The U.S. dairy industry is highly dependent on trade, with more than 20% of its total milk supply sold to other countries in the form of milk and dairy products, especially milk powders. Thus, even the threat of a trade war has had a chilling effect on nonfat dry milk (NDM) and skim milk powder (SMP) markets, according to Sarina Sharp, analyst with the Daily Dairy Report.
“While no new tariffs on U.S. dairy exports have been implemented, the risk of a trade war has already taken a toll on the U.S. dairy industry,” Sharp said.
Dairy Market News backed up that assessment when it reported that even the possibility of tariffs has caused domestic NDM buyers to take a step back “to avoid catching the proverbial falling knife.” CME spot NDM prices closed at $1.27/lb. last week, the lowest price in six months, and NDM futures were at their weakest levels since last summer.
“Throughout the final quarter of 2024, the bulls bellowed in the U.S. milk powder markets. Low U.S. output and tight global stocks buoyed U.S. powder values,” Sharp said. “A steep decline in milk and milk powder production in China in the second half of last year suggested the possibility of greater Chinese imports and higher prices.” CME spot NDM prices did indeed notch a two-year high in November.
While the supply outlook for NDM still remains bullish, the threat of tariffs has awakened U.S. bears. On the supply side, the same factors that choked off U.S. powder output last year—a heifer shortage, avian influenza, and competition for milk from other dairy processors—will continue to weigh on production this year, Sharp noted, adding that additional cheese processing capacity could drag U.S. powder output below its 11-year low.
On the demand side, the Trump administration’s announcement of 25% tariffs on Canada and Mexico, which were slated to begin on February 4, nearly set off a trade war after both Canada and Mexico responded by preparing to impose retaliatory tariffs. Since then, the United States, Mexico, and Canada have agreed to a 30-day reprieve from tariffs until March 4.
Interestingly, while Mexico did not include NDM in its list of potential targets for retaliatory tariffs, trade tensions have nonetheless chilled cross-border dairy commerce, Sharp said. Dairy Market News recently described Mexican demand for U.S. milk powder as “subdued,” and buyers have expressed concerns about committing to buy milk powder today that could face tariffs in the near future.
At the same time, the bulls remain mostly in charge in Oceania. Skim milk powder values at the Global Dairy Trade auction are close to November’s highs, and New Zealand dairy co-ops have been raising forecasts for pay prices to producers. Despite the recent recovery in prices, Dairy Market News reported an uptick in international queries for SMP from New Zealand as traders worldwide wait to see what happens with U.S. tariffs.
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