Due South: Could Latin America be the Answer to U.S. Dairy Export Woes?

U.S. dairy product prices are in the doldrums. At the Chicago Mercantile Exchange (CME), spot prices for Cheddar cheese and nonfat dry milk (NDM) have sunk to multi-year depths while the dry whey price is the lowest it has ever been since the product began trading in 2018. Weak commodity prices are weighing heavily on milk prices and dairy producers across the country have seen their margins evaporate in recent months.

Plentiful milk supply is part of the issue. Milk production in the U.S. has bested the same month in the prior year for the last eleven months. And while the rate of growth has slowed recently, stronger yields and a larger national dairy herd continue to drive production increases.

Of course, supply is only part of the equation. While milk supplies have grown, demand has dwindled, particularly from international buyers. After years of aggressive expansion, including a record setting 2022, U.S. dairy exports have stumbled this year. Lighter exports have allowed product to accumulate in warehouses back home, pushing product prices downward, especially at the CME, where processors and traders attempt to clear product that typically would have moved abroad.

That Sinking Feeling

During the first five months of 2023, the U.S. exported 1.122 million metric tons of dairy products valued at $3.6 billion US dollars. This may seem like a hefty number, but it actually represents a decline of 3.5% year over year and the lowest volume for the period since 2020. Exports were lighter than prior year in every month this year except for January.

Every major product category has seen volumes fall so far this year. Year to date exports of cheese are down by 4.2%, while whey exports have slipped by 9.1%. Shipments of butter between January and May tumbled by 32.5%, as exports of NDM and skim milk powder (SMP) dipped by a more modest 0.4%.

Weaker demand from Asian destinations has been a major driver behind the reduced U.S. export figures. Cumulative cheese exports to South Korea were down 42.3% during the first five months of the year. During this same period, shipments of NDM and SMP to Vietnam, the Philippines, and Indonesia have crumbled by 41.0%, 38.2%, and 12.2%, respectively. Even whey shipments to China, which had remained robust early in the year, were down 18.4% and 31.4% year over year in April and May.

But among a sea of bad export news, there has been one shining exception. Demand from Mexico, the most important trading partner of the U.S., has remained remarkably resilient. Between January and May, the United States sent 305,208 metric tons of dairy products south of the border, an increase of 25.4% compared to last year and the largest amount ever recorded for that time period by a margin of more than 50,000 metric tons.

A Beacon of Hope

U.S. dairy exports to Mexico are up across most commodity types. Even as powder exports to other destinations have faltered, they have surged into Mexico, rising by 43.4% year to date. Cheese exports have also boomed, up 15.0% so far this year, while whey has edged up 7.7%. Butter exports are down 38.5% versus last year’s exceptionally high figures but remain elevated compared to the five-year average.

Several factors have underpinned the increase in Mexican purchases in recent months. Firstly, the Mexican peso has strengthened consistently over the past year, reaching levels not seen since 2016. This dynamic boosts Mexican purchasing power and renders dollar denominated product relatively less expensive for Mexican buyers. In addition, the Mexican economy has performed better than initially anticipated, bolstered in part by recovering tourism. And finally, opportunism is likely at play as Mexican buyers have been picking up U.S. product at bargain prices.

Mexico may be getting most of the press, but there have been other success stories for U.S. exports across the Americas as well. In South America, U.S. dairy exports to Colombia during the first five months of the year rose 33.2% to 18,833 metric tons, the largest volume ever recorded for that time period, and galvanizing Colombia as the next largest Latin American destination for U.S. dairy exports after Mexico. Shipments to Chile were up 22.9% as exports to notoriously protectionist Brazil more than doubled.

There were also stand outs in Central America and the Caribbean. U.S. dairy exports to Guatemala, Costa Rica, and Honduras were up 44.2%, 13.6%, and 1.6%, respectively. Meanwhile, exports to the Dominican Republic rose 2.8% making the island nation the fourth most important destination for U.S. dairy exports this year.

A Sea of Possibility

Taken together, during the first five months of the year, Latin America accounted for 38.7% of U.S. dairy exports, an increase of 30.9% in 2022. Many Latin American markets are often overlooked, but this year has proven that they can be an important driver of U.S. exports. However, trying to ramp up sales to these markets only when interest from other regions wanes is a mistake. Being consistently successful in Latin America will require exporters to demonstrate a strategic commitment over the long term.

Luckily for U.S. exporters, they are likely to find that they already enjoy many advantages when serving Latin American demand. Proximity gives U.S. exporters logistical leg up. Furthermore, close cultural ties mean that many Latin American consumers are already familiar with and embrace products from the U.S. Finally, a broad range of trade agreements are in place which provide preferential access for US products in many parts of the region.

Of course, barriers do exist. Every market has idiosyncrasies and new exporters may find the regional patchwork difficult to navigate. Latin America is also rife with political and economic volatility which may be intimidating to those unfamiliar with its quirks. Personal relationships are valued, and regional buyers are likely to respond best to suppliers who are physically present in the market, through visits or local representation.

The challenges are real, but the opportunities are innumerable for U.S. dairy products in Latin America. Those U.S. exporters who invest the time and effort to thoughtfully develop their presence in the region as part of their broader international sales strategy are likely to reap years of fruitful rewards.