There is good news and bad news for U.S. dairy exports
The strong dollar is bad for U.S. dairy exports. Lower oil prices hurt the economies of some of our best customers. Economic growth in China is slowing. Dairy commodity prices are at a six-year low. And yet.
And yet not everyone buys into the sky-is-falling reading of these global issues. We’re not seeing U.S. dairy exporters hit the panic button. Far from it. At the risk of sounding like a Pollyanna, hear me out.
Following the International Monetary Fund’s spring meeting, Olivier Blanchard, IMF economic counselor and director of research, noted that a strong U.S. dollar and low oil prices are actually good news for the world economy.
“To the extent that both the euro area and Japan were at risk of another relapse, the euro and yen depreciations will help,” he said. “This adjustment of exchange rates must be seen, on net, as good news for the world economy.”
The meaning of cheaper oil
In addition, the decline in the price of oil has led to a large reallocation of income from oil exporters to oil importers.
“The early evidence suggests that in oil importers – from the United States to the euro area to China to India – the increase in real income is increasing spending. Oil exporters have cut spending but to a smaller extent: many have substantial financial reserves and are in a position to reduce spending slowly,” Blanchard said.
There’s another correlation that could benefit dairy consumption. Leo Abruzzese, global forecasting director for the Economist Intelligence Unit pointed out, “The 60% decline in the price of crude oil since July also is good news for food security. During the last 25 years, food and energy prices have tracked each other closely, so cheaper crude oil usually means more affordable food.”
If you’re looking at the long game, you may not be too alarmed by China’s slowing growth rate either. Because more than anything this reflects structural reforms designed to put the Chinese economy on a more sustainable track, driven by domestic consumption rather than government investment and inflated exports. If it works, China’s middle class will expand significantly. Reform of this magnitude won’t happen overnight, but it is happening, in what, so far, appears as a measured way.
As noted in the April 18 issue of The Economist, “The question for China is not whether growth will rebound to anything like the double-digit pace of the past. Instead, it is whether its slowdown will be a gradual descent – a little bumpy at times but free from crisis – or a sudden, dangerous lurch lower.”
No whitewash on the BRIC wall
Now, I’m not naïve. There are many troublesome issues in the world that can’t be whitewashed. Look at the BRIC countries (Brazil, Russia, India and China). Brazil and Russia have serious political and structural concerns. India has yet to walk the walk of its promises of easing its hyper-regulated market. The default of Greece threatens to undercut Europe’s slow recovery. Aging populations, weak investment and sluggish productivity gains all restrain global growth.
And then there’s the pesky matter of trying to sell dairy products into the weakest market in years, made worse with added sector-specific issues like slow buying from China, Russia’s import ban and a European dairy sector no longer restrained by production limits.
Don’t get me wrong. I’m not cheering today’s markets, with prices that have fallen below the cost of milk production throughout the world. We have our work cut out for us to defend our No. 3 global share in a climate of oversupply. But if we learned anything from the historic price levels we saw in 2013-14, it’s that the global market can’t support $5,000/ton milk powder. It kills demand. It also yields a milk price that urges everyone to make milk. A more reasonable, sustainable level in the range of $3,500-$4,000/ton supports demand growth, discourages substitution and allows good U.S. farmers to be profitable without encouraging supply growth everywhere.
Today’s prices, unfortunately, are signaling to the farm to reverse production growth. This high-price/low-price pendulum inherent in globalization makes it that much more critical to use the increasingly liquid CME hedging tools.
2015 will certainly go down as one of our tougher years, but the mindset in the U.S. dairy industry is “this too shall pass.” Today, most remain in it for the long haul.
The IMF projects global GDP to rise 3.5 % this year and 3.8 % next year, up from 3.4 % in 2014. These are considered moderate growth rates, less than the boom years prior to the Global Financial Crisis, but close to the 30-year average.
And while many of the indicators aren’t favorable for U.S. dairy exports in the short term, we can take the glass-half-full view, encouraged by the positive steps our industry is taking to become more competitive in a stronger, more diversified and more stable global economy.