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If U.S. dairy exporters feel like they’re in unfamiliar territory the last 18 months, they’re not imagining things.

The world is stuck in its deepest and widest stretch of surplus since 2006. World prices for cheese and butter remain sharply discounted to U.S. prices, which have been buoyed by surprisingly good returns in the domestic market. This summer, international prices for powder fell to their lowest level in more than a decade. The strong U.S. dollar – which has returned to exchange rates typical of 2003 – hasn’t helped.

As a result, U.S. dairy exports are down in 2015 for the first time in six years. In fact, declines are so rare, this is only the third time in the last 19 years that export volume has failed to rise.

From 2003 to 2014, U.S. dairy exports grew from a $1 billion-a-year business to one that generated more than $7 billion last year. During that stretch, global dairy trade expanded by more than 60%, and U.S. share of this growing pie more than doubled – from less than 7% to nearly 17%. For the most part, U.S. suppliers capitalized on a window of opportunity characterized by steadily growing demand, lagging supply and favorable prices.

But the world map looks different today, with greater competition fighting over slices of a more limited pie.

The China ‘bubble’

China accounted for about 40% of the growth in world trade from 2008 to 2014. Now we know that the final year of this buying spree was a bubble, one that shorted the world market and drove prices to record highs. In the year ending July 2014, China’s imports were equivalent to 14 million tons of milk (31 billion pounds), up 48% from the prior 12-month period. Over the next 12 months (year ending July 2015), China imports were equivalent to just 9.4 million tons of milk (21 billion pounds), a contraction of 4.6 million tons (10 billion pounds).

Coincidentally, Russia, the world’s No. 2 dairy customer, closed the door on most of the world at about the same time China stopped buying. Over the same 12-month period, Russia imports (excluding what it gets from Belarus) declined by 2.8 million tons milk equivalent (6.2 billion pounds).

So between China and Russia, imports were down 7.4 million tons milk equivalent (16.3 billion pounds) from the prior year.

Reduced buying notwithstanding, global milk supplies have continued to expand. During the same 12-month period, milk production from the EU-28, United States, New Zealand, Australia and Argentina, who collectively account for about 80% of world trade, increased more than 2%, adding about 5.4 million tons of milk (12 billion pounds) to global supply.

So simply, these three factors alone – growing milk production and declining imports from China and Russia – left a net supply increase of nearly 13 million tons (28 billion pounds) of milk for the market to absorb. For context, annual world trade had grown to about 72 million tons (159 billion pounds) before the crash.

Certainly imports from other buyers have increased in 2015, as buyers who were squeezed out by China were able to purchase at favorable prices. Excluding China and Russia, world trade was up by more than 10% in the first half of the year. But that was not nearly enough to cover the gap.

And while global milk production growth has slowed considerably, those lost purchases from China and Russia aren’t expected to come back any time soon. In short, a significant chunk of global buying has simply vanished.

Time to rebalance

In the final quarter of 2015, the world still has too much milk coming on and too much volume in inventory, given lighter import demand. It is estimated that EU-28 skim milk powder (SMP) stocks have increased more than 50% over the last year. In the United States, cheese, butter and powder inventories this summer were about 225 million pounds greater than the typical summer peak.

China milk powder inventories are said to still be excessive as well, though hard numbers are elusive. The prevailing view is that China still holds around 300,000 tons (mostly WMP) in storage. Furthermore, China’s milk production is running around 5% ahead in 2015.

And milk production from the top five suppliers is still expanding, albeit more slowly. It may not be until second quarter 2016 before the production numbers show contraction.

Therefore, we expect 2016 to be a year of destocking and rebalancing. There is still plenty of milk and inventory in the pipeline that needs to be worked through, and that work will take time. A lot will hinge on how vigorously (or not) China comes back into the market. If China’s imports, for instance, hold near 9.4 million tons milk equivalent (20.7 billion pounds) over the next year – the pace set in the year ending July 2015 – trade flows will have to evolve to reconcile what appears to be a smaller, more competitive pie than earlier believed.

Complicating the competitive environment is that global prices have recently worked themselves back to where price signals provide improved returns on the farm. This could incent continued production growth and forestall the needed supply contraction.

Watch Oceania, Europe

In this environment, U.S. exporters have their work cut out for them like they haven’t seen before.

Competitors from Oceania and Europe are pricing aggressively to win sales and grow market share and to prevent inventories from building. In early October, U.S. benchmark Cheddar cheese prices were 25 cents higher than global prices, and U.S. butter prices were $1.30 above global prices. This price disparity has rendered U.S. butter exports negligible and cut U.S. cheese exports by 15% in the first eight months of the year.

In contrast, U.S. milk powder and whey have been more responsive in competing in the global market place, and volumes have held up better, though NDM/SMP exports are still down 6% through August and whey exports are down 10%.

While the longer-term expectations are for demand to expand and strain supply, lifting prices from today’s levels, the intermediate outlook for the next 12 to 18 months indicates a fierce competitive environment. With more than 14% of its milk production now moving to international markets, the U.S. industry must aggressively compete to win to protect hard-earned volume and market share gains achieved over the past decade. Failing that, the United States will be the holder of global inventory and settle back into the role of the global “balancing plant.”