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Perspective:
Dairy Markets

Security of North American trade is good, but details matter

Lucas Fuess

Lucas Fuess is the director of dairy market intelligence at HighGround Dairy*, Chicago, a firm that specializes in dairy hedging, risk management and market analysis services. He contributes this column exclusively for Cheese Market News®.

After campaigning to improve various U.S. trade agreements way back in 2016 and withdrawing the United States from the Trans Pacific Partnership (TPP) as one of his first actions after being sworn in as president, it was not surprising to the industry when President Trump indicated his intentions to renegotiate NAFTA more than one year ago. While the dairy industry generally welcomed the renegotiation process — while stipulating that access to Mexico must be preserved and export access to Canada is ultimately desired — the renegotiation was still a nerve-wracking process that felt like it could derail at any moment. Finally, during the late hours of Sept. 30, Mexico, Canada, and the United States announced terms of a new trade agreement to be named the United States-Mexico-Canada-Agreement, or USMCA for short.

While not an acronym that rolls off the tongue, the industry was initially comforted by several provisions within the text of the new agreement that appear positive for U.S. dairy. Primarily, the increased dairy market access to Canada was welcome news that the industry has sought for years. While all food and agricultural products that had access to Canada under NAFTA will continue to have zero tariffs, Canada provided new tariff rate quotas specifically to the United States in a wide variety of dairy products, including fluid milk, cheese, butter, skim milk powder (SMP) and whey. The access increases steadily into year six and then grows at 1 percent per year for another 13 years. The access granted to Canada was greater than what the United States would have gained under the proposed TPP agreement.

In addition to market access, a key benefit not only for the United States but for all key global dairy exporting regions is Canada’s commitment to eliminate the Class 6/7 milk price system that valued Canadian SMP exports at among the lowest globally. Six months after the enactment of the agreement, Canada will price skim solids on a value no lower than U.S. nonfat dry milk values, according to the USTR.

In some ways, it was exciting for the U.S. industry to see the president and the U.S. trade representative make dairy access a key component of trade with our neighbors. It will, undoubtedly, be positive for the industry. The security of North American trade and another export destination for U.S. products are two wins. In addition to Canada, the security of continued access to Mexico, one of our largest trading partners, is not to be overlooked. While Canadian access can steal the headlines, continuation of U.S. access to Mexico, a country that is not self-sufficient in dairy and needs imports to feed its population, is also a positive outcome from the agreement.

Earlier this month there was considerable celebration of the agreement. Some thought it would be more bullish for the market, pushing stubborn recent range-bound milk prices higher. However, it is important to consider a variety of factors involved deep in the details.

First: the time line. While a lofty goal would be for the agreement to be signed and implemented by all three countries prior to Dec. 1 when the new Mexican administration takes office, the short window between now and then coupled with the U.S. election just weeks away makes that all but impossible. In fact, just this week Senate Majority Leader McConnell said there would be no U.S. congressional consideration of the agreement until 2019. Complicating the issue further in D.C. is the potential for a divided Congress after the start of the year in which one party could hold the agreement hostage in exchange for a vote on other, perhaps unrelated, issues. While both parties have found positives in the agreement, passage is not totally certain.

Assuming the agreement is signed and implemented, it is important to consider the time lines on market access to Canada. The initial TRQs phase in over a whopping six-year period. This slow, albeit steady, increase in access will come as the United States likely continues to produce more and more milk each year. The Canadian market access will barely move the needle as millions of additional pounds of U.S. milk need to find a home in the future, either domestically or abroad.

Finally, while access to Mexico was thankfully preserved, a separate and looming issue are the Section 232 metal tariffs the United States implemented on Mexico and other countries this spring, barring steel and aluminum imports from the nations. In response, Mexico slapped tariffs on cheese and other U.S. dairy products in retaliation. These tariffs are separate from the agreement, and fully restored access to the Mexican market is not related to the passage of the USMCA.

Ultimately, while not to discount the importance of our trading neighbor to the north, Canada has often found ways to scoot around the issue to preserve its balanced dairy system. It is neighborly to assume Canada will fulfill their promises of this agreement, but it would not be surprising if other non-tariff barriers are sought out by the nation.

Overall, the security of North American trade is welcomed but dairy farmers and dairy exporters should not “bet the farm” on this agreement to radically move dairy exports or milk prices higher. It would be prudent for the Trump administration to continue to pursue enhanced or new free trade agreements with other trading partners around the globe to continue to ease access for U.S. dairy exports.

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.

*These observations include information from sources believed to be reliable, but no independent verification has been made and therefore their accuracy and completeness cannot be guaranteed. Opinions and recommendations expressed are the opinion of the authors and are subject to change without notice. The risk of loss in trading futures contracts or commodity options can be substantial, and investors should carefully consider the inherent risks of such an investment in light of their financial condition.

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