unkown markets
January 9, 2017

Are We Entering a Geopolitical Recession?

 |  By: Dairy Talk

Geopolitically, financially, emotionally, 2017 could be the most volatile year since the end of World War II. That’s saying a lot, since a lot of water has gone under the bridge and over the dam since Germany and Japan surrendered to the Allies in 1945.

But the folks who study this, such as the Eurasia Group (EG), say 2017 could be the beginning of a geopolitical recession, brought on in part by the election of Donald Trump.

“This is by far the most challenging geopolitical forecast that we’ve ever given,” says Ian Bremmer, EG president. “We believe that the world has entered in 2017 a period of geopolitical recession that is marked by the end of ‘Pax-Americana’ and the U.S.-led global order;

“a willingness of the Chinese to challenge it economically but not step into America’s shoes as the global leader;

“the profound weakness of Europe internally;

“and the weakest that the transatlantic relationship has been since the end of World War II, as well as the continued implosion of the Middle East and a Russia which is much more willing to challenge historic U.S. norms, values and interests in its extended backyard.

“The world’s sole superpower was once the international trump card, imposing order to force compromise and head off conflict. Now, [the U.S.] is a wild card.”

And that’s not the half of it. Steve Watrin, who heads up risk management for Land O’Lakes, spoke last week at the LOL/Purina Leading Dairy Producer Conference at the Wisconsin Dells. He  rattled off a litany other risk factors that could directly impact dairy markets in the coming months:

• The strength of the U.S. dollar versus other currencies, inflationary pressure and increasing interest rates all could weaken the demand for dairy products both in global markets and here domestically. Rising oil and gas prices also mean consumers will have fewer dollars to spend (though it could help Middle Eastern countries import more dairy products).

• The level of Chinese imports in 2017 is unknown. “[The Chinese] will likely return to the global market for their needs, but expect [internal] milk supply to grow in 2017,” says Watrin.

• The United States Department of Agriculture will likely release its proposed rule for California’s Federal Order in the next few months. The comment and voting process could take six months. “If USDA proposes a new pricing structure that increases the average price for [California] producers, you could see an increase in milk production,” says Watrin.

• The Netherlands is facing forced phosphorus reductions from dairy manure in 2017, which could lead to the loss of 160,000 dairy cows (or roughly 10% of its national herd). This could lead to a reduced milk supply in the Netherlands of 2.75 billion lb. In turn, that could dampen total European Union (EU) milk production growth.

• The EU is currently holding a billion lb. of non-fat dry milk in inventory, removed in 2016 to bolster domestic milk prices. The EU is now holding twice-monthly auctions to reduce that inventory. It could take months to clear that inventory, capping world prices in the meantime.

All in all, 2017 is setting up to be an extremely volatile year. At the same, U.S. future markets are offering some fairly attractive prices throughout the year. Perhaps it’s time to lock in some of that opportunity. Just sayin.

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