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Dairy Exports Endure Pandemic

by Bev Berens

Published: Friday, February 12, 2021

Despite a pandemic, the U.S. finds itself in a position to be a strong and reliable supplier of dairy products in the world market.

Mary Ledman, global strategist for dairy with Rabobank, discussed global supply and demand issues based on Rabobank team research and forecasts during Great Lakes Regional Dairy Expo's virtual event held last week.

Beginning with a background in the major dairy product global suppliers, Ledman created a case for the team's bullish outlook. The United States, Oceania (New Zealand and Australia), European Union (EU) and South America lead the way in worldwide dairy exports.

From 2012-2017 the EU led the way in global supply increases due to rapid expansion from deregulating dairy quotas and enjoyed a strong headwind leading into 2020 and 2021. In 2019, EU surpassed New Zealand as the number one dairy exporting country, exporting nearly 30 percent of the nations' total production. The Netherlands led EU expansion numbers in that time with a 1.9 percent annual increase in cow numbers.

Big growth in cow numbers on a small country creates social and environmental implications. While the milk quotas may be gone, they have been replaced with phosphate quotas—a limit on how much manure can be produced on one farm-—effectively reining in herd expansion. The past three years saw Holland's cow numbers slow to 1.2 percent growth and is expected to drop to .7 percent for the next five years.

Ledman said that Oceania is finally catching a break from more than 10 years of drought. Herd numbers have increased slightly, but overall numbers remain lower than the five-year average. "Confidence to rebuild the nation's herd is just not there," she said, predicting increases in production will be slow and be a result of improved genetics rather than growth in cow numbers.

Even though New Zealand exports 98 percent of its dairy production, it only accounts for 3 percent of the world milk production. Together, New Zealand and Australia account for nearly one-third of global dairy trade. The EU exports nearly 30 percent of its milk production and the U.S. exports nearly 20 percent.

U.S. came into 2020 with strength in cow numbers and price. However, the pandemic interrupted the first quarter's head wind with the loss of school and food service consumption due to closures in those sectors. By the second quarter, some Midwest dairies were being asked to reduce production by as much as 20 percent, leveling the national annual peak production time and resulting in a loss of 35,000 cows from the U.S. herd. However, U.S. herd numbers recovered by the third quarter, as Texas led with the largest cow number increases for the period.

Worldwide, annual gains in milk production less than one billion liters year over year signifies that markets are in balance or even tight. While 2020 saw a gain at around 5 billion liters, less than 3-billion-liter increase is predicted for 2021, showing that trade markets are nearly balanced.

Because both Oceania and EU are in unfavorable growth positions, there will be greater opportunity for others to step in, and the U.S. is front in line to service the demand. Ledman predicts the U.S. will contribute the greatest volume to global milk production growth in the next 12 months.

Global dairy trade demands are driven by China, which is the largest importer of U.S. dairy products followed by Mexico. China's appetite for U.S. whey is based on the rebuilding of the swine herd from the devastation of the African swine flu, which decimated the herd in 2018-2019. The reconstructed herd is moving from a backyard farming system to a professionally managed system with a heavy emphasis on whey products for feeding litters.

Challenges in securing shipping containers at ports may show a discrepancy in the amount of product a country purchases and the actual amount that arrives at ports. The shipping container shortage is causing buyers to over buy just to get some product in the shipping pipeline. Shipping costs are increasing as much as $400 per container.

The U.S. has fared well in trade throughout the year, despite setbacks. Mexico's recession has reduced the pounds of whey and skim milk powder shipped to the country; however, the U.S. was able to pivot, becoming a reliable supplier to Indonesia and the Philippines. When the Mexican economy recovers, it will once again demand U.S. dairy products, creating a winning situation for the nation's dairy export economy.

While the pandemic caused regional surpluses and shortages, nationally, domestic butter and cheese sales increased because more people were cooking at home and eating occasions have changed. String cheese sales are up 1.6 percent and ricotta sales are up 18 percent. Ice cream sales are up by 10 percent, perhaps a reflection of the consumer's desire for comfort foods.

Government purchases of milk and cheese for the Family Food Box program pushed consumption in May and June, and later in the summer as the program's second round rolled out. Even though there was price volatility throughout the summer, overall fluid milk sales were the same as in 2019. It is likely that the USDA will purchase less milk in 2021 than in 2020 and may impact farm price and volatility.

Ledman says that less volatility can be expected for 2021, but the recent rise in beans and corn prices will continue to challenge margins for dairy producers.

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