W1 Dairy Update: New Zealand Welcomes Tariff Removal in China as the US and EU Navigate Challenges in 2024

New Zealand Scores Tariff-Free Dairy in China, Unlocking USD 350 Million Growth

All tariffs are now removed from New Zealand dairy entering China. The removal of tariffs on milk powder represents a noteworthy development in New Zealand's trade relations with China, allowing all dairy products from New Zealand to enter China without duties. This outcome is part of the New Zealand-China Free Trade Agreement (FTA), negotiated in 2008. The move is expected to bring substantial economic benefits, with an additional USD 350 million in revenue projected for New Zealand as the FTA takes effect. This development underscores the ongoing efforts to explore and expand export opportunities. The elimination of tariffs is anticipated to positively impact New Zealand's dairy industry, potentially influencing the dairy payout and overall farmer morale.
A key trading partner for New Zealand, China plays a significant role in the country's economy by importing around USD 8 billion worth of dairy products. While focusing on the relationship with China, the New Zealand government also expresses intentions to diversify its trade relationships, exploring opportunities in India, the European Union (EU), and other markets. Over the past three years, New Zealand's annual dairy exports to China have averaged 1.4 million metric tons (mmt), with milk powder constituting a substantial portion of this volume. Current FTAs cover two-thirds of New Zealand's exports.

Expectations for US Dairy Exports in 2024 Amidst Global Economic Factors

In the 2023 Fiscal Year (FY), United States (US) dairy exporters faced challenges marked by slow economic growth among importers and heightened competition from New Zealand and the EU. The year witnessed a YoY decline in export values for non-fat dry milk (NDM), cheese, and whey, primarily due to weakened demand in China and Southeast Asia. Global discretionary spending, influenced by higher interest rates, particularly impacted dairy consumption in Asia – the region experiencing the fastest growth for major exporters. Despite these challenges, a slight depreciation of the US dollar in 2023 provided some relief to US dairy product competitiveness.

Looking ahead to FY 2024, US exports are expected to encounter similar headwinds. Various factors, including efforts to control fiscal spending post-COVID, interest rate hikes, and rising food inflation, are anticipated to impact demand in key Asian markets throughout the year. China, the largest importer of dairy products, experienced surplus raw milk production, resulting in government subsidies and reduced demand for US imports, particularly whole milk powder. FY 2024 is expected to witness YoY price declines for US dairy products, putting pressure on export values. In H1 2024, a surge in demand for skimmed products is anticipated, propelled by enhanced price competitiveness in the US. Concurrently, NDM and whey, crucial for exports, are expected to experience lower YoY prices in H1 2024, accompanied by weak volumes due to subdued demand from East and Southeast Asia.

The World Agricultural Supply and Demand Estimates (WASDE) projects an 8% YoY decline in average NDM prices to USD 2.58 per kilogram (kg) or USD 1.17 per pound (lb) in FY 2024. Cheese prices are forecasted to average USD 3.77/kg or USD 1.71/lb, indicating an 8% YoY decline. Despite expectations for only moderate growth in shipment volumes, coupled with lower prices for dairy products, total dairy export values are forecasted to contract in FY 2024, especially in Q1-2024 and Q2-2024. Monthly data for FY 2024 is expected to mirror FY 2023, with growth in certain categories offset by declines in others. Increases in the value of cheese and infant formula exports are projected to be outweighed by decreases in skimmed milk powder, whey, lactose, and butter.

In the EU, a marginal decrease in milk production by 200 thousand metric tons (mt) is anticipated, bringing the total to 144.6 mmt. Despite a modest improvement in cow productivity, this is insufficient to counter reductions in the dairy herd. Persistent declines in producer milk prices and high production costs continue to pressure milk producers, especially in major producing member states such as Germany, France, Spain, and Poland. The impact is most pronounced among smaller farms lacking scale efficiencies, leading to expectations of further market consolidation and closures. However, larger operators are anticipated to maintain herds, slowing the pace of herd reduction in FY 2024.