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U.S. & Global Economic Outlook: What’s Ahead For U.S. Dairy? Response: Focus on Dairy

U.S. & Global Economic Outlook: What’s Ahead For U.S. Dairy? Response: Focus on Dairy. *Comments by Bill Dobson, Babcock Institute, University of Wisconsin-Madison, MN-WI Dairy Policy Conference, Rochester, MN, April 5, 2011. Overview.

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U.S. & Global Economic Outlook: What’s Ahead For U.S. Dairy? Response: Focus on Dairy

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  1. U.S. & Global Economic Outlook: What’s Ahead For U.S. Dairy? Response: Focus on Dairy *Comments by Bill Dobson, Babcock Institute, University of Wisconsin-Madison, MN-WI Dairy Policy Conference, Rochester, MN, April 5, 2011

  2. Overview • The prospects for economic recovery in 2011 are “Unusually uncertain.” --Ben Bernanke, Econ. South, 4th Quarter, 2010 • And prospects remain unusually uncertain because of problems in Japan, budget deficits, and a host of other developments.

  3. Head Winds & Tail Winds Affecting the U.S. Economy Head Winds: • Japan: More on Japan in next slides. • Weakness in the U.S. housing market (23% of mortgages underwater in 2010). • Generally rising oil & gasoline prices which could shave up to 0.5 percentage points off U.S. GDP. • Inflation fears: Low “core inflation” does not sooth fears of ordinary consumers.

  4. Impact of Earthquake in Japan on U.S. Agriculture • Japan is a big market for U.S. corn, soybeans, pork, and beef. These export markets will be curtailed until ports and other facilities for handling these products are fully restored. • Japan was the biggest foreign market for U.S. corn in 2010 (nearly 600 million bushels). • Composition of U.S. agricultural exports may change to emphasize finished products in the short-run. • Japan is the Number 2 cheese buyer in the international market. Japan accounted for 5.5% of total U.S. dairy exports in 2010.

  5. Moody Analytics Take on Japan’s Problems (rosy scenario) • Prior to quake: Japan’s real GDP was expected to grow by 0.25 percentage point in 1st & 2nd Quarters of 2011 and by 0.5 percentage point in 2nd half of 2011. • After quake: Japan’s real GDP growth will be a negative 0.1 to 0.4 percentage point in 1st half of 2011 but will increase by 0.75 to 1.0 percentage point in 2nd half of 2011.

  6. Head Winds & Tail Winds Head Winds: • Stubbornly high U.S. unemployment: Official statistics “understate” actual unemployment because many workers have given up looking for jobs. • State budget problems: State spending cuts and tax increases could shave more than 0.5 of a percentage point off U.S. GDP growth in 2011.

  7. Head Winds & Tail Winds Head Winds: • Disagreements over how to cut federal spending (U.S. public debt will be over 100% of GDP by 2015) • Results of a Recent WSJ/NBC News Poll: • 49% said “no” to cutting Social Security. • 54% said “no” to cutting Medicare. • 33% said “yes” to raising taxes • 26% said “yes” to postponing eliminating the deficit

  8. Head Winds & Tail Winds Tail Winds: • The Fed’s QE2 (purchases of Treasury Securities--e.g.,”printing money”) has helped the U.S. economy more than many analysts expected. • Unemployment declined to 8.9% in Feb 2011 from November 2010 high of 9.8%. • Corporate profits increased sharply in 2010 and remain reasonably strong.

  9. Head Winds and Tail Winds Tail Winds: • Certain sectors of the U.S. economy have partially decoupled from the overall economy and are faring better than the economy as a whole. • U.S. farming and other firms with strong exports to the growth markets of Asia are doing better than average.

  10. Head Winds and Tail Winds Tail Winds: • Whither the U.S. dollar? The U.S. dollar may strengthen in the short-run because it retains value as a safe-haven currency. • But it is likely to weaken over the medium-term. Partly this is because of QE2 and inflation. • The weaker dollar will boost U.S. exports, including exports of dairy products.

  11. Head Winds & Tail Winds Tail Winds: • A U.S.-Korea Free Trade Agreement (FTA) is likely to be ratified this year. • This would be the largest FTA entered into by the U.S. since NAFTA in 1994. • Two-thirds of U.S. Ag exports to Korea would enter duty-free under the FTA. • U.S. dairy products would be subject to TRQs, phased-out over 10 to 15 years.

  12. Which Forces Dominate, Head Winds or Tail Winds? • The strong head winds make the economic outlook unusually uncertain. • But the U.S. economy has gained momentum and is unlikely to be pushed back into near zero growth or recession. • However, lofty predictions of near 4% real GDP growth for the U.S. in 2011 should be shaved by up to 1.0 point.

  13. Which Forces Dominate, Head Winds or Tail Winds? • Ethan Harris, Bank of America, Merrill Lynch: “The economy’s underlying growth rate looks closer to 2.5% than 3.5%.” • Kelly Evans, WSJ: In a bad case scenario, we could have stagflation in the U.S. This is persistent inflation combined with stagnant demand, and relatively high unemployment.

  14. Implications of Macro Outlook for U.S. Domestic Dairy Business • Domestic demand for dairy products has received a modest boost from recovery of the U.S. economy. • Major dairy brands face strong competition from cheaper store brands. Lower and middle income consumers have not yet returned to pre-recession spending. • Dairy processors face a profit squeeze from major supermarkets.

  15. Implications of Macro Outlook for U.S. Domestic Dairy Business • The U.S. fluid milk business can be characterized as exhibiting “difficult economics.” • Dean Foods finished 2010 as one of the worst performing stocks in the S&P 500. • In addition to operating in an industry with difficult economics, Dean Foods experienced a “perfect storm” of difficulties in implementing its strategies.

  16. What Does the Macro Outlook Mean for U.S. Dairy Exports? Overview: • Robust U.S. dairy exports in 2010 established a foundation for strong U.S. dairy exports in 2011. • U.S. dairy industry’s positive trade balance. • Demand and supply prospects in 2011 in international dairy markets. • Impact of the stalled Doha Round of WTO negotiations.

  17. U.S. Dairy Exports Established a Sound Foundation in 2010 • U.S. dairy exports rose to $3.71 billion in 2010, the 2nd highest on record. • The U.S. dairy trade surplus (excess of exports over imports) exceeded $1.5 billion in 2010, $500 million higher than the previous record set in 2008. • NDM was the leading U.S. dairy export by value in 2010, followed by whey and lactose.

  18. Babcock Institute Discussion Paper 2011-1, Figure 1 U.S. Dairy Trade Balance

  19. U.S. Dairy Exports Established Sound Foundation in 2010 • Cheese was a rising star in U.S. dairy exports in 2010. • For the first time, the U.S. exported more tons of cheese than it imported in 2010. Import substitution is firmly in operation. • However, in value terms the U.S. trade balance for cheese remained negative at $270 million, reflecting continued U.S. imports of high-valued, specialty cheeses from Europe.

  20. Babcock Institute DiscussionPaper 2011-1, Figure 3 U.S. Balance of Trade in Cheese

  21. Destination of U.S. Dairy Exports in 2010 • The U.S. shipped dairy products to 163 countries in 2010. • Mexico and Canada were the top two destinations, receiving 22.2% and 11.7% of U.S. dairy exports, respectively. • China became the 3rd largest importer of U.S. dairy products in 2010, taking 6.4% of U.S. dairy exports. • Japan received 5.5% of U.S. dairy exports.

  22. Babcock Institute DiscussionPaper 2011-1, Figure 6 U.S. Dairy Exports to China

  23. Projected Growth in Real GDP in U.S. Dairy Export Markets, 2011

  24. Failure of Doha Round Negotiations: So What? • The Doha Round WTO negotiations (which began in 2001) appear to be hopelessly stalled. • But, international trade has continued to increase strongly without a Doha Round Agreement. Global exports doubled from $6.5 trillion in 2001 to $13 trillion in 2010. • So failure of the Doha Round may be no big deal.

  25. Why Might a Doha Round Agreement be Useful? • The world contains many global supply chains, which calls for global trade liberalization and a strong multilateral system of rules. • Bilateral and regional FTAs will proliferate without a Doha Round Agreement. • More FTAs will create a complex “spaghetti bowl” of tariffs and regulations.

  26. The Bottom Line on U.S. Dairy Export Prospects • Import substitution will further erode Europe’s share of the high-valued, specialty cheese market in the U.S. • While Japan’s problems may curtail GDP growth in Asia modestly, export demand for U.S. dairy products in Asia should be reasonably strong in 2011. • China is likely to be a rapidly expanding market for U.S. dairy products.

  27. The Bottom Line on U.S. Dairy Export Prospects • E.V. Jesse: The USDA forecasts reductions in the quantity of U.S. dairy exports for 2011. But higher international prices for dairy exports should keep the value of 2011 U.S. dairy exports near $3.7 billion. • The Dairy: Global Industry Almanac forecasts that global dairy product sales will increase by 4% to 5% per year from 2010 to 2014.

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