While reading Brazilian newspapers on the Web last week, I noticed a curious coincidence. One morning, I read in U.S. periodicals that higher steel prices are pressuring U.S. manufacturers and that milk prices are rising. That evening, I read about higher steel prices and milk prices in Brazil.
This apparent coincidence conceals a key fact. Steel costs more in the United States and Brazil for precisely the same reason. The higher milk prices, however, are completely unrelated. This illustrates an important lesson in international economics: Some goods are tradable; others are not. That affects exchange rates and relative costs of living between different nations.
Steel prices have risen in the United States for the same reason as in Brazil. World steel demand is up sharply in response to a stronger U.S. economy and a sizzling one in China. It is hard to quickly add steelmaking capacity, so when many steel users want more, they bid against each other.
Most steel is essentially a commodity. If reinforcing bars, structural steel, plates, bars or coiled strip steel meet standard specifications, the user really doesn’t care if it was made in Korea, Brazil, Germany or India. Steel stores indefinitely and does not need specialized shipping.
All this means that the steel market is global. If prices go up somewhere, they go up virtually everywhere.
Fluid milk is very different. It has a very short shelf life, requires special storage and transport facilities, and is subject to different sanitary standards in many countries. Cheese, dried milk and butter are traded internationally, but fluid milk is not.
Milk is expensive in the United States because prices were low for some time while beef prices rose. Dairy farmers culled their herds aggressively. There was a lag before the milk supply dropped, but the effects have now hit. Prices will stay high until farmers ramp up production again.
Milk is expensive in part of Brazil because Parmalat, an Italian firm that has bottling plants in the Rio de Janeiro-Sao Paulo area, went bankrupt. Unlike in this nation, where bankruptcy does not shut factories immediately, Parmalat plants in Brazil are idle. Farmers who sold them milk cannot find other buyers. Milk supplies in northeast Brazil are at usual levels. But there is no infrastructure to ship fluid milk from there, much less from other countries.
While fluid milk prices have risen in Brazil, they remain about half of what consumers pay in the Midwest. Higher prices elsewhere in the world have little impact on Brazilian dairy farmers.
Services are similar. Data entry is as easy in India as in North Dakota. Appraising houses still requires physical visits. Cars can be built in Korea, but only a local technician can replace cracked windshields in St. Paul. Excess barbers in Peru do not lower haircut costs in Minnesota even though new copper mines in the same country might reduce the cost of wiring new houses here.
© 2004 Edward Lotterman
Chanarambie Consulting, Inc.