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Can the New NAFTA Fix the Low Milk Price Problem in the U.S.?

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Since the start of 2017, U.S. milk prices have declined 27%. Concerns over international trade and an oversupply of milk have put downward pressure on prices. Global trade tensions have slowed demand for U.S. exports, and a weakened Euro has stimulated demand for European dairy instead. Meanwhile, milk production has been increasing, driven by favorable weather and pasture conditions, and continuous improvement in farming methods.

This is a concern for U.S. dairy farmers whose margins and profits have been squeezed by low prices. However, in light of the recent renegotiation of the NAFTA deal, is there a ray of light for the U.S. dairy industry?

The USMCA and the U.S.-Canada Dairy Trade

The U.S.-Canada dairy trade has been the source of friction between the two economies for the last few years. However, on Sept. 30, the U.S. and Canada, alongside Mexico, managed to reach a new trade agreement to replace the existing NAFTA deal. The United-States-Mexico-Canada-Agreement (USMCA) is to come into effect by 2020.

NAFTA, the North-American Free Trade Agreement, was “the worst trade deal” in U.S. history, according to U.S. President Donald Trump. As a result, Trump threatened to withdraw from NAFTA, a deal in place since 1988, if Canada and Mexico refused to negotiate. Renegotiations opened on Aug. 16, 2017.

Since this date, the U.S. and Canada had, among other issues, reached an impasse over the dairy trade as both nations fought for the best interests of their respective farmers.

U.S.-Canada Dairy Trade, What Are the Issues?

So what were the sticking points that left the U.S. and Canada feeling aggrieved over their dairy trade?

Firstly, U.S. dairy farmers have voiced frustration toward Canada’s supply management system, which is in place to regulate the volumes of milk produced and keep prices stable. Canadian farmers are limited as to what they can produce, while foreign exporters of milk have hefty tariffs slapped onto any volume of milk that exceeds their given quota, to prevent a large influx of milk. Previous to the USMCA, the U.S. had a quota of 3.25% of Canada’s dairy market share with any volumes exported into Canada exceeding this limit being hit with tariffs of 200% to 300%.

Despite running a dairy trade surplus with Canada, U.S. dairy farmers were aggrieved at the low market access to the Canadian industry. At the same time, Canadian farmers were concerned with the U.S.’s unfettered access to the Canadian market when it came to diafiltered milk.

The Diafiltered Dilemma

Diafiltered milk is non-fat milk solids finely filtered to achieve a higher protein concentration. This ultrafiltered milk can then be used for cheese processing and benefits processors by producing higher yields and less waste than skim milk. Canada does not produce its own diafiltered milk and is supplied by major production plants in bordering U.S. states like Wisconsin and New York. The product was created after the NAFTA deal, therefore diafiltered milk is not restrained by quotas on U.S. dairy imports because it is classed as a protein ingredient.

Canadian farmers have felt that the unrestricted access of diafiltered milk from the U.S. threatens Canadian milk sales. In response, the Canadian government introduced the Class 7 milk pricing system, a system that classifies and prices raw milk based on end use. Class 7 lowered the price for domestic non-fat milk solids in Canada and therefore decreased the demand for imports of milk protein concentrates such as the U.S.’s diafiltered milk.

In turn, Canadian producers supplied non-fat solids to processors at a discount, resulting in lower costs and the ability for Canadian produce to be exported into the international market at more competitive rates.

Clashes Over Class 7

The competitively priced dairy exports flowing into international markets from Canadian dairy producers weakened world market prices for dairy proteins. U.S. Agriculture Secretary Sonny Perdue relayed U.S. dairy farmers’ concerns and spoke how the Class 7 pricing system was cutting into the access that the U.S. had into world market opportunities.

With this complex array of sticking points between the U.S. and Canada, it seemed that a deal was unlikely to happen between the countries and that Canada could be excluded from a deal with Mexico and the U.S. However, despite the tensions, the USMCA was finalized in late September.

So, What’s New?

On the whole, not a lot is new, really. Many terms that existed in NAFTA remain the same, but the most significant differences were seen in the automotive industry — and dairy.

For Canada to join the deal, it adhered to the U.S.’s requests to eliminate the Class 7 pricing system and give U.S. dairy farmers greater access to the Canadian market. The export quota for U.S. dairy has been expanded from 3.25% market share of the Canadian dairy sector to 3.6%. While this might seem minimal, it equates to $70 million worth of trade.

This is a positive for U.S. farmers. It remains to be seen how prices in the dairy market will react to the elimination of the Class 7 pricing system and the increased Canadian quota. In general, the new USMCA offers some hope as it eases trade tensions, gives greater export access and helps strengthen world market prices. However, the U.S. dairy oversupply may ultimately be too large of a problem for the USMCA to fix.

George Duke is a market analyst at Mintec.

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