Risk-management strategies needed, economist says
By MATEUSZ PERKOWSKI
Exports have proven to be a double-edged sword for U.S. dairy farmers in the past decade, according to agricultural economists who study the industry.
Foreign markets have boosted overall demand for U.S. dairy products, but the reliance on exports has contributed to the price turbulence seen in recent years, experts say.
"If you're going to expand your export market, it's something you're going to have to deal with," said Leslie Butler, an economist specializing in dairy at the University of California-Davis.
The U.S. dairy industry's reliance on exports is a relatively new phenomenon, said Butler.
A confluence of forces caused the rise in U.S. dairy exports during the past decade -- including a weak dollar, weather problems for overseas competitors and the shifting economic effects of U.S. dairy subsidies, according to economists.
When the dollar dropped in value compared to other currencies in the early 2000s, the Bush administration's policy was not to interfere, Butler said.
The federal government can strengthen the U.S. currency by buying dollars on the global market, but the Bush administration chose not to prop up the dollar's value, he said.
The timing was perfect for the dairy industry.
By the late 1990s, domestic demand growth had reached a plateau and the industry was looking for outside market channels, said Roger Cryan, vice president of milk marketing and economics for the National Milk Producers Federation.
Federal price support levels were no longer as effective due to inflation, so it became more attractive to sell to foreign buyers than to the U.S. government, he said.
"The world market became more competitive with the price support program," Cryan said.
As U.S. dairy products became cheaper overseas due to the weakening dollar, two major global dairy competitors -- Australia and New Zealand -- saw their output decrease due to prolonged droughts, said Brian Gould, an agricultural economist specializing in dairy at the University of Wisconsin.
"Really, the U.S. stepped up and picked up the slack," Gould said.
Between 2004 and 2008, the share of total U.S. milk-equivalent dairy production headed for export roughly quadrupled, Butler said.
Typically, dairy farmers' ability to expand their herd is limited by milk prices, which in turn are affected by the milk supply, he said.
As more dairy products were exported from the U.S., that left demand unsatisfied domestically, allowing production to grow without being hindered by lower prices, Butler said.
"It's not as if anybody made a mistake or should be blamed for anything," he said. "It's one of those things that just happened."
In late 2008 and early 2009, the factors that contributed to strong U.S. exports basically reversed.
The dollar surged in value, global demand contracted due to the financial crisis and Australia and New Zealand began to recover from drought.
"It's hard to tell where one ends and the other begins," Cryan said.
As exports dried up, the U.S. found itself with too much milk, Butler said. Prices plunged.
Though dairy exports appear headed for recovery, recent events indicate the potential for disruption is still there, Gould said.
If China stopped accepting U.S. dairy products over health certificate disagreements -- as the country recently threatened -- that could derail export growth, he said.
Financial problems in Greece and elsewhere in Europe may devalue the euro against the dollar, posing a threat to U.S. exports to that continent, Gould said.
"When you rely on exports, you're sometimes subject to market conditions you have no control over," he said.
Milk prices will probably continue to be influenced by the world market more than domestic price support programs, and exports will continue to factor into the economic outlook for dairy farmers, Gould said.
For that reason, farmers and dairy companies must learn to adopt risk management strategies -- or contract for such services -- to limit their exposure to fluctuations, he said.
"Adopt a mindset that if volatility is here to stay, we have to manage that volatility to our advantage," Gould said.