Resurgent dollar played a role in milk price collapse

No one thing ever triggers a farm milk price collapse all by itself, although the simple explanation usually boils down to too much supply and not enough demand. That's the case this time, as well, but what dairy producers may not appreciate is that currency exchange rates play a role in today's imbalance.

Not only has recession in the U.S. spread like an infection around the world to sicken other economies, it has also pushed the value of the dollar higher in relation to other currencies. Thus, when it comes to buying U.S. dairy products today, foreign buyers not only are more fiscally cautious but they also have less buying power.

Take Mexico for example. The No. 1 buyer of U.S. dairy products has seen the value of the peso drop from about 9.8 cents in mid-2008 to barely 7 cents today, almost a 29 percent decline. Canada, our No. 2 buyer, has seen its currency drop from $1.03 in late 2007 to just 80 cents today, a decline of 22 percent.

But that's just part of the problem. Partly because the dollar was so weak for so long, the percentage of total U.S. milk production that was exported soared in recent years. According to the U.S. Dairy Export Council, 3.6 percent of all U.S. production was sold abroad in 1996. In 2008, it is expected to be between 10 and 11 percent. U.S. dairy producers boosted production to meet that growing demand.

The effect of even a modest slowdown in foreign purchases of U.S. dairy products is drastically more sudden and painful today than ever before. That's one reason why the pipeline of dairy product sales plugged up virtually overnight, why domestic sales alone are hopelessly unable to keep up with production, why producer milk prices imploded, and why this situation in unlikely to turn around soon.