Lower feed costs and better margins should improve PPC, but the spread of highly pathogenic avian influenza (bird flu) is expected to be a drag. When it hits a farm, milk production typically drops by about 20% for a few weeks, then mostly recovers. Our best guess is the virus has knocked somewhere between 0.2% and 0.6% off U.S. milk production March through June. If it continues to spread (it has only hit somewhere between 2% and 10% of the cows so far), then it will be hard to get much growth in PPC in the second half of 2024 and early 2025. So, the weak growth in the number of dairy cows and weak growth in PPC will keep overall milk production growth lower than average which limits the amount of product available to export.

Milk production across the other major exporters looks like it will be steady to higher. Margins for European farmers look very strong and there is evidence that milk production in the region is improving. Milk production in New Zealand and Australia grew last season, and if the weather is normal, we’re likely looking at flat to slightly higher production from the region. Supply growth doesn’t look strong, we’re likely talking about a 1% increase in milk solids production across the major exporters in calendar 2024 and 2025, but with demand growth weak, it is enough supply to satisfy the demand.

Weak Chinese demand is offsetting strength in some of the other importing countries. China is still the largest importer, absorbing more than three times as much as the next largest importer (Mexico), but their YTD imports are down 14.7% from last year, and on an annualized basis they are down 26.5% from their peak in November of 2021. The Chinese government has pushed the industry to become more self-sufficient and reported milk production in China during the first quarter was up 41% from 2019 which is structurally reducing their demand for imports. From a U.S. perspective, China is threatening to put additional tariffs on dairy products from Europe in retaliation for additional tariffs the EU has put on electric vehicles from China. That could boost Chinese demand for U.S. dairy products, especially whey products. There are also some early signals that the Chinese hog cycle is starting to turn from contraction to expansion, which also would be beneficial for whey product (dry whey, permeate, lactose) import demand.

Mexico is the second largest dairy importer with the vast majority of their imports coming from the U.S. From January-May, U.S. exports to Mexico are down 2.7% on a milk equivalent basis, but that masks some very big shifts in products. Exports of NFDM/SMP are down 17.8% after a surge last year while cheese exports are up an incredible 43.3% on top of good growth last year. It is hard to fully explain the surge of cheese, but most of it is in the form of “shredded or grated” cheese so I assume it is mostly driven by mozzarella going to pizza restaurants/makers in the country. With U.S. cheese prices much stronger than they were early in 2024, the exports will likely flatten out a bit, but we could be looking at structurally higher cheese demand from Mexico moving forward. That could be good news as new cheese capacity is expected to come online in the U.S. in Q4 and the first half of 2025.

Demand from the rest of the world (other than China and Mexico) has generally been good. Many countries in Southeast Asia have rebounded from weak import demand in 2022/2023 and imports by many Middle East countries have also been better than expected. But there are some pockets of weakness, like Indonesia, the third largest importer, which are only up slightly this year despite the good growth in other parts of the world. At the end of the day, the weak Chinese imports are largely offsetting the growth we’re seeing elsewhere, and total global imports in 2024 and 2025 will likely only be up 0.5% to 2%.

It’s always more fun to write about booming demand and the great opportunities for U.S. exports, but that probably isn’t the case for the remainder of 2024 and into 2025. Things aren’t bad, it’s just that relatively weak production growth is balancing well with relatively weak global demand growth.