Is Trade Really All About the Value of the Dollar?

In August 2011, shortly after Standard & Poor’s downgraded the U.S. credit rating and debt troubles resurfaced in Europe, the U.S. dollar soared against the New Zealand and Australian dollars, rising about 8.5 percent in a little over a week—a considerable jump in so short a period. People immediately began fearing the worst for U.S. dairy exports.

Many observers assume a high U.S. dollar equates to more expensive U.S. cheese, milk powder and whey proteins. When the dollar jumps, why wouldn’t an overseas buyer opt for New Zealand cheese that has, in theory, suddenly become a deal?

That’s one of the most frequently asked questions USDEC receives. Even when the dollar is falling or stable, people ask what will happen when its value rebounds. An almost constant apprehension exists that the entire basis for U.S. exports is reliant on a cheap U.S. dollar.

The short response to such concerns is that short-term fluctuations in exchange rates—daily, weekly and even monthly—have very little effect on U.S. export sales. News of day-to-day currency shifts can be considered as background noise.

The long answer is more complex.

Short-term dollar volatility is indeed a minor factor in driving short-term dairy trade. Virtually all world dairy trade is denominated in U.S. dollars, so if the value of the U.S. dollar rises, it affects all global dairy suppliers. For example, assume for the sake of argument that the market price for cheese from both the United States and Australia was running about US$4,200/ton, and a Chinese buyer opted to purchase the U.S. product.

Then the U.S. dollar—worth about 92 Australian cents at the time of purchase—leaps more than 8 percent to 98 Australian cents in a week’s time.

Because trade is denominated in U.S. dollars, that same Chinese buyer would still be paying either seller US$4,200. The Australian product does not suddenly become cheaper, because the Australian seller has no incentive to discount his product if the international market price is still US$4,200. Assuming the U.S. supplier is meeting his buyer’s needs otherwise, a buyer has no reason to switch.

One could argue that an Australian buyer could adjust his U.S. dollar selling price downward because he is getting more Australian dollars from a higher value U.S. dollar when the money is exchanged. But the international dairy market simply does not work that way. Contracts establish prices for periods of months, and currency markets shift too quickly for any company to reliably expect to capitalize.

Indeed, the week after the U.S. dollar rose 8.5 percent against the Australian dollar, it fell almost 3 percent, and by Sept. 1 it dropped another 2 percent.

While calling currency a “wild card,” the Innovation Center for U.S. Dairy affirmed in its “Dairy Globalization Refresh” (a study by Bain & Co., supported by U.S. dairy farmers through the check-off program) that currency is unlikely to have a near-term impact on U.S. dairy exports. Buyers are more likely to manage currency fluctuations through hedging operations than through short-term purchasing decisions, the Refresh concluded.

That is not to say that the exchange rate has no effect at all on global dairy trade.

First, U.S. dairy suppliers are directly affected when they sell to countries that also sell dairy to the United States, such as the European Union (EU). Because those currencies directly compete, a rising U.S. dollar would make EU shipments to the United States cheaper and U.S. exports to the EU more expensive. But the vast majority of U.S. dairy export volume goes to countries where there is no such direct competition.

Second, because all dairy trade is denominated in U.S. dollars, a weak U.S. dollar is good for global dairy demand. A weak U.S. dollar means buyers get more for their money no matter the national origin of the seller, which is particularly appealing in an era of rising food prices.

All international dairy suppliers have benefitted from the nine-year decline of the U.S. dollar. Through July 2011, according to the Federal Reserve’s Broad Trade Weighted Index (which measures the U.S. dollar vs. the currencies of a set of trading partners), the dollar is down 27 percent from its peak in March 2002.

Conversely, should the U.S. dollar rise substantially for a sustained period (say a 25-30 percent rise over a full year), it could negatively affect global dairy consumption. Retail prices could rise, buyers could be more motivated to seek out dairy alternatives and consumers could curtail their shopping habits.

In addition, a substantial, longer-term gain in the value of the U.S. dollar would give export competitors more certainty about their price-setting structure. A higher U.S. dollar plateau would allow them to undercut U.S. prices by contract, knowing they could make up the difference in the exchange rate.

But again we are talking about a long-term change, not short-term volatility. And even if the U.S. dollar strengthened in the years ahead, the longer-term latent demand gap forecast in the Globalization Refresh would still exist. Rising demand amongst the middle class of emerging markets will support favorable pricing trends, which are the primary dairy export driver.

Quality buyers are motivated by factors other than short-term price movements. Customer service, reliability, product quality and consistency all play a role in purchasing decisions—a bigger role than short-term price and exchange rate volatility.

Current favorable exchange rates give U.S. suppliers a chance to prove their commitment to overseas buyers and build a better capability to sustain themselves when the U.S. dollar strengthens. Concerns over the dollar’s value should not slow down the vital need to forge ever-stronger long-term business relationships.

(This article first appeared in Cheese Market News in September 2011.)

The U.S. Dairy Export Council represents dairy farmers, proprietary processors, cooperatives, ingredient suppliers and export traders. Its mission is to enhance U.S. competitiveness and increase global sales of U.S. dairy ingredients and products.