Mexico is an important trade partner for U.S. dairy. It’s our largest export customer for cheese by a large margin.

Throughout much of 2023 and into 2024, sluggish exports headed to Asia, among other factors, have prevented milk prices from taking a run higher. But our neighbor to the south has bucked that trend and remained a reliable customer throughout, especially for cheese. Mexico’s strong economy over the past couple of years has contributed to these positive developments.

U.S. exports of cheese to Mexico have been rising every month on a year-over-year basis since July 2021 (see graph). In February 2024, cheese exports were up a staggering 60% from last February and nearly double the volume of February 2021, after correcting for the leap year.

Skim milk powder and nonfat dry milk exports, meanwhile, have not fared as well, experiencing six months of year-over-year declines. But, given the choice, cheese is a much higher value product compared with milk powders on a milk-equivalent basis.

Strong economy boosts the U.S. cheese appeal

Much of the strong cheese demand has to do with broad growth and relative stability in the Mexican economy. Mexico is an attractive spot for multinationals to invest in manufacturing, partly because having a manufacturing footprint in Mexico provides a lower-tariff access point to the U.S. market.

The fast-growing, low-cost Chinese electric vehicle manufacturer BYD is planning to build an assembly plant in Mexico in 2024. Although BYD wouldn’t get all the trade benefits of the United States-Mexico-Canada Agreement (USMCA) that Mexican companies do, it would avoid some of the logistical risks of overseas shipping to the U.S. and see an advantage on tariffs compared with the status quo.

The boom in this type of manufacturing investment, known as “nearshoring,” has helped strengthen Mexico's consumer optimism and gross domestic product (GDP) as well as the peso, which recently hit its strongest level against the dollar since 2015. When the peso is strong relative to the dollar, U.S. products feel less expensive to buyers in Mexico. That effect is magnified when cheese prices are already cheap in U.S. dollar terms to begin with.

There are some signs that the pace of growth in the Mexican economy may not be able to keep up with the past couple of years. The peso recently fell sharply relative to the strengthening dollar after hawkish remarks on interest rates by Federal Reserve chair Jerome Powell boosted the dollar. Still, the major investments in manufacturing are supportive of Mexico’s long-term employment gains and productivity.

Politics add uncertainty to the mix. Mexico and the U.S. both hold presidential elections in 2024, and the USMCA is up for review in mid-2026. The trade agreement, negotiated under the Trump administration, was designed to terminate 16 years after taking effect in 2020. The first review in July 2026 could include a decision to extend the life of the USMCA. While these are long-term decisions, the review process will be an opportunity for fresh negotiations.

U.S. cheese markets need demand from Southeast Asia and other key markets like Japan and South Korea to rebound in order to see any additional price increases. But Mexico has come to the rescue as a reliable, resilient customer. The country’s increasing appetite for cheese imports is encouraging in light of additional U.S. processing capacity being built, and the long-term outlook for Mexican demand is supportive of continued strength.