This time on The Milk Check, we welcome a leading mind in international trade policy and personal friend of the podcast.
Jaime Castaneda is senior vice president of policy strategy and international trade for the National Milk Producers Federation, where he oversees the development and implementation of domestic policy. He also leads international trade negotiations for the U.S. dairy industry as senior vice president of trade policy for the U.S. Dairy Export Council.
Jaime joins the Teds in a discussion of how trade policy developed over Jaime’s 22 years in the industry, from dairy farmers’ early reluctance to accept imports to the industry’s ongoing efforts to improve and enforce trade agreements.
Among other topics, they also debate whether the Federal Order System and tariff rates are holding back U.S. dairy in international markets, or if the problem is our slow response to short-term international economics and low customer loyalty outside of domestic markets.
T3: Hello, everybody. Welcome to the “Milk Check,” episode 35. It is March 16, and our guest today is Jaime Castenada from the U.S. Dairy Export Council. But I believe you wear multiple hats. So, I’ll let you describe what roles you fill with USDEC and National Milk.
Jaime: Yeah. Thanks. Good afternoon to everyone. I am actually the senior vice president for the National Milk Producers Federation. Under that capacity, I oversee the development and implementation of domestic policy, an area of different issues, including from the initiative of Foundation for the Future, that was the preload to the dairy margin coverage to Farm Bills to just name it. At the same time, I served in my capacity, as senior vice president for policy and trade, I also lead our partnership with the U.S. Dairy Export Council and serve now, for almost, actually, next month is going to be 22 years that I am with the industry and that I have been serving as our partner with the U.S. Dairy Export Council.
T3: Well, wow, we’re lucky to have you. And T.C. Jacolby & Company is one of the founding members of the U.S. Dairy Export Council and we’ve been involved with the U.S. Dairy Export Council from the very beginning. Have you been involved with the U.S. Dairy Export Council the whole time?
Jaime: Yes, yes. In fact on Suber, really, I discuss joining the U.S. Dairy Export Council. The way that we work is that we operate everything that relates to policy under National Milk, specifically related to trade, just to make sure that, if you remember, the U.S. Dairy Export Council, it’s a cooperator for USDA, which receives monies from MAP, the checkoff funds as well as MAP money. So, in order to make sure that advocacy is properly and it’s done using membership dues, then we created this ability. And I do remember sitting… And now at U.S. Dairy Export Council is a large organization, 150 members more or less. And I do remember when sitting with Ted Sr. in a small table, Lei Jensen and a few other folks that were the original founders of the U.S. Dairy Export Council.
Ted: Those were the days. I remember those days very vividly. It goes back, what, to the ’90s?
Jaime: Yeah, 1999. 1999, and that’s where we began developing the trade policy. If you remember, prior to 1999, even dairy farmers, and this is a lot of credit to folks like yourself and Tom Camaro that look at the vision and the future. And if you remember, dairy farmers were not very keen on trade. In fact, if you talked to them on trade, in the 1990s, it was all about, “We hate imports.” And it was the development through this small group of folks that were the visionaries that we developed this trade policy and this perspective, that you’re not going to be able to just fight, fight, fight imports. You’re better to use your capital to get better at exports. And that’s what we have done over the years.
Ted: Well, that’s sort of the route that we took too, and NAFTA kicked in about that time. And I think it kicked in fully over, what, a five-year period? And so trade became an important cog in the wheel, and it wasn’t there before for the reasons that you just described. Suddenly, it became important, and just about that time is when you and Tom Suber and Tom Camaro and the rest of them started to be aware that it was time to get organized in that regard. And, frankly, you did a good job doing it. You put together a sustaining organization that’s grown ever since and it’s been very successful.
T3: So, speaking of that, my first question would be, we recently passed a new trade pact between Mexico and Canada, the USMCA. Jaime, in your eyes, what are the differences between how NAFTA worked and how the USMCA is going to work, and where are the improvements? And is there any place where maybe it’s going to hurt the U.S. dairy industry?
Jaime: Let me start by clarifying, I know that many folks say a new trade agreement. I take issue with that, and you will know because through the conversation this afternoon, I will emphasize over and over, I will beat that dead horse, that we have not had a new trade agreement in more than 12 years. USMCA was an old agreement, NAFTA, that was just improved on the edges. And sure, thank God it was passed, and thank God we didn’t have to actually deal with removing the United States of the previous trade agreement. Now, we’ll talk a little bit more about why I say we haven’t actually passed a new trade agreement in more than 12 years. But USMCA improve somewhat access for the U.S. into Canada and eliminated what is supposed to be Class VI and Class VII pricing in Canada, which was promoting the…let me use the word dumping. It should be a more technical word. But the dumping of Canadian powder into the world market. The concern that we had there was that they were going to be producing more and more of powder. And there will be more quantities of that product in overseas replacing U.S. product. Class VI, Class VII, if you remember, was created in Canada because we were selling ultrafilter milk for cheese-making into Canada. That has happened, that Canadians have always find ways to try to close what they call loopholes. We call it legitimate trade that the Canadians constantly are trying to block and you guys have been part of that. USMCA, it’s, again, an improvement over what we had before, but I wouldn’t say that it is a major change or a new trade agreement in which we’re going to see significant new opportunities.
T3: So, one of my questions, one of the issues that has come out of the USMCA is the way Canada has administered the TRQ’s, the tariff rate quotas. Jaime, you’re in the front line with that issue. Can you explain to us exactly what the issue is?
Jaime: Yeah. And this is very important because as I stated just a minute ago, there was an improvement. But just imagine that this improvement, that it was an additional 3.25% of the Canadian market, would be actually also limited. Then, you’re talking that those small improvements are not going to be given the United States dairy farmer or manufacturing or trader the opportunities that we would actually should have. The TRQ administration is a perfect example. When USMCA was negotiated, we knew, at some point… Actually, I didn’t know that at the beginning because we heard President Trump talking about how we needed to have an open market with Canada. When we realized that the Canadians, the USDR, the U.S. government wasn’t going to be very forceful in opening the Canadian market in any significant way, we realized that whatever little we were going to have, we needed to work for everybody to be able to actually sell the highest possible value of that product. Look. What the Canadians have done is to limit the access of that TRQ to certain importers into Canada. So, for instance, if you take Jacobi or many other importers of cheese that can go directly to a Walmart or to a Costco or to a restaurant or pizza chain, they’re not allowing that to happen. The majority of the TRQ is given to processors, to major companies in Canada. So, the opportunities for folks like yourself and others to have a direct relationship with buyers, end-users in Canada are not being fulfilled by the way that actually Canada is implementing the TRQ administration.
T3: So, if that’s the case, how does that hurt the U.S. dairy industry? In my perspective, the issue is because we don’t have the opportunity to sell directly to the end-users of dairy products in Canada, those processors who have received the TRQ’s are either going to not actually utilize the TRQ’s, and therefore, not actually buy U.S. dairy products and bring them into Canada, or they’re going to apply a margin on top of whatever the margin that the U.S. dairy companies have. And they’re going to make it essentially too expensive for those exports of U.S. dairy products to Canada to actually work. Am I looking at it the right way? Am I thinking about it the right way?
Jaime: Yeah, you are. I could add that they can also buy a certain type of product, certain type of cheese that they can further process and you basically lose the greatest value of that product. There is a number of reasons why you describe it very well, the first two that we’re not importing much and we have actually seen that some of the numbers on the TRQ field rates have been very low, so far.
T3: I know that USDEC and National Milk have started engaging in conversations with the Trade Administration to see if we can address this issue. What has been done so far? And what do you think the outcome will be?
Jaime: Yeah, those two organizations have been the leading organizations on pushing for, first of all, USMCA and changes that occur on Class VII, on Class VI. And obviously, on the TRQ administration, we were the ones who provided, the very first time, the administration with the right information for them to begin reviewing this legally. We also contact members of Congress to ensure that the U.S. government, the previous administration, but also talking to this administration, look at enforcement as a priority. So, at this stage, the last communications that we had with the U.S. government was with IDFA, too, so it was IDFA, National Milk, and the U.S. Dairy as proconsul to make sure that the U.S. government knew that this was a unified position from the industry. And, at this stage, I believe USDR, the U.S. government is waiting for Katherine Tai, the nominee or the USDR position to be confirmed, which should happen this Thursday [Tai confirmed post recording]. We expect that once she’s in her position, that this would be one of her first topics, items to deal with. And we believe that USDR will be making a decision soon. Our expectation is that the next step is to call for the formation of a panel.
T3: Okay. And how long do you think it will take for that panel to be put together?
Jaime: Under USMCA, the whole system of dispute settlement is a lot faster. So, it should take, I mean, no more than a couple of months. And then there is a whole process that instead of being a WTO dispute settlement, which I think that needs major reform, and instead of taking years and years, this could be a resolution, this could be in by the end of this year if we request a tribunal panel soon.
T3: Good. You know, you mentioned the trade panel and how it’ll happen faster than it did under NAFTA. It made me think of another issue that we’ve experienced. Dad, I don’t know how long ago it was. But we used to export a fair amount of milk from Texas and New Mexico into Mexico, and then that all stopped. It’s probably over 10 years ago now, and we haven’t been able to move it forward. I’m sure you remember that, and I know Jaime, you’re familiar with that issue as well. Do you think that is an issue that could be addressed under USMCA, or is that probably not a priority for the new administration?
Jaime: We’re going to make sure that all our issues are their priorities. Obviously, they going to have many, many different people asking the same thing. This issue, as Ted Sr. knows, we dealt with it for a long time. And we thought that we were making progress. And sometimes the U.S. government is your best friend, and sometimes it creates a situation in which something becomes political. We tried to address this issue under USMCA, and I think we were making progress, and sometimes other things get involved and things are complicated. This is a matter of, for many dairy farmers in Mexico, and as a badge of honor that they don’t want fluid milk to come in. And I think that has been protectionist actions by Mexico that have prevented that we restore this trade that has absolutely no reason why not to have it.
Ted: Yeah. But Jaime, that’s true. That’s what happened. But, you know, enforcement on these trade agreements is a critical issue. I mean, we have trade agreements, for example, or understandings with a lot of different countries in the world, China being one. They’re members of the WTO and Mexico and through NAFTA and the new USMCA. But how do you achieve enforcement? Canada, obviously, it’s stretching the limit of the law, and Mexico does too. So, what good is the agreement if you can enforce the rules?
Jaime: Couldn’t agree more with you, Ted. I think that there are two major issues that the United States have fall way behind. One is catching up on trade agreements, and the second one has been on enforcement. This issue with Mexico should have been taking care of, issues with India exports. There are a number of places in the world that we need to have enforcement. And it’s one of those questions that I don’t have any specific answer other than we bring these issues, we bring cases to the U.S. government. And a lot of times, there are reasons that we cannot explain as to why the U.S. government do not proceed with an enforcement case. But sometimes, actually, you don’t need a WTO case or a USMCA case. What you need is to create leverage and to sit down with your counterpart and try to negotiate an agreement. I remember we did that with Canada a long time ago about a number of issues in which there is a number of irritants. I think it is time for us to sit down with Mexico and try to deal with a number of irritants from both sides. Actually, the Mexicans has also some issues with us, but we need to actually sit down. And as long as you don’t have that, then you’re not going to be able to resolve this.
T3: Jaime, do you think that the new administration is going to be more proactive in those kinds of issues, both from a dispute standpoint with current trade agreements, and even pursuing new trade agreements with countries where maybe we either don’t have trade agreements or the trade agreements need improvement?
Jamie: We hope that this is one of the two issues that they’re going to be addressing is enforcement. I do believe that Katherine Tai is someone that believes in enforcement, so I do believe that she will start looking at this. But you need resources, right? There’s a certain amount of lawyers. There is a certain amount of folks that actually can work on a particular issue. Now, with respect to trade agreements, I think we’re going to have to wait and see. We certainly know what we’re going to be asking the administration. And it can be possible that we have spent more than 12 years in which we have not negotiated and passed a new trade agreement while Europe, New Zealand, Australia are constantly negotiating and passing new agreements. And it is primarily because of politics. It’s not because of the economics of the country. And here, in both parties, both parties need to actually be willing to compromise. There is no reason why we shouldn’t have a trade agreement with Vietnam. There is no reason other than geopolitical perspective to not have an agreement with the Philippines. And I can keep on going with respect to trade agreements. But I do think enforcement will be a priority. Trade agreements, we’ll have to work hard on that.
T3: So, let me ask you this because when I think of trade agreements, I tend to think of it in terms of from a U.S. Dairy Export standpoint. The import tariff rates that have to be paid on U.S. dairy products relative to, let’s say, those same tariff rates coming out of Europe or coming out of New Zealand, or Australia, or other exporting countries. Would you say today the U.S. pays more in tariffs than their competition out of Europe and Oceana, or do we pay about the same amount?
Jaime: We pay more.
T3: How much more? I know it varies from country to country. But what percentage difference, in general, do you think that is?
Jaime: Yeah, you said it. It varies from country to country. But even if it’s actually relatively small tariffs, 10% to 20%, if anybody knows how important is the margins in this business and that when you’re trading and you’re buying this product, 10%, 20% makes a huge difference in whether you’re gonna be competitive or not.
T3: So, Dad, the reason I asked that question is, as Jaime was talking, I was thinking about all the conversations that we have about where the U.S. dairy prices are, and where maybe the prices are on GDP, or out of New Zealand, or out of Europe. And we tend to have this question where we ask, where we go, “Our prices on paper seem to be low enough. Why aren’t we getting the business?” I wonder if a lot of times in those discussions that we have…are we taking into account the fact that the U.S. has to pay higher tariff rates a lot of times than our competitors out of Europe and Oceana?
Ted: I’m sure that we do in a case-by-case basis. However, over a longer period of time, there’s quite a bit of variance in the international call it juxtaposition of pricing. If you look, for example, right now at the international pricing, say from New Zealand, as opposed to the U.S., and you transfer that to a milk price, without doing the math, I’m gonna guess that we’re $4 or $5 a hundredweight lower than the New Zealand on a per hundredweight basis, probably less than that with regard to Europe. However, going back about three years, the shoe was on the other foot, and it wasn’t to that extent, but our pricing was much higher. And it seems to take a while for this thing to sort of level out. And what that tells me is it’s not necessarily a tariff issue. I’m sure that tariffs have a bearing on it. But what it tells me is we’re very slow to adjust. We don’t have, for example, a lot of customer loyalty in export markets. We have customer loyalty and domestic markets. And so our industry is structured so that when we have surpluses, we want to get rid of them as quick as possible and get them out of the way of our domestic business.
And this is a structural problem with our industry, and I don’t think it’s only the United States that has that problem. But for some reason, the Europeans and the New Zealanders don’t have it to the extent that we do. And I’m not sure I understand why. Maybe our federal barter system to some extent stands in the way. But with regard to international pricing, I don’t think so. I think we have classified pricing, which should basically reflect international pricing for powder and butter and cheese. And yet, right now, our industry is languishing in the international markets on those products. I’m sure that we will catch up. That’s one of the reasons why I feel that the second half of this year is rather bullish for the U.S. dairy industry. And I know, Teddy, you don’t agree with that. But given the difference in the international markets and what we have right now, I think that we will. But why does it take so long? And why do these gaps in pricing persist for as long as they do? And I’d like to hear what Jaime would have to say on that.
Jaime: Actually, that was very good. And I appreciate always listening to you. But let me first say that, it’s not that actually, we’re not exporting. We’re still the largest exporter of skim milk powder. I mean, we’re selling record levels and inventories is not that, actually, they’re that big on the powder side. There is this differential between, obviously the GTT than the Kiwi prizes and like you said to a lesser standard, the European. I think it is more of today, at least, the ports have to do something with it. I think we’re behind of the ability to export by maybe a couple of weeks or even more. But I think, in principle, I think that tariffs have definitely an impact back here on the pricing, but it is also some of this relationship that you build, based on these free trade agreements. Look at China, for instance, and I have actually struggle with respect to the China phase one agreement in which the Chinese are supposed to be buying huge quantities of product for everybody. There’s no specific quantity for dairy.
But, you know, we still don’t sell a lot of skim milk powder into China. I’m definitely determined to try to find out more about why. But I certainly understand that New Zealanders and now the Australians have a significant quota that they can fill in the first three, four months of the year. But then you have the rest of the year that even though they’re going to be using that, there should be more opportunities. With respect to cheese, I think that what the Europeans have that we don’t have, and we can talk about the federal orders, I always say this, that I don’t think anybody has ever shown me a main reason why the federal orders should be a hurdle or a problem to export. There is a reason why we went from exporting 3% to levels of 17%. And if you would actually use a baseline or an index, that quantity would be even much, much higher. And all of that was done under the same federal orders ruling. But Europe has, just like Fonterra, has very few players. If you look at Arla, FrieslandCampina, and all these just few folks, they can actually work in a completely different world in which we work, and they can operate in an easier just because they are one or two companies that are handling most of the exports and most of the milk inside those countries.
T3: Jaime, do you think that Arla and FrieslandCampina and those bigger countries in Europe that do a lot of the exporting, do you think that they sell into the export market on a regular basis at a lower price than they sell into the domestic EU market? Because quite often that’s the impression that we get. When they want product to go away, they’ll make it go away into the export market at prices that are lower than the published prices that we see. Are you seeing that as well?
Jaime: I think that what they do, that we don’t have, if you look at Arla, look at the amount of milk that they have in the amount of different countries, now, from Germany to Denmark to England and so on. If you look at how they actually go about it, they have a huge presence in the retail market. The way that they actually price and pay farmers is just a calculation of a blend price of everything they can get for all the products that they sell. So, if you have a significant part of your overall sales that goes into retail, actually, that helps you pay higher prices, in addition to the fact that at least one-third of the farmer’s income in Europe comes from subsidized money from the government. It helps them when they do that blending. And sure, insurance is private. It is not government-induced. It helps them actually to export in a much easier way than we could ever do.
T3: Well, and we experience that when we’re trying to export U.S. dairy products. The Europeans seem to be able to adjust price competitively at times when the U.S. cannot. We think we’re competitive for a brief period of time. And then the European competitors who were chasing the same business we are seem to come up with a better price. And my feeling has always been that and maybe it’s unfairly but I tend to criticize the federal order system, that between the federal order system and the structure that we have, which can be a bit inflexible, and the futures that are tied to those federal order prices, you’ll see the Europeans who don’t have that inflexible structure. They’ll just say, “Hey, this is where we need to be to sell here, so we’re going to be here.” And then, what we’re dealing with is we’re dealing with, “Well, the futures are here. We can’t be competitive in that price. And so we can’t adjust to be competitive in the international marketplace.” And then what eventually happens is because a lot of times in the international market, you do a deal where the shipping time period is three to six months down the road from when you actually negotiate the price, that by the time you actually arrive at the moment in time where you’re making products for export, our pricing would be competitive. But we couldn’t go there because of our federal order structure at the time that the price was negotiated, and the Europeans seem to always have the freedom to do so.
T3: Jaime makes a point that I had never really got my head around before but I’d like to go back to it. The question is customer loyalty. And we’re using Arla as an example, but there are a number of European companies that have plants in a lot of different countries. If they’re involved in the sales and marketing to different outlets and exporting to different countries as part of their overall sales profile, of course, they’ve got more of an incentive to nurture, if you will, customer loyalty with different countries and different companies at different prices. The question to them is the blend price for their own individual company. And that is a much more important loyalty factor than we have under our federal order system. People tend to look at the federal order system in a bad light for the wrong reasons in my view. I don’t think that our classified pricing system hurts us, particularly on exports, given the structure of our industry. I think it’s the structure of the U.S. industry that hurts us, not the federal order system necessarily, in that we’re not incentivized to deal in international markets with the same degree of loyalty to the customers that the Europeans have, or the New Zealanders have. And you want to point your finger at the federal order, yeah, there are issues there but they’re not the big issues. In my view, they’re smaller. I don’t know how we’re going to exactly deal with that without a major structural reform within the industry. And I think that would be rather painful for the industry.
Jaime: If I can actually add to that, first of all, I agree with Ted Sr. 100%. And I would say that you look at when sometimes some folks in the industry criticize one organization or two because they’re too big. But if you look at how the Arlas and the FrieslandCampinas and all the big, big companies in Europe export and you look at Fonterra, I always say that there is a reason why Nestle or Kraft, which are pretty much in every single country in the world, including Kenya or Nicaragua, they never actually had a plant in New Zealand. And you can argue, “Oh, well, it’s a small places.” There are many countries in which they are in which they have small populations, but because Fonterra always control the milk, so, Fonterra was the only source. So, it is difficult to actually compete with folks that actually control the amount of milk that some of these companies do control. And especially that if you want to grow and be bigger here in the United States as somebody who is sourcing milk, a lot of times you get criticized for being bigger when they’re not looking at our competition.
Ted: I think Jaime makes a point and he’s sort of tiptoeing around the basis for it. And I understand it, that in a lot of ways, so we don’t control our own milk supply. We rely on others for our milk supply. And we don’t have… Our exporting countries who export value-added products, particularly, in most cases don’t control their own milk supply. And as a result, that also reflects back on customer loyalty and the incentive to maintain that loyalty with international customers and markets.
T3: So, with that in mind, Jaime, where do you see the U.S. dairy industry in terms of exports, in let’s say, 10 years? And I ask that question kind of framing it this way. You know, the majority of U.S. dairy exports are the commodities skim milk powder, whey powder, whey permeate, lactose, and a growing part of it is cheese, but the majority of the cheeses are kind of commodity mozzarella and cheddar. When you look 10 years down the road, do you think those are still going to be the dominant products, or do you think the U.S. will become more of a value-added exporter?
Jaime: Let me first say that thanks to folks like yourselves and many, many others. I have a lot of faith that we’re going to actually continue to expand on exports, and we’re going to continue to do as good as the job that we have been doing over the past 15, 20 years in growing. Do we have to actually room for improvement? Of course, there is a number of different things that we could actually do. The United States, their industry is a complex industry. Do I think that we’re going to be a commodity or more value? I think it’s going to be a little bit of everything. I certainly believe that we’re gonna actually be exporting more value-added products. But I think it’s going to be critical that we need more export opportunities, more markets. We need to open more markets. We need to actually fight protectionism around the world. If many of you or maybe the audience may not remember, “The Judgment of Paris,” movie created, it was a time in which all the wines from California beat all the French wine. I always say that we’re like the wine industry. We’re just a little bit behind. But it’s going to get to a point in which we are going to be exporting more and more high-quality cheeses, more and more high-value products. It’s going to just take time. But folks like the U.S. Dairy Export Council and many others are working toward that. And I’m very proud of the industry and everybody who is putting an effort on exporting more products.
T3: Thank you, Jaime. Dad, any other question for Jaime?
Ted: Multiple questions, but I don’t think questions that we want to raise necessarily right here. But Jaime it’s been great to talk to you. And we very much appreciate your participation in this program. It’s been a successful program for our dairy support business. And it’s people like you, which have helped us in this regard, which we appreciate. So, thank you.
T3: And Jaime, thank you very much for joining us today. And when this pandemic is finally over, I look forward to getting together with you in-person, having a few drinks, and having some of those great dairy market discussions that we always have.
Jaime: Absolutely, with you and the whole team. I’m really looking forward to that day.
T3: We are, too.