The implications of what the U.S dollar does are very big for dairy producers who buy inputs and sell milk.
By Patrick Patton, Stewart-Peterson Inc.
Our dairy advisory team has been watching the U.S. Dollar (USD) closely of late. The trend for the USD is up, and it is at risk of rallying even higher. People sometimes forget that even currencies have bull and bear cycles, and many indications are that the USD is starting a bull run and has a risk of moving still higher, to the 84.50 level.
A rallying dollar is bad news for dairy prices, and bad news for commodity prices overall. It makes U.S. commodities more expensive abroad and slows down demand. In contrast, a falling dollar is good news for dairy and commodity prices, as it fuels stronger exports.
If we think about what has transpired politically in the U.S. and how the USD has continued an upward trend, it paints a confusing picture. And yet, the implications of what the USD does are very big for dairy producers who buy inputs and sell milk. That’s why we’re paying attention to it, and preparing strategies that help us navigate the uncertainty.
Here’s a summary of the situation: Since 2008, the Federal Reserve (FED) has undertaken four rounds of what is termed "Quantitative Easing (QE)." QE is essentially increasing the money supply for the purpose of keeping interest rates low to stimulate economic growth. The FED’s QE programs have totaled over $2.5 trillion and counting, as QE4 is still ongoing.
The consequences of increasing the money supply are typically that it drives down the value of the currency, and this tends to fuel inflation. So far, of the four rounds of QE that the FED has undertaken since 2008, only QE1 had a substantial impact on driving down the value of the dollar.
When looking at the value of the dollar now, relative to QE2, QE3, and QE4, its value is actually higher than when each of those easing programs was announced and implemented. Close to a couple trillion dollars of easing has occurred since QE2 and yet the value of the dollar has been going up, not down. This is a bit of a red flag, because one would think that QE of the size and scope that we’ve seen over the last four years would easily have the USD down at the 2008/2011 lows or lower.
And so, the USD could continue to trend up, following its bullish trend, or it could succumb to the impacts of quantitative easing, and go down. Amidst such uncertainty, how should dairy producers be thinking about milk prices and feed costs?
• An up USD would be good from the standpoint of falling input costs, but it would be bad from the standpoint of a falling revenue stream from milk. In that case, milk prices at their current levels could be providing us with a great opportunity to lock in prices for the second half of 2013.
• A down USD would be bad from the standpoint of rising input costs, but should be good for an increasing revenue stream from milk.
Because of the significant implications that the direction of the USD has on commodity prices, dairy producers need to prepare for both an UP dollar and a DOWN dollar. If you consider your marketing strategies in advance for both potential scenarios, you will be prepared when one of them begins to unfold. You can position your dairy in a way that makes either USD scenario a good scenario overall for your operation.
Patrick Patton is Director of Client Services for Stewart-Peterson Inc., a commodity marketing consulting firm based in West Bend, Wis. You may reach Patrick at 800-334-9779, or email him at email@example.com.
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