A Longer Run View: Exchange Rates
Figure 4 shows the relative exchange rates of Canada, New Zealand, Australia, and the Euro compared to the dollar. They are indexed compared to their January 2006 value. It is apparent that they have changed considerably over this period, dropping in 2007, rising in the fall of 2008 to a very high level by early 2009, and then falling sharply during 2009 and more since. The U.S dollar is only 70% of its January 2006 value compared to Australia and 81% to 85% for New Zealand, Canada, and the Euro. This means that things we buy with dollars from these countries are relatively more expensive for us, and things they buy from us are relatively cheaper. Since New Zealand, the European Union, and Australia are our main competitors in dairy exports, this means that in 2009 we were much less competitive than we are today. The export data reflects this and so does the milk price. If our surplus production of agricultural products has to find a market in the United States, domestic prices drop sharply. We have seen this with broilers during the Russian poultry embargoes in the past, and in 2009 in dairy markets.
Source: Jim Dunn, Professor of Agricultural Economics, Penn State University