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Trade, Not Aid

October 1, 2018

If a quick scan of the business news headlines of 2018 tells us anything, it’s that America’s dairy farmers have a great deal riding on foreign exports – even as domestic markets continue to absorb the lion’s share of U.S. milk production.  The tariff conflicts affecting U.S. dairy export sales to our top markets have had significant, harmful financial impacts for dairy farmers. Resolving them is critical to realizing our long-term farmer income and marketing opportunities at home and abroad.

It wasn’t all that long ago when export opportunities were hardly a component of any company’s marketing strategy in the dairy cooperative or processor communities, and the main thing the dairy farmer community focused on was minimizing imports.

But oh, how times have changed.  This is due to a variety of factors, ranging from the reality that there are now at least as many middle-class consumers in China as in the United States, as well as the fact that the U.S. has invested significant resources in recent decades, such as forming the U.S. Dairy Export Council, our own Cooperatives Working Together (CWT) program, and the Consortium for Common Food Names, to help dairy companies reach and defend foreign markets. The trickle of export volume at the start of the 21st century has now surged to more than 16% of our overall milk production, and earlier this summer, the share topped 18%.

To be clear, the U.S. dairy sector will always rely heavily on nourishing America’s 330 million consumers. But with the recognition of the critical role that global markets have come to play for U.S. dairy farmers, growing our exports is no longer a nice-to-have – it’s an imperative. And just as slight swings in domestic supply and demand can have outsized impacts, so, too, does the size of our export market have a noticeable effect on milk checks.

The best example of this is what happened earlier this summer, when after a long period of lackluster prices, the dairy futures markets indicated much better milk prices for the second half of the year – until both China and Mexico announced retaliatory tariffs on U.S. farm exports, in response to U.S. tariffs against steel and aluminum exports from those nations.

Mexico and China are the No. 1 and No. 3 destinations for America’s dairy exports, and even though exporters are working to maintain a portion of existing sales, the impact on both cash and futures markets was damaging.  The imposition of those tariffs was the only significant “new” factor affecting milk supply and demand this summer, and it knocked farm-level prices down by more than $1 per hundredweight. NMPF estimated that the total cost of the tariff conflict to dairy farmers, if nothing changes between July and the end of this year, will be more than $1.5 billion.

Agriculture Secretary Sonny Perdue recognized the cost of the tariffs to American agricultural producers and worked to help mitigate some of those losses.  Unfortunately, the dairy portion of the tariff relief package – $127 million in direct payments to farmers, plus $85 million in purchases of dairy products – is far smaller than what the tariffs are costing dairy producers.

NMPF is continuing its efforts to demonstrate to the Agriculture Department (USDA) the full extent of the monetary losses caused by the tariffs, in anticipation that a second payment package may be delivered before the end of 2018.  While USDA’s current methodology to calculate the damage for U.S. ag commodities doesn’t adequately capture the impact on dairy, we will keep making the case for adjusting that approach to reflect how this retaliation is actually impacting farmers.  We will push for additional financial resources while our products face significant tariff-related headwinds in world markets.

The best solution to this export challenge, of course, is the removal of the tariffs and the creation of even more trade deals that deliver new dairy markets for our industry.  That’s why it is so important that the newly negotiated agreement with Canada force that country to scrap their harmful Class 7 pricing program. We’ll have more to say on that agreement in the coming months.

Since trade policy solutions are likely to take time to implement, there are other avenues we must also pursue. One of the tools we’ve used to help dairy farmers mount a vigorous effort in the trade arena is the dairy-farmer funded CWT export assistance program which, for 15 years, has utilized member resources to bolster the sales of American-made dairy products in overseas markets.  With its focus on the products that most benefit dairy farmer milk checks – cheese, butter and whole milk powder – CWT helps cooperatives compete for and win sales contracts against foreign competitors.

Earlier this month, total year-to-date exports facilitated by CWT topped 1 billion pounds’ worth of milk output, which is more than half of the total increase in U.S. milk production through August.  Without CWT’s assistance, we would have a lot more cheese, butter and milk powder looking for a home domestically.

Some people in the industry may look at the vagaries of international markets and think, if the world is so uncertain, given the fickle political and economic factors on every continent, why even bother? The answer is because we must. If the 34+ billion pounds of milk we currently export were sloshing around the U.S. market, just imagine how bad milk prices would be.  A lot more farmers would be forced out of business.

Maintaining existing markets while searching for new customers is never a given, at home or abroad. But the U.S. dairy community has had tremendous success at reaching foreign customers in the past 15 years.  Despite today’s headlines about the current headwinds we’re experiencing, America’s dairy producers and processors will continue competing – successfully – in the coming years.