Transcript U.S. & Global Economic Outlook: What`s Ahead For U.S. 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
• 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.
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.
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.
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.
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.
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:
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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
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.
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.
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 mediumterm. Partly this is because of QE2 and
inflation.
• The weaker dollar will boost U.S. exports,
including exports of dairy products.
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.
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.
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.
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.
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.
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.
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.
Babcock Institute Discussion
Paper 2011-1, Figure 1
U.S. Dairy Trade Balance
Figure 1. U.S. Dairy Trade
4.0
Export Value
3.5
Import Value
Trade Balance (Exports - Imports)
3.0
2.5
1.5
1.0
0.5
-1.0
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
19
99
19
98
19
97
19
96
19
95
-0.5
19
94
0.0
19
93
$Billion
2.0
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.
Babcock Institute Discussion
Paper 2011-1, Figure 3
U.S. Balance of Trade in Cheese
Figure 3. U.S. Balance of Trade in Cheese
100
0
1989
1992
1995
-100
$MIllion/1,000 MT
-200
-300
-400
-500
-600
-700
-800
Trade Balance in Dollars
Trade Balance in metric tons
-900
1998
2001
2004
2007
2010
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.
Babcock Institute Discussion
Paper 2011-1, Figure 6
U.S. Dairy Exports to China
Projected Growth in Real GDP in
U.S. Dairy Export Markets, 2011
Country
Real GDP Growth, 2011
Mexico
3.9%
Canada
2.7
China
9.6
Japan
0.3
Philippines
4.5
Indonesia
6.2
U.S.
2.3
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.
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.
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.
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.