Sunday, November 27, 2016

Election Impact

On the second Tuesday of November, American citizens voted for state and national leaders.  The results were surprising and are well known.  What is the short-term impact on the dairy industry?  There is good and bad.

The impact of the Trans Pacific Partnership agreement (TPP) on the U.S. dairy industry was covered in the October 16 post to this blog.  Recent statements from the President-elect indicate that the TPP will be rejected in its present form.  While there are opposing opinions on the impact of this agreement on the dairy industry, by the analytics reviewed in the October 16 post, the TPP would have increased price volatility and potentially had a negative influence on milk prices.

Exchange rates have been reviewed in many past posts to this blog.  A strong USD always means that U.S. exports will be more expensive on the international markets.  That means that prices for U.S. products must be lower in order to compete.  Below are the three most important charts for USD exchange rates that have a strong influence on dairy prices.  They are shown for the period from November 7, the day before the elections, to November 23.  The first two charts show the USD vs. the Euro and the NZD; as Europe and New Zealand are the largest dairy exporters on the international markets competing with the U.S.  In both cases, the USD has become increasingly strong.  The change is somewhere around 4%.

Mexico is the largest U.S. trading partner for dairy exports.  Mexico is also a major partner for imports of butter.  The change in exchange rates between the USD and the Mexican Peso is around 10%.  The drop in the Peso started as the election ballets were counted.  With the surprising elections returns, there is also the possibility of revisions to NAFTA.  The impact on dairy exports and imports with Mexico is unclear at this time, but a stronger USD and weaker Mexican Peso is not good news for dairy exports.

During this same time span, cheese prices on the CME have fallen about 8%.   While there can be many factors influencing cheese prices, the impact of exchange rates and trade agreements are certainly a factor.  One of two things will happen.

1.  The stronger USD would make export volumes decline, increasing domestic inventories and thereby reducing domestic cheese prices.
2. With the stronger USD, export prices would drop to maintain the volume of exports,  having a similar impact on domestic prices.

Cheese prices are by far the most important factor in calculation of the Class III milk price (see earlier post).

Butter prices have increased slightly during this time span and NDM prices have remained stable.  Butter exports are already almost zero, so the export price or the loss of export volume is not a factor for butter prices.   Butter imports come primarily from Ireland, Mexico, and New Zealand and average around 6% of U.S. butter production.  Except for NAFTA, butter imports are limited by the two tier quota and tariff specifications.  Overall, the impact on butter prices is cloudy.

NDM/SMP is largely exported.  The largest export market by far is Mexico.  The stability of the NDM price is surprising.  NDM prices will continue to be followed in upcoming posts to this blog.

Class and Component prices for November will be published on December 2.  Current data would indicate that the Class III milk price will be well above the prior month.  The next post will review the November Class and Component price announcement.

No comments:

Post a Comment