Don't Blame Stronger Dollar for Slump of U.S. Dairy Exports

The value of the U.S. dollar is a factor in global dairy trade, but supply and demand are the primary economic drivers.  

From May 2014-April 2015, the U.S. dollar climbed about 23 percent vs. the euro and 14 percent vs. the New Zealand dollar. It wasn’t long into the dollar’s ascent that industry watchers and media began expressing concerns that the shifting exchange rates would impair U.S. competitiveness.

It is an understandable assessment. Theoretically, a sustained rise in the U.S. dollar over time makes U.S. suppliers less competitive on the world market. However, when attempting to calculate the role of exchange rates on export competitiveness of specific U.S. commodities and products, you need to get beyond theory.

In actuality, the connection between a rising dollar and declining exports is not clear-cut and varies by the commodity or product in question. For example, the strong dollar is likely to have a greater impact on U.S. corn exports than on dairy exports because of greater integration between the U.S. and international corn markets.

Shifts in exchange rates can also substantially affect non-agricultural trade. Companies that trade durable goods such as industrial machines or automobiles may feel the impact more acutely because their U.S. dollar price is established on a set of generally fixed costs of materials, labor and overhead, as are the prices of its overseas competitors. Consequently, a buyer is basing its purchase decision purely on how these relatively fixed prices translate into its home currency. That’s completely different than dairy commodities whose underlying price changes are based on global supply and demand factors. 

The value of the U.S. dollar does play a role in global dairy trade, but that role is for the most part secondary or tertiary—amplifying or dampening underlying commodity price changes, which may or may not affect U.S. dairy exports. Other marketplace factors remain the primary influence on U.S. competitiveness.

For example, European Union (EU) exporters stole share from U.S. suppliers in the second half of 2014. Their move corresponds with the rise in U.S. exchange rates. But the decline in U.S. competitiveness, in this case, was primarily driven by depressed EU milk powder and butter prices brought on by rising EU inventories caused by the Russian dairy embargo. U.S. suppliers were pressed to price competitively regardless of the exchange rate.

Conversely, U.S. exports have been rising steadily for years not exclusively because of the prolonged favorable exchange rates we saw for most of the 2000s, but due to strong demand in emerging markets coupled with periodic supply shortfalls from Australia, New Zealand and the EU.

Because virtually all dairy trade is denominated in U.S. dollars, a weaker U.S. dollar helped all suppliers by keeping dairy products more affordable for consumers. But the fundamentals of supply and demand then and now remain the key drivers of U.S. dairy trade.

That’s not to say exchange rate has no impact on U.S. competitiveness. Its capacity to influence depends on the extent of the change in value over time, but pinpointing its exact effect is virtually impossible given the multiple factors at play in any dairy export transaction.

What can be stated with some certainty is that short-term and long-term changes in the exchange rate have wholly different implications.

Day-to-day fluctuations in U.S. dollar value are relatively meaningless for U.S. dairy suppliers. Again, because trade is denominated in U.S. dollars, a rise or decline in the exchange rate does not necessarily change a sellers’ asking price. It changes exporter returns.

Currency changes over a prolonged period can produce greater effects, but those too are dependent on factors such as changes in internal market conditions and the degree of integration between the domestic market and the international market.

Theoretically, other manufacturers can offer deeper discounts and still maintain profitability if there is some degree of certainty that the U.S. dollar has reached a lower price band. Whether or not a supplier will do so is another question.

If the going international price for cheese is US$3,200/ton, for example, will an EU supplier sell for less than US$3,200/ton if it could get US$3,200/ton? Additionally, if the domestic European price is more than US$3,200/ton, that seller might just decide not to export at all.

New Zealand is different because of the role dairy plays in its economy: New Zealand must export 95 percent of its milk production. It is fully integrated with the international market and has become the global price setter. If necessary to move its product, it can undercut U.S. and EU product prices at any time. But if the market isn’t saying the price should go lower, New Zealand isn’t going to lower its prices just because the U.S. dollar rises.

Theorizing significant damage to U.S. dairy exports for a strong dollar is far different than determining its exact impact. You cannot isolate the impact of exchange rates from all the other factors affecting sales—supply, demand, prices and atypical events like the West Coast port issue or the Russian trade embargo.

Even if we were able to differentiate among the price effects of all factors affecting international prices, chances are we would very likely determine the impact of U.S. dollar strength is relatively minor . . . unless it gets transmitted to retail prices. We have not seen retail price inflation accompany the rate change so far, but such changes take time to work through the system, partly because dairy commodity prices more than offset exchange rate increases. As you go longer and longer with the dollar being stronger and stronger, it becomes more likely the effects are going to pass through the value chain.

Then the question becomes: How high can retail prices rise before we see a decline in global dairy consumption?

The U.S. Dairy Export Council is primarily supported by Dairy Management Inc. through the dairy farmer checkoff that builds on collaborative industry partnerships with processors, trading companies and others to build global demand for U.S. dairy products.  

Image copyright of rising dollar: 123RF.com.