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Six indicators of U.S. dairy export efficiency in 2023

USDEC seems to be on the principal market elements influencing dairy import demand and commerce within the yr forward.

Yearly, the U.S. Dairy Export Council summarizes the important thing “signposts” that our analysts can be watching within the yr forward that can decide the route of U.S. dairy exports and international markets. This yr, we’ll concentrate on the main structural elements that can come into play in 2023.

Listed below are our six signposts to observe:

Financial headwinds: Inflation and client buying energy

If one phrase might summarize the worldwide economic system in 2022, it’s “inflation.” Pushed by provide shortages, Russia’s invasion of Ukraine and powerful demand, excessive inflation charges challenged client incomes, lowering buying energy and forcing shoppers to make powerful selections on the way to spend their restricted foreign money.

Positively, U.S. inflation is predicted to ease in 2023 with a forecast of two.9%—down sharply from the 2022 common of roughly 8%. International inflation can be anticipated to enhance in 2023—down from the 2022 common of seven.4% to 4.8%.

Buying energy in each the U.S. and the remainder of the world will enhance as inflation strain eases, however that strain can be felt otherwise relying on the area and nation. Moreover, whereas the forecast 2023 ranges present a lower, these numbers are nonetheless effectively above pre-pandemic ranges.

In comparison with the pre-pandemic, five-year common inflation fee (2015-2019), the 2023 inflation forecast for the U.S. continues to be 83% larger. Equally, for the world, the 2023 forecast inflation fee continues to be 54% larger than pre-pandemic ranges. So, whereas the projected easing is constructive, shoppers worldwide will nonetheless be battling elevated costs in 2023.

When it comes to U.S. dairy exports, international restoration is necessary, however U.S. exporters ought to care most concerning the restoration in just a few key areas. Roughly 75% of U.S. dairy exports are destined for Southeast Asia (SEA), Mexico, China, Japan and Korea. Positively, for almost all of those nations, inflation is forecast to say no quicker in 2023 than the world common. Within the case of Mexico and China, each nations are anticipated to have inflation charges in 2023 under the five-year pre-pandemic common—all of which is constructive for U.S. exports within the yr forward.

Sadly, the sharp rise in rates of interest (which is the first instrument used to manage inflation) slowed international financial development. So whereas inflation is getting below management, the financial outlook is in no way rosy. Thus, our analysts can be watching economies, currencies and inflation charges particularly intently in 2023 for indicators on dairy demand.

China’s import demand: When will it bounce again?

China can be a important signpost for the yr forward after dominating international market discussions in 2021 and 2022. International dairy commerce fell 4% (in milk solids equal, or MSE) by the primary 10 months of 2022, largely due to the precipitous drop-off in Chinese language buying. By means of the primary 11 months of 2022, Chinese language dairy import quantity plummeted 17% or by greater than 400,000 MT MSE.

A yr stuffed with COVID-related lockdowns, journey restrictions and anemic financial development (by Chinese language requirements), mixed with robust home milk manufacturing and heavy inventories, severely undercut import demand. Actually, a few of the magnitude of the decline stemmed from the sky-high spike in Chinese language imports in 2021, as China shattered all import data that yr. Nonetheless, the extra knowledge we analyze, the extra we imagine the 2021 rise was due largely to China constructing heavy inventories in a way just like the 2013/14 entire milk powder (WMP) shopping for bubble versus a sustainable improve.

Chart1 (2)-Jan-18-2023-06-41-00-6958-PM

So what can we anticipate in 2023?

Sadly, the reply might be nearer to 2022 import volumes than the report 2021.

On the plus facet, the nation famously did a whole 180 on its zero-tolerance COVID coverage over the previous two months. Moreover, China’s central financial institution promised to extend focused stimulus measures for key areas and industries broken by the pandemic, partially to help home demand development.

Whereas economists and traders—to not point out the Chinese language inhabitants—cheered the modifications, a big dairy demand increase could have to attend till China exits its present COVID wave. By China’s personal admission, the wave contaminated tons of of tens of millions for the reason that starting of December 2022.

Simply as necessary, home WMP and skim milk powder (SMP) inventories have declined considerably in current months. Business estimates peg WMP shares at their lowest degree in a yr and SMP inventories on the lowest since December 2020, although dependable knowledge stays troublesome to pin down.

General, development from China, if it returns, is more likely to be nearer to the long-term development than the more and more anomalous 2021 growth. Reasonable development ought to help dairy costs and international demand although loads of uncertainty stays for the nation, making Chinese language buying conduct a important signpost for 2023.

Dairy options: Palm oil and plant-based imitators

With China’s demand showing measured if not spectacular, international demand dynamics are more likely to be pushed by the opposite main importing markets, together with SEA, the Center East-North Africa (MENA) and Latin America (and Japan and Korea for cheese and whey proteins).

In these markets, particularly these the place financial situations are challenged, we anticipate shoppers to be on the lookout for cost-saving measures, doubtlessly buying and selling down from higher-value merchandise to extra reasonably priced choices. This dynamic will seemingly influence demand for dairy options, each within the low-cost area and the premium segments.

Beginning within the commodity area, an important signpost can be palm oil costs. Palm oil is used as a less expensive various to dairy fats in some purposes, probably the most notable being fat-filled milk powder (FFMP) and analogue cheese. Not too long ago, palm oil costs have fallen dramatically after spending most of 2022 at traditionally elevated ranges.

Chart2 (2)-Jan-18-2023-06-42-06-9022-PM

With the sharp fall in palm oil, the comparative value of FFMP versus entire milk powder and analogue cheese versus pure cheese is more likely to widen in favor of options. This in flip is more likely to push price-sensitive shoppers to the cheaper options that include much less dairy.

U.S. non-fat dry milk/skim milk powder (NFDM/SMP) demand ought to fare effectively as U.S. NFDM/SMP is a important enter to FFMP manufacturing, notably in SEA and MENA, even when WMP demand suffers. Nonetheless, U.S. cheese exports will seemingly be negatively impacted, particularly to Latin America and MENA, the place analogue cheeses are outstanding. The excessive palm costs seen in 2022 meant there was little or no cause for importers to buy analogue, boosting U.S. cheese exports, however now this dynamic has shifted as a result of vital worth distinction.

On the flip facet (alternatively, if you’ll…), plant-based imitators are more likely to be challenged as many are priced considerably larger than dairy staples. In response to IRI, various drinks held a 66% premium over cow’s milk on a gallon equal foundation in 2022. Whereas the plant-based phase, particularly on a world foundation, stays very small in comparison with cow’s milk, flexitarian shoppers gravitating to conventional dairy would assist help home consumption in each the U.S. and Europe, boosting demand and costs however doubtlessly limiting exportable provides.

EU27+UK milk manufacturing: Will the rebound final?

Switching from demand to provide, one of many elements that supported U.S. dairy exports in 2022 was restricted manufacturing development in Europe. From September 2021 by August 2022, EU27+UK milk manufacturing fell by 0.6% or greater than 2 billion lbs. in comparison with the identical interval the earlier yr.

With much less milk, EU dairy manufacturing declined for all main export merchandise, undercutting provide and laying the groundwork for a much less aggressive U.S. export competitor. Within the final 12 months, the EU market share of worldwide dairy commerce fell by 2%, with the U.S. taking benefit and rising by an equal quantity.

The query is can we anticipate an identical efficiency from the EU27+UK in 2023?

The reply is sort of actually no – at the very least within the first half. Regardless of operating under year-ago ranges for many of 2022, EU27+UK milk manufacturing started choosing up within the remaining third of 2022 after dramatically larger farmer payouts lastly incentivized elevated output.

Chart3 (2)-Jan-18-2023-06-42-58-7437-PM

Yr-over-year September-October milk deliveries elevated 1.3%, and preliminary indications counsel good points persevering with by December. Low comparable volumes in 2021 have contributed to the will increase however they don’t seem to be wholly accountable. October’s deliveries, for instance, topped October 2020 in addition to year-ago ranges. When November and December numbers are reported, the EU27+UK may even erase the sluggish begin and end the yr practically flat. The rebound ought to proceed into the beginning of 2023 too.

Added to that, sluggish European financial development (and potential recession on the horizon) will create home consumption headwinds. Weak demand coupled with improved milk deliveries is leading to elevated exportable volumes (albeit modest) and heightened competitors with U.S. suppliers that we didn’t see for a lot of 2022. The speedy fall in European spot costs, notably in cheese, provides additional proof of plentiful provide and weak demand within the European Union to start out the yr.

Whereas the short-term outlook seems supportive of development (at the very least till decrease product costs are handed onto European farmers), the 1,500-lb. Holstein within the room is the EU’s more and more prescriptive Widespread Agricultural Coverage (CAP) that daunts dairy funding and growth. Jan. 1, 2023, marked the implementation of the bloc’s new CAP, which incorporates strategic plans submitted by every member state to align with local weather and environmental objectives specified by the EU’s “Farm to Fork Technique.”

For some key dairy producers just like the Netherlands and Eire the means to succeed in these objectives is fewer cows and farms. These strategic plans come on prime of an EU dairy herd that was already shrinking. EU27+UK cow numbers peaked in 2015 and have been declining ever since—a drop of about 1.5 million head over seven years. The EU itself expects its dairy herd dimension will decline an additional 10% (greater than 2 million head) over the following decade, with milk manufacturing falling about 0.2% yearly.

Quick EU27+UK milk manufacturing is trying up for now with the U.S. going through stiffer competitors abroad, notably in cheese. Nonetheless, the structural limitations on European farmers counsel their surprisingly robust milk manufacturing development will seemingly be ephemeral past the primary half of 2023.

Farm inputs: Value and availability

For farmers the world over, enter prices have been top-of-mind over the past two years as stability sheets had been squeezed. Feed and labor prices have been particularly excessive, and, whereas we’re more likely to see some slight easing on the feed value facet, it might not really feel like a lot reduction.

USDA is forecasting 2023 corn manufacturing will see a lift over the earlier season—up from 13.895 billion bushels to fifteen.265 billion bushels (+10%). Equally with soybean meal, USDA is forecasting manufacturing will rise from 52.6 million tons to 54.1 million tons (+3%). Consequently, each corn and soybean meal futures are trending decrease all year long. Whereas that easing is constructive, costs are nonetheless excessive and anticipated to stay effectively above pre-pandemic ranges for the foreseeable future. Plus, given the prevalence of danger administration applications, even when feed prices do fall, these farmers buying most of their feed, particularly out West, are unlikely to see a lot reduction of their bills for a lot of months after costs ease.

Moreover, farm labor will proceed to be a problem when it comes to each sustaining wanted personnel and paying the rising value of that labor. The continued tight labor market suggests these challenges will persist in 2023. Job openings far outpace the obtainable workforce with practically twice as many vacancies as there are people looking for employment. That imbalance has elevated labor competitors and led to elevated wages. We anticipate job openings to proceed easing into 2023, however anticipate the labor market to stay tight with elevated wage charges through the yr.

Why does this matter for dairy exports? General, with a difficult demand setting and rising milk manufacturing within the U.S. and Europe, dairy product costs are more likely to ease within the close to time period. If enter prices stay excessive, farmer margins are more likely to be squeezed. As we noticed in 2021 and 2022, diminished farmer margins will restrict manufacturing development, which in flip can restrict exportable provide.

Inventories: Was “just-in-case” only a fad?

Lastly, for 2021 and far of 2022, with so many challenges round provide availability and transport, corporations, together with within the dairy sector, had been targeted on provide safety and proved prepared to pay larger costs for that safety. A principal technique in reaching provide safety was carrying heavier inventories and switching from a “just-in-time” stock mannequin to “just-in-case.” As touched on earlier, China in 2021 was the proper instance of this phenomenon.

However immediately, with transport points having eased considerably from final yr, provide extra available and the necessity to scale back prices being important in a difficult financial setting, knowledge and market intelligence present corporations are eschewing “just-in-case” stock administration simply two brief years after its inception.

Whereas dairy-specific knowledge on stock technique is restricted, we will make some common factors by trying on the broader economic system. First, knowledge from the Logistics Managers’ Index present U.S. warehouse utilization and costs have reached the bottom level up to now two years after peaking in late 2021 and early 2022. Equally, Census Bureau statistics element how inventory-to-sales ratios held by producers, retailers and wholesalers have plateaued or declined in late Q3-This autumn in comparison with earlier within the yr. Equally, imported containers on the main West Coast ports have additionally decreased dramatically, even falling under pre-pandemic ranges! All this knowledge highlights that inventories are being drawn down, at the very least in the US, and given the overall fall in transport prices globally, this dynamic is happening in lots of importing markets as effectively.

Chart4 (2)-Jan-18-2023-06-44-41-5776-PM

What does this imply for dairy exports?

Positively, with much less focus within the U.S. by retailers and client items corporations scrambling to safe stock, this could place much less strain on U.S. ports, enhancing export reliability and transport prices. Nonetheless, with dairy costs nonetheless elevated in comparison with historic norms and end-users targeted on minimizing prices, dairy importers’ willingness to construct safety shares (like we noticed in China in 2021 or MENA in 2020) will seemingly be restricted too. Thus, we should always anticipate hand-to-mouth shopping for to be frequent, seemingly making markets and import demand extra unstable within the yr forward.

rn extra about international dairy markets:

The U.S. Dairy Export Council fosters collaborative trade partnerships with processors, buying and selling corporations and others to boost international demand for U.S. dairy merchandise and components. USDEC is primarily supported by Dairy Administration Inc. by the dairy farmer checkoff. How one can republish this put up.  



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