Industry Facts and Figures
Welcome to Export Exchange, the U.S. Dairy Export Council's new video series designed to keep you in the know as to what's happening in dairy markets.
Export Exchange: Q2 2021
Hello, and welcome back to another edition of Export Exchange. I'll start things off with a market update before passing to William to go more in depth on the U.S. port situation and what it means for trade. The first quarter of 2021 was a strong quarter for global trade, up nearly 8% in milk solids. As economies around the world continue to recover and reopen, dairy demand is increasing along with it. As vaccines continue to be rolled out and individuals become more comfortable being out and about again, we expect dairy demand to follow that recovery and show strong demand throughout the year.
Looking first at milk production, U.S. milk production has been strong through the first part of the year, up 2.5% through April. U.S. producers also continue to add cows to the herd, contributing to the increased production. In 2020, roughly 93,000 head were added to the herd. And so far this year, through April, 48,000 cows have been added to the herd. This, along with the continual gains in efficiency, leans toward an outlook of strong milk production through the remainder of the year. This means that there will be plenty of product available for exports.
In New Zealand, milk production has seen a strong finish to its 2020/21 milking season, which helped bump production from the first part of the year to 7.7 million metric tons through April, up 6.4% over the same period last year. While this is strong growth, the production season is now all but finished for the season. The production growth for the remainder of the year is not anticipated to be as high, and will likely be in line with a more historic production levels. As the 2021/22 season kicks off in Quarter 3 (Q3), we'll be watching closely to see how pasture conditions develop.
EU milk production, while seeing some slight gains more recently, has had a poor start to the year in terms of milk production, down 0.3% through March. Despite significant growth in smaller production countries, like Ireland and Poland, overall milk production in the EU is not anticipated to grow significantly in the remainder of 2021, due to a limited growth outlook in the large production countries, like Germany and France.
Now turning to a U.S. production outlook, U.S. butter stocks have been heavy in recent months. Increased domestic demand through the returning of food service and increased exports have helped only slightly to alleviate some of that burden. Stocks are still comparatively high and it seems the rush to refill food service pipelines has subsided for the time being. This has weighed on the prices, making U.S. butter competitive on the world market, which has resulted in record U.S. butter exports this year. Despite the record exports, stocks will likely continue to weigh on the domestic market and limit any significant gains in prices through the remainder of the year.
U.S. skim milk powder exports have been significant in the first part of the year. That, along with the increased domestic demand during the same period, has led to a significant drawdown in stocks.From this year's monthly high stocks in February of 160,000 metric tons, stocks decreased 12% to April's low of 141,000 metric tons. This has tightened the U.S. skim milk powder market in the first part of the year, leading to an increase in prices, and we expect the market to remain tight through the end of the year, driven primarily by increased global demand for the product.
After a wild ride in 2020, volatility in the U.S. cheese market has settled down. Food service returning has been a key driver in increased domestic demand for cheese and the refilling of food service pipelines in the front part of the year helped tighten the market for cheese even with waning retail sales as folks decreased purchases for use at home in favor of dining out. Despite the strong demand both in the U.S. and abroad, new production capacity has helped keep markets balanced.
Increases in global whey demand has been dominated by China over the last year with seemingly insatiable demand, and it has continued into 2021. In the first quarter of 2021, U.S. whey exports to China increased 128%, EU whey exports to China increased 37%, and Belarus whey exports to China increased 120%. U.S. production has not kept pace with demand, leading to a drawdown in stocks. U.S. stocks in Q1 of this year are the lowest they've been at in years. However, as cheese production comes fully online, whey production will increase as well. Additionally, while we expect Chinese demand to continue through the end of the year, we're not expecting to see the same level of growth that we've seen over the last year continue through the back half of this year. These two things, additional U.S. whey production and a maxing out of Chinese demand growth, will likely ease some of the tightness of the whey market, in the back half of the year.And lastly, we want to spend a moment taking a closer look at shipping and logistics. To talk more on that, I'll pass it to William.
Thanks, Stephen. For this episode's deep dive, I'm going to address the rising freight costs and shipping delays that are happening around the world right now.These delays and added costs have affected all goods that are shipped internationally. That includes U.S. dairy exports. Today, I want to take a look and see why this is happening and what it means moving forward. Let's start with the why. There are a lot of small issues that have exacerbated the shipping delays around the world, from container ships getting stuck in the Suez Canal or not enough containers, chassis, trucks, or other equipment readily available to meet demand. But there's one underlying, fundamental cause behind the delays, at least here in the United States, That's the American consumer and how the American consumer has behaved during the COVID-19 pandemic.
Fundamentally, while we all sat at home and socially distanced from one another, American consumers weren't spending their money on restaurants or gyms or hotels or flights. Instead, they spent it on goods, things like fitness equipment, an outdoor grill, or a better work-from-home setup. Most of those goods aren't made here in the U.S., or if they are, they often have many different inputs from abroad. As a result, there was a surge in demand here in the United States for imported products. U.S. ports, particularly on the West Coast, in California, were flooded with ships looking to unload. Naturally, it takes time to unload the ships, particularly since these ships came at a time during a pandemic when all places of work needed to do their best to maintain social distancing and labor was often hard to find. That has naturally slowed the speed at which ships can be unloaded and depart from the U.S. Additionally, this dynamic has caused global shipping prices to surge. At time of recording, global shipping prices are nearly quadruple what they were at this point last year. But the rise in shipping rates isn't uniform. Prices from Asia to the United States spiked to a much greater degree than the reverse. According to the shipping analysis group, Freightos, average freight rates from East Asia to the West Coast of the U.S. are more than six times the cost of the U.S. to East Asia. This has created a dynamic where it's more profitable for shipping companies to run blanks, or empty containers, back to Asia to save a couple of days rather than wait to be loaded full of U.S. products, including U.S. dairy exports. It's also worth noting that this is a global problem. If you look at the reliability of container vessels around the world to arrive and depart on time, you can see a sharp decline starting in the middle of 2020. Essentially, as of today, around 40% of containers depart when they're supposed to. Clearly, the time and cost it takes to move products have increased sharply.This is coming as dairy exporters try to secure bookings on container ships that are fiercely in demand. Still, U.S. exporters are adapting and working to make sure customers get their product as soon as possible. If we look at where the U.S. is shipping from, we can see there's a clear uptick in shipments out of Northern California, the Pacific Northwest, the East Coast, and even the Gulf of Mexico. This is coming as those exporters are diversifying which ports they ship from. But exports out of Southern California, which has been the epicenter for much of the delays in the fourth quarter of 2020 and early this year, have seen their share of exports decline. Overall, this is good news. We're diversifying. But there's still plenty of ships to be unloaded outside of port. And, carrier companies continue running blanks, which means rolled or canceled bookings continue. However, looking longer term, the most optimistic aspect is that there are increasing vaccination rates here in the United States. The country is opening up. This means that consumers are returning, or hope to return, to spending more on the services I mentioned earlier, restaurants, hotels, sporting events, etc. That should then allow U.S. ports to clear the current backlog of ships and return to a more normal shipping environment. However, the point at which that happens is still very much in the air.
Working with your suppliers to understand these delays and specific nuances particular to your order are crucial. As I mentioned, the port delays are not uniform, nor limited to the U.S. Communication with your U.S. supplier is always going to be the best way to assess how these global issues affect your business. Moving forward, the U.S. Dairy Export Council is here to help and here to listen. Thank you to everyone who took the time to listen to this month's Export Exchange. We hope you have a great day. Thanks so much.
Export Exchange: Q1 2021
Hi, everyone. Welcome back to Export Exchange. It's been a little while since we last talked as we transition these videos to quarterly. And wow, there's a lot changed in the global dairy marketplace. Today, Stephen and I are going to walk through what's happening in the market today and what you should be watching and looking for as we move forward beyond today.
First, let's start off with what's happening? How did we get here? And I am sure many of the folks watching are curious about what is happening at the GDT, where everyone seems to be talking. We've seen a steady rise in prices over the last couple months. But the event on March 2nd caused a real spike in prices. You can see pretty clearly when that event happened on the chart here. That's that sharp increase. The auction as a whole saw a 21% jump in whole milk powder, a 14% rise in butter, and a 7% rise in AMF with the auction as a whole gaining 15%. The index reached its highest point since 2014. The March 16 auction was less bullish with WMP and butter falling slightly. But considering there was more volume on the auction, it's not too surprising. Overall, the market remains very tight with relatively high prices compared to where we were a year ago at this time.
So what's happening in the market? Interesting and important to know. However, it's a lot more helpful to know why prices are climbing and how sustainable it is. I want to point to two main reasons. I'll touch on the first one and then Stephen will take over on the second one in just a minute.
The first of the primary drivers of these rising prices in 2021 is actually the same as it was back in 2013, China. China is the single largest country importer of dairy products in the world, and demand is running strong within the country. At the March 2nd auction we talked about, North Asia, of which China is the largest buyer in it, bought 75% of the WMP and 71% of the SMP available on the auction. That continued on the March 16 auction as well. Buyers needed product and there was only so much available. As a result, prices climbed sharply.
We've seen that in the trade data as well. Trade going to China has kept global dairy trade running above trend in the back half of 2020. But if you look at trade to the rest of the world,
it came back down to trend in late Q3 and Q4.
There are a couple of reasons for this, as to why China is buying so much. Number one is that demand is just running very strong. We continue to hear reports that inventories remain well within the normal range for both whole and skim milk powder, while Chinese consumers are buying dairy at a stronger pace than pre-COVID-19. So, demand is strong even with these greater imports. At the same time, domestic milk prices within China remain elevated compared to the historic norm as you can see on this chart. This is creating a situation where even at these elevated prices and with consumer demand running strong, buying large import volumes still makes sense.
However, strong demand, particularly out of China, is only half the story. The other part is supply, and I'll let Stephen explain more.
Thanks, Will. Milk production in the EU and New Zealand has not experienced the same growth that the U.S. experienced in 2020. Overall, U.S. production rose 1.76% in 2020 while the EU was up 0.81% and New Zealand was up just 0.09%.
Focusing for a moment on New Zealand, New Zealand milk production depends heavily on pasture grazing and as such is highly dependent on good weather to aid pasture growth. The country faced production obstacles at different times of the year with both drought and excessive rain which negatively impacted pasture growth resulting in essentially flat production of just 0.09% in 2020.
Production through the first part of 2021 has not seen significant growth either. Looking ahead, the New Zealand production season will be wrapping up towards the end of May as cold weather sets in for the southern hemisphere. What this means is ultimately, New Zealand is finding itself short of product. And as long as Chinese demand continues at this feverish rate in an uncharacteristic time period, the market will continue to be tight.
In the European Union, there is a similar story as with New Zealand where weather also had a negative impact on production in 2020. Overall EU milk production growth for last year was also not that significant with growth of just 0.81%. Cold weather hampered production especially in the fourth quarter of last year in key production countries of Germany and France. German milk production in 2020 was up just 0.05% in 2020, but down 0.75% in the fourth quarter. Similarly, French production was up 0.25% last year as a whole, but down 0.56% in the fourth quarter. And we're seeing this trend continue through the first part of 2021 as well with lower production.
However, as the weather turns warmer, production is expected to pick up and come more closely in line with last year with the spring flush. But overall high milk production growth is not expected for the first half of this year and will more realistically be down slightly or flat. What this means moving forward, is the EU will continue to experience a tight market in the face of milk production that is not particularly strong. And again, like New Zealand, the EU will continue to face a tight market as long as Chinese demand continues at this strong pace.
Lastly, what about the U.S.? The U.S., New Zealand and the EU together exported roughly 8.2 million MT of milk solids in 2020 and combined represent roughly 70 to 80 percent of all milk solids exports. With both New Zealand and the EU facing lackluster production, the U.S. is the only major dairy exporter that is not currently experiencing production difficulties and as such, should be able to increase export volume especially given the fact that the U.S. is currently competitively should priced on the world market. The major current obstacle hindering U.S. exports are supply chain constraints and difficulty moving product through ports. As these ease likely towards the second half of 2021, product flow will be easier.
Looking ahead long term as well, regulations will play a stronger role in both New Zealand and the EU with environmental initiatives obstructing significant growth in the industry in both countries. Water regulations in New Zealand effectively limit herd growth and similar outcomes in the EU stemming from sustainability initiatives will likely provide obstacles for growing the herd as well. This leaves industry growth in both New Zealand and the EU largely relying on efficiency gains of the current herd with production per cow growth. As global demand grows in the face of these constraints, the U.S. emerges as the likely best option for meeting that future dairy demand growth.
Well, that's it for this month's episode of Export Exchange. Feel free to reach out to Will or I with any comments or questions and we look forward to talking with you next time. Thank you.