Entering the second half of 2009, recovery in global dairy demand remains elusive, leaving expectations for soft commodity markets for the balance of the year and into 2010.

“Global economic activity is still almost universally down over recent years,” says Tom Suber, president of the U.S. Dairy Export Council. “Developed countries remain in a recession that has lasted more than a year, still struggling with a credit crisis that has sapped normal commercial activity, increased unemployment and far lower commodity prices such as oil that drove demand in many parts of the world. The net impact is sharply less demand for dairy products in emerging markets such as China, Southeast Asia and Latin America, where we saw much of the growth of the past five years.

“Since January, USDEC programs have been re-positioned to assist U.S. suppliers to protect share in key markets and despite tough economic conditions, U.S. suppliers remain committed to international sales.” 

Some signs of growth emerge

“Ultimately, the return of consumer demand will only come with the restoration of economic growth,” says Suber, adding that some signs of recovery are emerging, albeit slowly.

The International Monetary Fund believes the global economy is beginning to pull out of recession, though full recovery is expected to be sluggish.

“Financial conditions have improved more than expected,” IMF reported in its July 8 World Economic Outlook Update. “Economic growth during 2009-10 is now projected to be about one-half percentage point higher than projected in April.”

Global Gross Domestic Product is projected to rise 2.5% in 2010, compared with the April estimate of 1.9% growth. This follows an estimated decline of 1.4% in 2009 (down from the earlier 1.3% estimated decline). IMF forecasts world trade volume of all goods and services to increase 1.0% in 2010, after a projected drop of 12.2% this year.

In its June Dairy Quarterly, global lender Rabobank International cautioned that a build-up of inventories could forestall a speedy price rebound in the dairy sector.

“While there is still hope that fundamentals will begin to turn in favor of sellers late in 2009, pricing through third quarter 2009 looks likely to be heavily influenced by the relative strength of intervention buying in the Northern Hemisphere,” Rabobank says.

Sustained demand still elusive

Strong milk production growth worldwide in response to record high prices in 2007-2008 has left substantial supply overhanging the market. While output has begun to contract in the United States and Europe, Suber notes that exporters are still not seeing sustained demand from their customers.

“Today’s commodity buying appears to be non-strategic, spot filling of the pipeline,” he says. “Going forward, we need to see a return of global demand sufficient to sop up supply, plus a work-down of inventories that have built up over the last nine months.”

Soft markets are reflected in declining U.S. dairy exports in 2009. In the January-May period, the value of U.S. dairy shipments was $855 million, down 52% from last year’s record pace, according to U.S. Department of Agriculture/Foreign Agricultural Service data released July 10.
In the first five months of the year, exports represented 8.1% of U.S. milk production, as measured on a total-solids basis. This figure is down from 10.8% of production in 2008 and the lowest percentage since 2004.

Much of the decline in 2009 volumes can be attributed to a drop-off in overseas sales of non-fat dry milk/skim milk powder, the largest U.S. dairy export commodity by volume and value. Exports in January-May were 195.2 million lbs., down 53%. Some exporters, however, have maintained shipments in lieu of selling to CCC through dairy blends and skim milk powder with slightly lower protein levels.

Cheese exports, which reached record-high volumes last year, were off 30%, at 90.4 million lbs.  However, exporters were able to increase penetration in Mexico, the largest overseas market for U.S. cheese, with a 15% gain in the first five months of the year. Overall butterfat shipments were just 18.6 million lbs., down 80 %. Again, sales to Mexico were higher (+51%) as exporters focused on one of their core markets.

Exports of dairy ingredients like whey and lactose have held up well in 2009. Shipments of dry whey in the first five months of the year were 186.0 million lbs., up 15% from last year. Exports of higher-value whey protein isolates were up 51%, to 14.7 million lbs., while sales of whey protein concentrates were down 17%, to 105.4 million lbs. Overall, whey protein exports to key markets China and Mexico were higher, while shipments to South America and Oceania slackened. Exports of lactose were 182.0 million lbs., up 1 percent in the January-May period.

Investment in core markets

For its part, USDEC continues to support U.S. exporters with programs designed to defend share in core markets.

“We do this because our members remain active and committed, but they need help in the face of slow demand and significant competitive supply,” Suber explains.

From May to August, USDEC will conduct more than two dozen promotions, seminars, workshops and reverse trade missions with buyers and consumers in key markets around the globe.

For instance:
• Export Council foodservice and retail cheese promotions in Mexico and South Korea include sampling activities that reinforce the quality and variety of U.S. cheese.
• USDEC conducted seminars in China and Vietnam to educate hog farmers and feed mills on the benefits of using whey in pig starter diets. The feed sector makes up a significant percentage of dairy-ingredient use throughout Asia. Exporters report they are recapturing sales lost when commodity prices more than doubled in 2007-2008.
• The Council hosted a trade mission that brought major buyers of milk powder to the United States from Central America to facilitate trade contacts with U.S. suppliers. The meetings also helped U.S. manufacturers and exporters understand the product specifications and service requirements of overseas milk powder users.

In addition to the commercial impact of USDEC’s market-development activities, the Council’s technical and trade policy programs continue to help exporters minimize risk and clear barriers to trade. For example, last fall, USDEC developed a certificate that assured Chinese buyers that U.S. ingredients were melamine-free, allowing sales to continue uninterrupted. USDEC also is working closely with Chinese regulators as they develop new whey standards, ensuring that requirements are compatible with U.S. commercial specifications.

“We continue to support the efforts of U.S. exporters during these challenging market conditions,” Suber says. “Unlike the attitudes that prevailed before the 2007-2008 ‘boom,’ U.S. suppliers appreciate and need these sales, want to stay involved and know our programs and the benefits that they can bring. USDEC long-term programs are aimed at positioning the U.S. industry to capitalize when market conditions become more favorable.”