December market report: What if NAFTA blows up?

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Without a doubt, the American dairy industry has benefited greatly since NAFTA became effective in 1994. In fact, agriculture in the U.S. has been the biggest beneficiary of the deal. But President Donald Trump’s pledge to renegotiate NAFTA shortly after he took office put its future in sudden limbo.

Those renegotiation sessions are now well underway, and dairy interests have joined the ag community in urging negotiators not to ruin what’s been an unquestionably good thing.

NAFTA has been good for U.S. dairy

Two data points from the U.S. Dairy Export Council show NAFTA has been good for the American dairy industry:

• U.S. dairy exports amounted to around 3.6% of total domestic production in 1996. Last year, exports stood at just over 14% of total production.
• Mexico takes in by far the most American dairy products (valued at over $1.2 billion in 2016) while Canada ($631 million) is the third most popular destination. These two export markets alone represented more than $1.8 billion (more than 38%) of the $4.83 billion in total American dairy product exports.

But $4.83 billion in exported dairy products is dwarfed by U.S. Trade Representative data showing the U.S. is at a trade deficit with Mexico to the tune of $63 billion. And Trump loudly derides “unfair deals” that don’t result in a dollar-for-dollar balance.

Without question, American dairy will suffer if NAFTA is scrapped.

Points of contention in dairy

Dairy industry leaders have stated that their main priority during negotiations is to ensure that the lucrative export market in Mexico stays open. But that could mean another confrontation over the relatively recent Mexican policy of not accepting American export certificates for raw milk.

That was in response to American authorities refusing to accept Mexican milk that was not subject to tuberculosis testing. It angered Mexican authorities, who want the standards for milk headed to the U.S. to be the same as what we have for our milk headed to Mexico. American authorities counter that subjecting domestic raw milk to additional TB testing is too burdensome considering the disease has been essentially eradicated on our side of the border.

Meanwhile, two main arguments persist between American and Canadian trade authorities. The more recent argument centers around Canada’s new Class 7 milk classification. Government subsidies paid to producers sending milk to Class 7 priced it below the world market price, effectively making it impossible for American dairies to compete with their Canadian peers.

American stakeholders claim the Canadian action is illegal under both NAFTA and World Trade Organization rules, and any resolution could take years while renegotiations are ongoing.

Another argument —one that dates back decades— is over Canada’s entrenched milk production quotas. American negotiators in the early 1990s had hoped Canada would scrap those quotas in the run-up to NAFTA; even most Canadians oppose them. But the Canadian dairy lobby wields considerable power and the quotas remain in place.

American negotiators likely will urge Canada to dump that policy once again, but we expect nothing to come of it.

Uncertainty awaits

The uncertainty swirling around NAFTA comes at a worrisome time for a few reasons:

• Milk production in the U.S. is high.
• With the elimination of production quotas in the European Union, production there is high and getting higher, too.
• EU, southeast Asian and South American nations are negotiating trade agreements—none of which includes the U.S.
• Increased domestic milk production and stiff competition led the USDA to lower its forecast dairy market prices for 2018.

NAFTA opened the door for American dairies to boost production and export their products. We sprinted through that door and haven’t looked back, so a reversal of course now would leave dairy in a serious lurch.

Demand for dairy products is accelerating quickly China and east Asia. Accordingly, other dairy-producing regions in the world (the EU, South America, Australia and New Zealand) are busy crafting trade agreements with those Asian nations in hopes of securing new export markets in the face of increased milk production worldwide.

It’s an “us vs. them” scenario, and the world’s export markets serve as the battleground for producers duking it out for market share.

We predict current NAFTA renegotiations will break down later this year and that American representatives will walk away. And once the deal is dissolved, alarm bells will begin ringing in all three nations, and negotiators will then begin working overtime to craft a new one.