Eight Dairy Export Signposts for 2018

 

In the immortal words of science fiction writer Douglas Adams, “Trying to predict the future is a mug’s game.”

 

The pace of change in today’s world is so quick that the expected outcomes can shift from one day to the next. At the same time, knowing where we are headed as an industry is essential to ensuring that we have a place in that future.

 

That’s one of the reasons USDEC, working with members, devised and implemented a plan to lift U.S. exports from the equivalent of 15 percent of U.S. milk solids to 20 percent—a goal we are calling The Next 5%.

 

What follows are not predictions of what we expect to achieve in 2018, but rather eight signposts to gauge market strength and direction and help monitor progress of U.S. dairy export growth in the year ahead.

 

 

The push to complete NAFTA renegotiations continues. At stake is preferential access to the No. 1 U.S. dairy export market (a market in which overall dairy import demand is expected grow 20 percent over the next five years) as well as resolution of Canada’s unfair Class 7 milk pricing scheme and its destructive impact on U.S. and global dairy markets.

 

As it aggressively did so in 2016, USDEC’s trade policy team will continue to address these issues.

 

In addition to threatening U.S. access to Mexico, research by Fitch Ratings, Moody Analytics, Bloomberg Intelligence and others suggests withdrawal from NAFTA would reduce Mexican economic growth, lead to Mexican job losses and increase consumer prices, all of which would lessen buying power and hinder dairy demand. And that would impact all dairy companies supplying Mexico—U.S. and otherwise.

 

On a broader scale, while the United States continues to focus on revisiting existing deals like NAFTA and the South Korea-U.S. Free Trade Agreement, U.S. dairy export competitors pushed forward on new market-opening pacts in 2017. USDEC will continue to work to bolster U.S. competitiveness in 2018, stressing to policy-makers how critical it is that the U.S. get back in the game of negotiating new agreements with key agriculture-importing countries.

 

 

This year will offer some insights on how two 2017 achievements—the U.S.-China plant registration Memorandum of Understanding and China’s move to reduce cheese tariffs—might benefit U.S. competitiveness. We have some momentum coming off of a strong 2017 in which U.S. dairy export volume to China grew more than 25 percent through the first 10 months (compared to January-October 2016).

 

Furthermore, the Chinese import bubble of 2013-2014 was, in retrospect, an aberration. Chinese milk powder stocks are down to pre-bubble levels (estimated at just 50,000 tons), and dairy import growth is back to about 14 percent—the compound annual growth rate it posted for the decade prior to the buying spike.

 

However, Chinese import buying in both 2016 and 2017 benefited from two years of declining milk production. Population and income growth, urbanization and other factors will continue to drive Chinese demand, but a rebound in domestic milk output (USDA projects nearly a 3 percent increase in 2018) will test whether 14 percent remains the norm in the post-bubble era.

 

In addition, despite U.S. gains in 2017, the overall U.S. share of China’s dairy import market was down over the past three years, and we face a competitive disadvantage with New Zealand and Australia due to their trade agreements with China, and with the EU and Australia due to the U.S.-yuan exchange rate.

 

 

A handful of smaller but quickly growing dairy exporters are seeking to plant their flags in key global markets. Five years ago, Belarus, Canada, Iran and Turkey exported less dairy than Australia (the world’s No. 4 supplier). Today, they export twice as much.

 

Canada is most worrisome. Canadian milk production rose about 5 percent in 2017. Canadian skim milk powder (SMP) exports more than tripled to over 61,000 tons through the first 10 months of 2017, in large part due to changes to the nation’s milk pricing system that essentially allow it to undercut world prices. It has a resurgent export program, and the pricing scheme’s potential impact on U.S. and world markets is significant.

 

This year will test those aspirants. Each faces its own growth constraints—Belarus, for example, has a limited product portfolio and has geared its business to mainly supply Russia. But each country is also actively working to overcome the challenges and expand its dairy export reach.