Price enhancement may not be a plus
Conventional wisdom suggests that if you increase dairy exports, the increased demand will raise prices as well. But that might not be true, says Marin Bozic, University of Minnesota dairy foods marketing economist.
In the short term, heightened demand will increase prices if supply is not sufficient, he says. But in the long run, price increases will encourage more production. Once demand is met, prices return to normal levels and the cost of producing milk is again the long-term price.
There is also evidence that reliance on exports increases price volatility within the domestic market. There are five reasons for this:
- Macroeconomic imbalances. The 2008/2009 global recession, for example, virtually froze credit. While importers wanted to buy dairy products, their access to credit dried up and they could not finance those purchases.
- Production fluctuations by exporting competitors. Some exporting countries, particularly those that base production on grazing, have tremendous swings in output. New Zealand and Australia, for example, are notorious for wide year-to-year swings, depending on rainfall.
- Demand shocks abroad. Foot-and-mouth disease recently forced South Korea to kill more than a million animals, including some dairy cows. That created a dairy shortage, forcing the country to boost its imports.
- Removal of price floors. In 2009, world prices for skim milk dipped nearly 50% below U.S. dairy price supports. If those supports are eliminated, the safety net will no longer exist.
- Exchange rate fluctuations. Despite the fact that dairy products are traded in dollars, changing currency values still have influence over the relative buying power within countries. In just the last 18 months, for example, the euro has fluctuated from€€1.20 per U.S. dollar to €1.50 per U.S. dollar, which affects its relative competitiveness for European Union dairy products.
Despite all this, Bozic says, U.S. dairy producers should embrace dairy exports for one big reason: volume.
Increased volume allows dairies that grow to sell more milk. It allows them to spread more volume over their fixed costs, reducing their overall cost of production. But it also means producers need to control their costs and manage price risk of both inputs and milk, he says.
- February 2012