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‘Volatile’ Is The Name Of The Dairy Trade Game
Over the past 25 years or so, the term “volatile” has been used, or over-used, primarily to describe milk and dairy product prices. Today it can also be used to describe the global dairy trade business.
This point came into focus during a presentation by Al Levitt, vice president of communications and market analysis for the US Dairy Export Council, at the Wisconsin Dairy Products Association’s annual Dairy Symposium in Egg Harbor, WI, this week (for more details, please see the story starting on our front page).
Levitt was blunt in stating that his presentation was not necessarily “upbeat,” which is in sharp contrast to presentations he’s made in previous years, when US dairy exports were posting regular if not spectacular increases. Today the global market is “in the tank,” and there aren’t a lot of positives for US exporters, he pointed out.
At least some of the factors Levitt mentioned as having changed over the last couple of years will be changing again in the not-too-distant (but unpredictable) future. For example, US dairy exports steadily increased when the US dollar was weak, but they’ve been declining now that the dollar has gained strength.
But the dollar won’t remain strong forever, so that’s one factor that worked in the US dairy industry’s favor in the past, isn’t working in the industry’s favor today, but will again work in the industry’s favor sometime in the future.
Also, Levitt noted that the 2003-14 period was characterized by a strong commodity cycle, while there’s been a weak commodity cycle since 2015. Evidence of this point can be seen in a number of ways, including oil and corn prices, both of which reached record highs at some point (or points) over the past decade but, like the global dairy market, are in the tank today.
There are few guarantees in the world today, but here are two of them: oil won’t stay under $50 per barrel forever, and corn won’t stay under $5.00 per bushel forever.
Yet another factor that’s changed just since 2015 is the end of the EU’s milk production quota system. That system had been in place since the mid-1980s, when the US was almost exclusively focused on its domestic market.
Unlike some other changes over the past couple of years, the EU quota system is gone forever. There is some talk of some form of voluntary milk production cutbacks in the EU, due to ongoing and unsustainably low milk prices, but it seems highly unlikely that the EU will bring back any sort of mandatory quota system, let alone one that remains in place for more than three decades.
So what does all of this trade volatility mean for the US dairy industry? Let’s take a look at one specific segment of US dairy trade: cheese.
Back in 2000, the first year in which the Uruguay Round Agreement on Agriculture was fully implemented, US cheese exports totaled 101.1 million pounds, while US cheese imports totaled 415.2 million pounds, for a cheese trade deficit of 310.1 million pounds.
US cheese imports reached an all-time high two years later, at 474.6 million pounds. US cheese exports that year totaled 118.6 million pounds, for a noteworthy cheese trade deficit of 356 million pounds.
The US cheese trade deficit actually grew slightly in 2003, reaching 359.2 million pounds, as cheese imports fell less than a million pounds from 2002 but cheese exports dropped about 4 million pounds.
That year, 2003, was the beginning of a long and steady decline for US cheese imports, which finally bottomed out at 304.8 million pounds in 2010, due at least in part to a weak US dollar.
Meanwhile, US cheese exports bounced around a bit, falling to 127.1 million pounds in 2005, rising to 288.6 million pounds in 2008, falling to 238.5 million pounds in 2009 and then growing phenomenally over the next five years to a record 810.4 million pounds in 2014.
As cheese imports fell and cheese exports rose, the US cheese trade deficit shrank, to 86.2 million pounds in 2008, then rose to 117.7 million pounds in 2009 (the year in which the global financial and economic crisis had its main impacts).
And then it disappeared. In 2010, the US exported 381.3 million pounds of cheese and imported 304.8 million pounds of cheese, for a cheese trade surplus of 76.5 million pounds. By 2014, when US cheese exports reached a record high, the US was running a cheese trade surplus of some 448 million pounds.
But in a world in which nothing lasts forever, US cheese exports started to decline in 2015 and are continuing to decline here in 2016, while cheese imports last year were at their highest level since 2006, and are running ahead of that pace this year.
So is all of this volatility in dairy trade a positive for the US dairy industry? We’re reminded of an observation made years ago by Clayton Yeutter, when he served as US agriculture secretary under President George H.W. Bush. Yeutter stated that volatile prices generally lead to higher overall price levels.
It looks like dairy trade is similar: volatile trade still leads to higher overall exports for the US dairy industry.
Looking at the aforementioned cheese trade balance, cheese exports did in fact drop by more than 110 million pounds from 2014 to 2015 and are on pace to fall maybe another 150 million pounds this year. But the US will still be exporting over half a billion pounds of cheese, something that was unheard of just a decade ago.
International dairy trade is indeed volatile, but it’s still a key source of growth for the US dairy industry.
Cheese Reporter welcomes letters to the editor. Comments should be sent to: Dick Groves by Fax at (608) 246-8431; or e-mail your comments to dgroves @cheesereporter.com.
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