From Auckland to Eau Claire: Price Transmission from International Dairy Markets to Local U.S. Milksheds

The price relationships governing dairy commodity price transmission among the U.S., Oceania, and EU markets are considered using Vector Autoregressive and Vector Error Correction models. Results demonstrate a one-way price relationship for U.S. dry milk powders as price shocks in Oceania and the European Union spread to the U.S. while U.S. price shocks do not spread into those markets. U.S. prices for cheddar and butter are impacted by price shocks in Oceania and the EU, however, U.S. price shocks also spread the Oceania market and may reflect potential arbitrage opportunities. Historically thought to be shielded from international prices through low import quotas and high out-of-quota tariffs these results are the first to empirically demonstrate that U.S. dairy commodity prices and farm-gate milk prices are influenced in both the long-run and short run by international dairy commodity prices.