With so many pandemic related variables, it’s been a balancing act for U.S. dairy exports. At this point, anything is possible.

Normally, things such as economic and population growth, price levels, price spreads, changes to trade agreements/tariffs and available supply in each of the exporting regions would be the main drivers for the U.S. export outlook. While those are still very important drivers, there are wide possible ranges for those variables, and there are big unknowns such as when a widely available vaccine will be available.

Maybe most important, we know what demand looks like in a “normal” recession and economic recovery, but we don’t know what demand looks like in a pandemic recession and recovery. The pandemic has pushed most countries into a recession, which normally reduces dairy demand.

On top of that, foodservice sales have taken a hit, which should be net negative for dairy demand in most countries. If we net out government purchases in the United States, it looks like domestic commercial disappearance has been down since March.

Our estimates for the EU member states put domestic disappearance about flat against last year. In the places where we have the best visibility, it looks like consumption is flat to down, which makes sense given the macroeconomy and pandemic. However, global imports were up about 7.7% on a milk-equivalent basis during the second quarter.

It is possible that dairy consumption in the importing countries has actually increased, but I think the more likely scenario is that importers were concerned about global logistics after some ports were shutdown early in the pandemic, and they opted to import some extra buffer inventories.

Reaching the other side

We model dairy imports for 24 countries based on gross domestic product (GDP), population, dairy prices, oil prices, currency and other country-specific variables. The International Monetary Fund (IMF) is expecting a big drop in GDP for most countries this year, but a strong bounce-back in GDP in 2021. That should reduce global import demand during the fourth quarter of 2020 and probably into the first half of 2021, with the possibility of a strong rebound in demand and prices in the second half of the year if the pandemic is under control and economic activity fully rebounds.

U.S. exporters will be facing weak overall global demand, but U.S. exports will be facing increased supply coming out of the other major exporting regions. Milk prices are generally at profitable levels in the EU, New Zealand and Australia, and milk production is expected to grow in all the major exporting countries except Argentina. That means the major exporters are all going to be trying to push more available supply into a weak world market, and prices will take a hit.

Exports go highwire

It may surprise you, but the last time we had a global recession (2009), global milk-equivalent imports were up more than 10% from 2008. A chunk of that was due to China and the melamine scandal in late 2008, but even if we exclude China, imports by everyone else were up 6.6%.

However, the trick to moving more volume in the midst of a global recession is to cut prices dramatically. It took a 50% price cut between 2008 and 2009 to keep that kind of volume moving into the export market.

I think the most likely scenario is a global oversupply — certainly in the first quarter and maybe into the second quarter. This will limit U.S. export volumes, push U.S. dairy prices dramatically lower or do both. But the very strong imports during the second quarter (which extended into July as well) do offer some hope that maybe this recession isn’t as damaging to global dairy demand as previous economic slowdowns were.

It’s not just global dairy imports that have turned out better than expected. Total global trade in goods has bounced back better than economists predicted, too. The explanation seems to be that the sectors taking the biggest hit in this recession are local services, but the world has an increased appetite for electronic devices, kitchen appliances and exercise/outdoor equipment.

There is a chance that dairy demand in some of these importing countries is actually up despite the weak economic conditions and reduced foodservice sales. Maybe this recession is different, but probably not.

There are also domestic risks to the export outlook. If dairy prices crash again, dairy cooperatives and milk processors could put their base/overbase milk pricing programs back in place. In that case, we could see milk production tighten up quickly and push U.S. dairy prices above the world market, which would reduce U.S. export opportunities. Another possibility is that U.S. government dairy purchases turn out bigger than expected, which might keep U.S. prices above the world market.

If GDP rebounds as strongly as the IMF is forecasting, demand should be very strong in the second half of 2021, but I struggle to find optimistic scenarios for the first half of the year.

Nate Donnay is the director of dairy market insight at StoneX Group Inc. and has been applying his interest in large complicated systems and statistical analysis to the dairy markets since 2005.