October market report: Analyzing the USMCA

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Now that an updated trilateral free trade agreement among the U.S., Mexico and Canada is tentatively in place, dairy industry players are combing through the details to get a sense of what will happen once the terms of the deal become effective in 2020.

Reaction to the agreement has been mixed. From the perspective of the American dairy industry, the U.S. got most of what it wanted out of the deal. From the highest levels of the government down to most dairy farmers in the U.S., reaction to the deal has been generally positive.

The same is true south of the border. The USMCA preserves a trading relationship that’s been great for both the U.S. and Mexico.

It’s a different story in Canada. The government there has spun the deal as a victory, but dairy farmers and powerful dairy interest groups claim that Ottawa caved in on dairy.

Changing the U.S. – Canada dynamic

One of the longest-standing points of contention in the NAFTA era was the strict controls Canada kept on its dairy markets. The country’s powerful dairy lobby helped create trade barriers and an entrenched quota system that’s insulated producers from the worst of the inherent volatility in dairy markets.

More market access

In successive trade deals (first with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, of which the U.S. is not a part, and now with the USMCA), Canadian trade officials loosened things up. Before, U.S. dairy exports to Canada were limited to just over 1% of Canada’s dairy market, the new agreement gradually opens the door for imports up to 3.6%.

This fact sheet from the U.S. Trade Representative outlines the changes based on product type in detail.

The lobby group Dairy Farmers of Canada quickly expressed its displeasure. In a press release, they stated that Ottawa “conceded access to our domestic market to the U.S.,” a move that “is slowly bleeding Canada’s dairy sector.”

From our perspective, increased access to Canadian markets amounting to 3.6% of that country’s dairy output is little more than flirting at the margins. It’s a fraction of a fraction in terms of total U.S. dairy production.

Don’t get us wrong: We’re glad. It may be little more than a symbolic difference, but it’s a difference in the right direction.

Eliminating Canada’s Class 6 and 7

Another win for U.S. dairy was Ottawa’s agreement to suspend the Class 6 and Class 7 milk classes.

The structure of these classes resulted in Canadian skim milk solids being priced below world market values. American dairy interests claimed that constituted an illegal market barrier to American producers who could no longer compete.

Under USMCA, these milk classes disappear.

Status quo with Mexico

The USMCA preserves the duty-free relationship between buyers and sellers of dairy products between the two countries.

That’s precisely what American trade authorities wanted, since Mexico is our largest dairy export partner. No other nation comes close.

But tariffs that the U.S. placed on steel and aluminum imports from Mexico, Canada and other key allies earlier this year prompted Mexican authorities slap $3 billion in tariffs on American exports in return. Fresh cheeses were among the products affected.

The USMCA doesn’t address other, separate trade actions. So while the trilateral trade deal provides for duty-free exports of American cheeses into Mexico, that can only resume if the unrelated tariffs on those products are lifted. And the only way those tariffs are lifted is if the steel and aluminum duties that started it all disappear first.

Will USMCA be good for dairy?

The short answer is that it appears the USMCA will be positive for American dairy.

But that a lot can happen between now and the deal’s anticipated ratification by all parties’ legislatures next year. If any of the respective bodies do not ratify the USMCA, it’s back to the negotiating table.