January 30, 2017

Rising U.S. Dollar Could Limit 2017 Dairy Export Opportunities

 |  By: Fran Howard

The U.S. dairy industry will remain reliant on world export markets to lap up increasing domestic milk production in 2017. However, the recent rise in the value of the U.S. dollar could make exporting dairy products more difficult.

“Dairy product prices might need to come under pressure to keep product moving overseas in sufficient volumes,” says Sarina Sharp, agricultural economist with the Daily Dairy Report. “Nonfat dry milk will be especially vulnerable to a price setback because eventually the mountain of skim milk powder held in European Intervention stocks will trickle back into the market.”

Mexican end users could also scale back purchases of U.S. nonfat dry milk if U.S. prices begin to look more expensive based on the declining value of the peso. Last year, Mexico accounted for nearly half of all U.S. dairy product exports.

Since May, when the U.S. dollar hit a near-term low against a basket of currencies, the U.S. dollar has surged 28% against the Mexican peso. “That means Mexican buyers of U.S. dairy products have seen their purchasing power decline 28% in the past eight months,” Sharp notes.

The U.S. dollar has also climbed 7.8% against the euro and 7% against the Canadian dollar since its near-term low in May, and the dollar will likely continue to climb against these and other currencies.

Federal Reserve Chair Janet Yellen recently reaffirmed the central bank’s intention to raise interest rates a few times this year. “Central banks in Europe, Canada, and Mexico are more likely to lower interest rates and use other measures to keep monetary policy accommodative,” says Sharp. “This suggests that the dollar could continue to strengthen, making U.S. dairy exports less competitive in world markets.”

At the same time, U.S. dairy products have become more expensive to overseas buyers, output is contracting in many of the world’s large milk-production regions. For the January through November 2016 period, year-over-year milk production in Argentina fell an estimated 2.6 billion pounds. Australia’s year-over-year output over the same period plunged 1.45 billion pounds, while New Zealand output sank 771 million pounds.

Combined, output in these three major dairy nations was down 4.86 billion pounds compared to January through November of 2015. That’s equivalent to the December 2016 output in California, Idaho, and Kansas.

Year-over-year production growth in Europe over the same period of 616 million pounds is likely to be erased once December milk production data is reported, says Sharp.

“Contraction among its competitors has put the United States in an excellent position to gain a larger share of the growing global dairy trade, but changes in currency markets are putting U.S. dairy products at a disadvantage,” she concludes.