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Falling Prices, Rising Opportunities On Tap For 2023

Record milk prices seen in 2022 likely won’t repeat themselves, as production increases and consumers grapple with an economic slowdown, according to members of the NMPF and U.S. Dairy Export Council’s joint economics unit, in a Dairy Defined Podcast released today. But exports are on track to increase, and demand will likely be resilient as dairy remains must-have for buyers.

“Consumers around the world still gravitate towards dairy, even when they’re experiencing tighter economic situations,” said Will Loux, head of the team Vice President for Global Economic Affairs with NMPF and USDEC. “They ultimately view dairy as an essential item and will continue to consume it.”

Loux discusses the global and domestic dairy outlook with NMPF’s Chief Economist, Peter Vitaliano; Economic Research and Analysis Director, Stephen Cain; and the joint economic team’s newest member, Economic Policy and Global Analysis Coordinator, Allison Wilton.

TRANSCRIPT

Alan Bjerga, NMPF: Hello and welcome to Dairy Defined. 2022 shaped up as a memorable year for the dairy economy with record milk prices and exports, even as farmer costs also reached new highs. But what does this year have in store? Joining us today is the full economics team, and we mean team. Created last year jointly by NNPF and the US Dairy Export Council. It’s led by Will Loux, Vice President for Global Economic Affairs with NMPF and USDEC, along with NMPF Chief Economist, Peter Vitaliano, Economic Research and Analysis Director, Stephen Cain and the team’s newest member, Economic Policy and Global Analysis Coordinator, Allison Wilton. I’d like to start with you Will. Heading into 2023, what does the global economy look like, and where does US dairy fit into it?

Will Loux, NMPF: We’re still in for plenty of uncertainty around the world. I think that’s going to be the buzzword again. Obviously last year was all about inflation. Inflation isn’t going away in 2023. What we expect to see is perhaps not as high of inflation as we saw this past year, but it’s still, if you take out 2022, probably going to be the highest this century anyway, so it’s still going to squeeze consumers’ pocketbooks. I think you’ve also got central banks around the world, including the US’s Federal Reserve, raising interest rates, trying to slow down inflation, but in doing so, slowing down the US economy and the global economy and all of that really hurts consumers pocketbooks and checkbooks.

And what that means ultimately for dairy is that we expect to see a little bit slower consumer demand. But ultimately I think what we want to focus on here is the fact that consumers around the world still gravitate towards dairy, even when they’re experiencing tighter economic situation. They ultimately view dairy as an essential item and will continue to consume it, but likely they’re going to trade down the value chain. Think less of your nice specialty cheeses, probably a bit more of your staples like cheddar and mozzarella and the like.

Alan Bjerga, NMPF: In this case, the in inelasticity of demand for dairy becomes the industry’s friend.

Stephen Cain, NMPF: Yeah, first just touching a little bit on where we came from last year. Global trade dairy products last year overall was down 4%, but the US during that same timeframe, was up 4%. It’s a really great testament to the US resiliency in the export market when it’s in a tough climate, but also just that we have great products and folks around the world are wanting them. And so for 2023, so what are we expecting? We’re expecting to see some continued growth like we saw this year, or where are we headed? First touch a little bit on Mexico, our big southern neighbor there to the south. It’s a major export destination for US dairy products. Mexico was hit pretty hard with economic impacts of COVID and really over the last few years they’ve been working their way back gradually to trend. And I think we’re going to see that continue to happen, especially nonfat dry milk and cheese.

We’ve seen some pretty strong growth over the last 18 months or so for both of those products and the US, we’ve got a market share dominance in the region. Whenever demand increases in Mexico, that is a direct benefit for US dairy exporters. Non-fat, a little bit flat here over the last 18 months, but we’ve seen some more resurgence here over the last few months, which is really bullish, exciting, therefore exports going into Mexico for that product. Cheese though has really been on a tear for growth over the last couple years, up 40% from where they started in 2021. And again, US dominant market shareholder there, so any major growth coming out of cheese in Mexico, direct benefit to us. I don’t think we’re going to stay necessarily on that same dramatic growth increase, but I think we’ll continue to see some strong demand for cheese coming into Mexico in 2023.

Southeast Asia, this is a little bit different of a story. I’m not expecting to see a huge amount of growth here in 2023 for US exports to the region. We saw some dramatic growth a couple years ago and we claimed a lot of market share dominance in the region. For 2023, I still expected to see some incremental growth where we can get it. But I think the biggest story for Southeast Asia for US exports is maintaining that market share that we’ve clawed away from our competitors and really growing where we can, but maybe not as dramatic of a growth as we saw a couple years ago.

Alan Bjerga, NMPF: And these are all very positive stories for US dairy producers, you now see one out of every six gallons of US milk somehow making their way to an overseas market. Of course that still means five out of every six are being consumed domestically, which is pretty dominant. And I want to turn a little bit to the domestic front, Peter. The bulk of US milk is still tied to the domestic market. What trends are we seeing in these areas, and how do you see farmers responding?

Will Loux, NMPF: We officially joined and unveiled it at the NMPF DMI annual meeting this past October.

Alan Bjerga, NMPF: And since we have you all in one spot, I want to try something that we don’t usually do here, but it might be of value to our audience. We’re going to do a lightning round. I know economists hate making prognostications, but that’s also what a lot of listeners come for, so I’m hoping you can do your best. We’re going to throw a few topics at you, just some quick takes about what we might see in 2023. Dairy prices in 2023, up, down?

Peter Vitaliano, NMPF: Down, as I mentioned.

Will Loux, NMPF: I’m with Peter, down, at least in the first half, and then a recovery in the second.

Alan Bjerga, NMPF: How about production?

Stephen Cain, NMPF: Up.

Alan Bjerga, NMPF: Stephen, you want to elaborate?

Stephen Cain, NMPF: Yeah, well just by pure math numbers, I think we’re necessarily going to be up for sure in Q1 and into Q2, just on pure cow numbers alone. In November production numbers, we have 38,000 head more in November than we did in November of 2021. And as move into 2023, that gap is going to persist. Just on cow numbers alone, I think we’re going to be up. But then as moving into back half of the year, again, I think we will just continue to see some increase in productivity and with those higher cow numbers, I think overall we’re going to see milk production be up in 2023.

Alan Bjerga, NMPF: Okay.

Will Loux, NMPF: And it’s worth noting we almost always have productivity growth from dairy farmers who continue to get more and more efficient. We always see games in pretty much every month of liquid milk per cow, as well as the components in each hundred way to milk.

Alan Bjerga, NMPF: Turning to exports, we’ve had a couple record years coming here. Are we going to see another record in 2023? Value, volume, yes, no, and why?

Will Loux, NMPF: I’ll say yes, and I’ll go on the record for this one, so y’all can call me out on it if we end up being wrong. But we’ve had three straight years of records for volume. We’ve had two straight years of records for value. I think we will get another record year for volume, especially if we see that milk production growth that we’re expecting, as well as we continue to see demand growth overseas. The big question to me is if prices do dip, then we may not see the same growth in value this year and that record may be harder to sustain. But overall, I think we’ll see a good record year for volume.

Alan Bjerga, NMPF: Finally, some best case and worst case scenarios. What factors could make this a better year for dairy farmers than expected, and what could be something that could actually make it a little tougher than we’re thinking right now?

Peter Vitaliano, NMPF: I’d say the biggest variable right now in terms of toughness for dairy farmers, which means milk prices and margins, would be the rate at which milk production expands, this year, because it’s a commodity industry and supply and demand set the price. It is, as Allison mentioned, there are risk management options dairy farmers can take. And when prices are coming down, it’s not a bad time to do that because the futures markets tend to be conservative. They tend to forecast about where things were over the last several months and we’re, the last several months, have been very high prices, so the futures markets reflect that. Locking in those prices may actually prove advantageous compared to where prices actually move as we go forward throughout the year.

Will Loux, NMPF: I’ll agree with Peter on supply, but I actually might take not so much what US dairy farmers do, but what farmers around the world are doing in terms of milk production growth. These past two years, we’ve seen really weak milk production, particularly out of New Zealand as well as the European Union, although Europe’s milk production has started to come on a little bit stronger as of late, but I think that’s going to play a major role overall in that big global supply and demand. But I do think demand is going to matter a whole lot, especially given the economic headwinds that we’re facing, as I mentioned at the top of the show.

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