It is hard not to feel like the U.S. dairy industry is just a penny ante chip in the high stakes poker game that the North American Free Trade Agreement (NAFTA) has become.

Our side of the table has repeatedly threatened to “tear up” the current deal. Is that a promise or a bluff? And what would happen if that play was made – and then called?

Dairy economists and analysts are pretty much unanimous that scrapping the 23-year-old deal between the U.S., Canada, and Mexico would be horrible for American dairy producers. The outlook for U.S. farm milk prices in 2018 is already bad; it would likely be much worse if NAFTA went away.

In an industry where just 2 percent oversupply has historically been disastrous for prices, the U.S. dairy industry has been exporting 14 to 16 percent of everything it makes in recent years. NAFTA accounted for just part of that, but losing any sales would mean an instant buildup of stocks and a hit on prices.

In a recent article by BBC News, former Penn State University ag economics professor James Dunn said, “We produce more milk than we can use. If we don’t export about 16 percent of milk production, the price is going to go in the dumpster.”

Even if NAFTA stays, the U.S. should be worried about future business relations with its nearest and biggest partners, Canada (number two) and Mexico (number three). Mexico, our biggest customer for dairy products by far, isn’t waiting around for everyone to show their cards.

It is already deep in negotiations with the European Union (EU) to expand their 17-year-old trade pact to include farm products. Keep in mind that the EU makes nearly twice as much milk as the U.S. does.

Just before Christmas, Mexico’s Economy Minister said the two sides are “very close, very near” to signing a deal. Mexico is also in negotiations with nations in Latin America and Asia.

Having a reliable number one trading partner, both as a supplier and as a buyer, is not something that Mexico or any nation can go without having a Plan B for. Especially when nearly 80 percent of everything Mexico exports goes to that partner. The U.S. clearly does not look as reliable as it once was.

The total value of all trade between the U.S. and Mexico in 2016 was about $524 billion. Dairy products’ share of that is so small it is easy to see how people outside the industry might dismiss it. But for those inside the industry it is crucial for survival.

According to the U.S. Dairy Exports Council, Mexico was easily the biggest buyer of U.S. dairy products in 2016 at $1.22 billion. Southeast Asia and Canada were second and third with a combined value of $1.32 billion, and sales to Canada plunged steeply in 2017.

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(c) Hoard's Dairyman Intel 2017
January 1, 2018
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