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Guest Columns

Perspective:
Dairy Markets

Trade tensions, tariffs and treaties … Oh my!

Lucas Fuess

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

Rewind to four years ago this month: April 2014. President Obama. A UConn men’s basketball tournament win. Also, in the dairy world, February export data was released, and exports were surging for many products.

It was the beginning of a run up in U.S. milk prices that gave dairymen the best returns in decades, with the Class III price moving on later in the year to peak in September at $24.60/cwt., a new record high. The United States was supplying the world with dairy products, including some that were moving to Russia, which did not ban imports from some Western nations until that summer. Cheddar exports in 2014 peaked in March at 22.1 million pounds, nearly double prior year levels, while overall cheese exports were up double-digit percentages throughout most of the year. Powder exports were up 134 percent versus 2013 in June, in the middle of a five-month period of more than double prior year exports.

Now, fast forward to today: April 2018. February was a banner month for U.S. dairy exports, reaching a new all-time record monthly high (on a 30-day month basis), with every commodity posting increases above year ago levels. Nonfat dry milk posted a new all-time monthly high, dry whey recorded the strongest February exports on record, and Cheddar exports were the highest for a single month since September 2014. Demand was strong from multiple countries, including China, which imported a record amount of lactose from the United States.

On the surface, this seems great. Exports are at a record high! Product is moving offshore! But what is different versus four years ago? The United States is now embroiled in uncertainty and confusion around the future of free trade agreements and ease of exports. Like a storm cloud hanging over the record high export data released earlier this month is continued concern that we might have an uphill climb in the future to maintain our global competitiveness. Challenges are emerging all around us that could hinder our ability to serve global markets where dairy demand is increasing — markets that can and should be served with U.S. products that are competitive in quality, format and price versus products from our peers in the European Union and New Zealand. To sit back and see record exports and think nothing is wrong represents a short-term, myopic view of the world, and one that our industry cannot brush aside as a minor issue.

While the United States turns increasingly protectionist and nationalistic, and leaders in Washington attempt to rewrite (or even cancel!) trade agreements suddenly deemed ineffective, the European Union has gone on significant offense in negotiating and signing new free trade agreements, setting themselves up for long term export success. While the United States has not signed a new free trade agreement in six years, the European Union has been aggressive at signing new agreements with some of the United States’ top dairy trading partners. The European Union is in the process of implementing a free trade agreement with Canada, has recently finalized an agreement with Japan, is close to concluding a revised deal with Mexico and is negotiating agreements in nearly all other parts of the world, including the Middle East, South America and Southeast Asia, all potentially large buyers of U.S. dairy in the future.

Why are we doing this to ourselves? Maybe the U.S. administration has a plan and is playing the long game; it is possible we could see some wins on dairy in NAFTA which would be positive in sending products to our North American trading partners. We have not been without successes in recent years either, having implemented our agreements with Peru, South Korea and Colombia. And all this said, we should not blindly pursue agreements that are not fair to us. But, as a global agricultural and dairy powerhouse, the United States has much to gain from implementing agreements with foreign countries that reduce (or remove) tariffs and eliminate non-tariff barriers that prevent our products from getting a fair look versus our global competitors.

In the alphabet soup of trade, TPP has turned to CPTPP, TTIP is essentially on hold, KORUS is saved for now, and the news changes on NAFTA every day (did you get all that?). How can we engage our trade representatives to understand the significance of exports to the U.S. dairy industry and rural America?

One key area to focus on that is often overlooked is the power that dairy exports have in creating jobs in rural America, whether on dairy farms or in the small towns where dairy processing facilities are often located. Job creation and invigoration in rural manufacturing is something that will grab the attention of nearly every elected official and trade negotiator in Washington. In fact, in Wisconsin alone (where you might be reading this article during the International Cheese Technology Expo in Milwaukee), dairy exports alone create 10,254 jobs and have a $1.5 billion economic impact on the state, according to the U.S. Dairy Export Council.

Overall, the United States should be proud of our successes over the past several years of shifting focus to a more global perspective to drive dairy exports higher. We are increasingly punching our weight in global dairy markets, and we have big plans for the future as well: exporting 20 percent of our milk supply within the next few years. However, trade rules will make all the difference in our access to global markets, and without remaining diligent in fighting for trade agreements that give us access to markets where demand is increasing, we will be stuck with abundant products domestically that will weigh on our overall supplies and prices. We must not lose sight of the long-term potential of U.S. exports facilitated by trade agreements that support dairy.

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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