NAFTA Negotiations as Critical as it Gets

If there’s one issue worth losing sleep over, it’s what the Trump, Trudeau and Nieto administrations do while renegotiating the North American Free Trade Agreement (NAFTA).

Dairy is extremely vulnerable. About 15% of U.S. milk production is exported. Mexico and Canada buy 45% of U.S. dairy exports—Mexico buys nearly a third of those exports, Canada an eighth.

Some states are even more trade dependent, with California, Wisconsin, Michigan and New York exporting 20% to 30% of their milk production. “A shake-up in trade f lows will disproportionately affect those states,” say Rabo-bank dairy analysts Tom Bailey and Aga Dobrowolska Perry.

Last month, Rabobank released an analysis of NAFTA and the prospects of renegotiating the 23-year agreement. Most likely, renegotiation will result in a soft landing, the analysts say, where the U.S. dairy industry sees more upside than downside, increased risk for Canada and status quo for Mexico.

But none of this is a given. “History tells us that it will take at least two to four years to renegotiate the deal,” Perry says, “and all that assumes all three nations will be able to agree.”

Worst-case scenario

A worst-case scenario, where NAFTA is dissolved, would be tumultuous, with $3.7 billion in dairy trade lost. “For dairy, it would take years to recover, as milk supplies would be forced lower due to a drop in milk prices [approaching those of 2009] and weakened economic growth slowing farmgate investments,” the analysts say.

The U.S. would likely eventually regain markets elsewhere, picking up sales displaced by European and Oceania exports to Mexico. But that reshuff ling would take time and would likely be at lower prices due to longer transportation routes and other marketing costs.

“The very threat of the loss of NAFTA should be a wake-up call to the U.S. dairy industry’s lack of market differentiation and overdependence on one single market,” Bailey and Perry say.

One of the trickier aspects of the negotiations will be gaining greater access to the Canadian dairy market. Canada has already negotiated a new, bilateral agreement with the European Union, granting some additional limited access to its dairy markets. But that has come under increasing scrutiny in recent weeks as the reality of what that access will mean to Canadian dairy farmers.

Creating even more access for U.S. dairy farmers won’t be easy, if it comes at all. “We are making big progress on opening things up,” said President Donald Trump in mid-June during a trip to Wisconsin. He was referring to the most recent trade dispute with Canada’s cessation of milk protein concentrate imports. But no details were provided, and none have followed in the days since.

The president claims to be the world’s consummate deal maker. He needs to put those skills to use because failure would be a nightmare.

 

Editor's Note: This story appears in the July 2017 issue of Dairy Herd Management.

 
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