By Mark Stephenson
In 1964 at the New York World's Fair, Walt Disney unveiled a display and new theme song that almost everybody knows today — "It's a Small World After All." One of the lines in that song goes: "Though the mountains divide and the oceans are wide, it's a small small world." As of about 2007, the song's sentiment became true for the U.S. dairy industry.
Prior to 2007, the United States imported about as much dairy product as we exported—roughly 2% to 4% of our milk production. We tended to import higher valued products that we didn't make here, like some styles of European cheeses, and we tended to export lower value commodities, like nonfat dry milk and whey.
In 2007, several factors aligned to vault our dairy industry into the role of a major world exporter. One factor was a rapidly growing world demand for dairy products. We often think of China as the poster child for this opportunity, but there are many other countries as well. Another factor was the changing agricultural policy in the European Union which stopped subsidizing the export of dairy products and let world market prices rise. Still another was a declining value of the U.S. dollar against major currencies which let other countries see our dairy products as being a good value. And finally, Oceania (Australia and New Zealand) were experiencing a severe drought and producing much less dairy product to meet the world demand.
World market dependency
Today, the U.S. is the third largest exporter of dairy products behind New Zealand and the European Union. Our major customers are countries that we have traded with for decades: Mexico and Canada. But many other countries in Asia and even Africa are growing opportunities for sales of our products.
Milk proteins in the form of nonfat dry milk or skim milk powder and dry whey powder have traditionally been our major export items. Today, we are finding new opportunities with cheese and butter sales. The sum of the milk solids that are exported represent 13% to 14% of our milk production. All of this is good for our dairy industry, but we need to recognize that we are no longer isolated from what is happening in the rest of the world.
One example of our new dependency on world markets happened this past fall. Because of drought and high feed costs, our milk supply had been contracting from the spring of 2012 through the fall as producer margins were squeezed. Cheese production had been fairly strong but not unusually so. Moreover, cheese stocks were on the low side of normal. These things would typically suggest strengthening milk prices but cheese and milk prices were falling. To understand why, you had to look beyond our borders.
The chart shows you that in the fall of 2012 our cheese prices were trying to strengthen. However, they were moving well above Oceania prices and the market started to reel them in. Normally U.S. dairy product prices sell at a discount to New Zealand prices. Those prices are aligned again today. You might ask why our prices can't move with some independence, but if you think what would happen if 13% of our milk production came back to our domestic markets, you probably understand why our prices were falling.
Just now, New Zealand is suffering from dry pasture conditions and there is real concern in world markets that supplies of dairy products might be tight. The futures markets have shown some lift in recent weeks as they anticipate greater opportunity for export sales of U.S. dairy products. I'm expecting that the second half of 2013 could give us very good milk prices. It's a small world, after all.
Stephenson is the director of dairy policy analysis at University of Wisconsin-Madison.