March market report: U.S. cheese exports are heating up

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We were beginning to think we’d just keep repeating ourselves.

And, to an extent, we still can: Domestic supply remains somewhat long, prices remain depressed, demand remains weak and American dairy farmers are seeing month after month of lackluster milk checks.

But one market segment —U.S. cheese exports— is showing signs of strength.

The buzz at Gulfood

Late last month we sent some of our traders to the Gulfood conference in Dubai. It provides a great opportunity for networking, product launches and food tastings. But the big draw is the chance to strike deals.

We were surprised at the amount of buzz over cheese. Everyone, it seemed, was interested in cheddar and mozzarella from the U.S. While Gulfood draws attendees and exhibitors from around the world (in all, 97,000 came in 2017), most of the purchasing during the show is on behalf of buyers in the Middle East and Africa—regions primarily supplied by the European Union. This represents a shift from the norm, which usually plays out this way:

• The Middle East and Africa (MEA) produce very little milk themselves, so it’s a given that they import most of what they need to meet demand.
• The European Union is the logical supplier for MEA buyers because it’s the closest significant milkshed to those customers.
• When MEA buyers don’t purchase from the EU, they turn to Oceania. The U.S. is usually second understudy at best. It takes too long —and normally costs too much— to ship products to faraway Middle East ports.

Why us? Why now?

The action during and following the Gulfood conference is evidence that something has shifted on the world stage. Or, more probably, many factors are combining to foment bullishness toward American cheese products on the part of international buyers.

One factor could be that European producers aren’t making enough of the products that MEA buyers are looking for. We’ve seen evidence lately that some European processors are turning out more gouda or other products to meet growing demand for them elsewhere in the EU. If this is the case, the MEA buyers may need a boost to make up for what they can no longer get as easily from the EU, and they’re willing to pay the premium to get it.

Another factor could be that Oceania, normally ready to step in as the alternate supplier, is faltering. Two facts support this. First, New Zealand has lately turned its focus toward boosting powder production to meet growing demands in Asian markets. Second, the weather there has been horrid. Production through their flush has been lower than expected, and it isn’t likely to pick up as the Southern Hemisphere winter approaches.

Yet another factor may be the prolonged price weakness in the U.S. Even though low prices in the U.S. still translate to higher costs when accounting for shipping, that weakness is bringing the overall cost of U.S.-produced cheeses in line with that of cheeses made elsewhere. Buyers are interested because it might be the best deal they can get.

One note of certainty among all those factors is this: Gulfood points out that demand for dairy in the Middle East and Africa is increasing rapidly.

How long does this last?

That’s almost impossible to predict.

As we explained above, this issue is characterized by its many moving parts. We also noted above that MEA buyers are interested in the most economical deal. We can search for answers until the cows come home, but we should also delight in the prospect of making more sales in these emerging markets—especially since the EU remains the best-suited supplier in this scenario. Global trade is competitive. They won’t let us keep these markets for long.

But we should note one final factor that’s cause for some optimism: Prices in the U.S. are already low, and we’re headed toward the spring flush. That naturally depresses market prices. We’re not pleased at the thought of added economic strain on farmers and processors this spring and summer, but we’re not upset that those circumstances may set the stage for prolonged strength in U.S. cheese exports.