Conventional wisdom suggests that if you increase dairy exports, that increased demand will increase prices as well. But that might not necessarily be true, particularly in the long run, says Marin Bozic, an economist in dairy foods marketing at the University of Minnesota.
In the short term, heightened demand will increase prices if milk supply is not sufficient to meet that demand, he says. But over the longer term, price increases will encourage more milk production. Once that demand is met, the price settles back to more normal levels—to where the cost of producing that milk again becomes the long-term milk price. “Over the long run, milk prices could be flat,” he says. “Those who benefit are those who have grown their milk production.”
“In the shorter term, it’s not so much the level of the growth of dairy exports that will boost milk prices but the uncertainty about what the growth rate will be in,” he says.
Increased volatility.There is also evidence that increased reliance on exports increases price volatility within the domestic market. There are five reasons why:
• Macroeconomic imbalances. Perhaps the best example is the 2008/2009 global recession, which virtually froze credit. While importers wanted to buy dairy products, their access to credit dried up and they simply could not finance those purchases.
• Production fluctuations by exporting competitors. Some exporting countries, particularly those that base production on grazing, can have tremendous swings in output. New Zealand and Australia, for example, are notorious for wide year-to-year swings, depending rainfall.
• Demand shocks abroad. The recent Foot and Mouth Disease in South Korea forced that country to kill more than a million animals, including some dairy cows. That created a dairy shortage, forcing South Korea to boost its imports to keep dairy coolers fully stocked.
• Removal of price floors. In 2009, world prices for skim milk dipped nearly 50% below U.S. dairy price supports. If U.S. price supports are eliminated, that safety net will no longer exist.
• Exchange rate fluctuations. Despite the fact dairy products are traded in dollars, changing currency values still have influence over the relative buying power within countries. The Euro is a prime example. In just the last 18 months, the Euro has fluctuated from €1.20/$1 to €1.5/$1, which affects its relative competitiveness for European Union dairy products.
At the same, Bozic says, there are three reasons why U.S. dairy producers should embrace dairy exports: Volume, volume, volume.
Increased volume allows dairies who 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.
Editor’s note: Marin Bozic is a newly minted Ph. D. A native of Croatia, Bozic received his undergraduate degree in Croatia, his master’s degree in Italy, and his Ph.D. from the University of Wisconsin. In a unique arrangement, Bozic’s appointment at the University of Minnesota is being funded by dairy checkoff dollars through the Midwest Dairy Association. Bozic’s primary mission is to analyze marketing opportunities for Midwest dairy products.