There are plenty of articles about the U.S. placing tariffs on goods entering the U.S. from Mexico, Canada, and China as a tool for raising tax revenue, balancing trade between countries and improving (or not) the U.S. economy. While interesting, those articles do not address potential impacts to your bottom line. Let’s zoom in and get a perspective on the potential impact of tariffs to the U.S. dairy industry.

 

 

U.S. Dairy Has a Large Stake in Exports and in the Impact of Potential Tariffs

 

Before we talk about tariffs, let’s take a quick look at the impact of the U.S. dairy industry on the world market. The U.S. exported $2,090 billion in goods in 2022 (Bea: All Countries Total – International Trade and Investment Country Facts), and dairy accounted for a record $9.55 billion (Dairy Products | USDA Foreign Agricultural Service) or about 0.45% of those exports that year, followed by $8.0 billion or 0.4% of total exports in 2023. While these numbers may seem rather small, they actually make dairy a rather significant player in the global market. And wouldn’t you know it, the three countries the U.S. is primarily targeting for tariffs accounted for about 50% of dairy’s non-U.S. business in 2023 (Dairy Products | USDA Foreign Agricultural Service).

 

• Mexico, the largest importer of U.S. dairy, alone accounted for $2.32 billion or 29% of dairy exports in 2023.
• Our second biggest importer, Canada, imported $1.09 billion of U.S. dairy in 2023, or 13% of U.S. dairy exports.
• China, our third biggest dairy importer, bought $0.61 billion worth of U.S. dairy goods (or 8% of the U.S. dairy export business in 2023).

 

If the U.S. places tariffs on those three countries, the price of Mexican, Canadian, and Chinese goods will rise in part or in whole of the tariffed amount for U.S. consumers. That’s because importers charge more to cover the newly higher cost of the product.

 

 

 

Why Tariffs Placed on Goods Coming into the U.S. Affect Dairy Exports

 

Interesting, but whatever, you might be thinking; we’re talking about imported goods to the U.S., not goods exported from the U.S. However, markets equalize in price globally. And like the markets we watch every day, countries react to new information to try to maximize their outcomes. Big tariffs tend to promote big reactions. Let’s dig into likely reactions of Mexico, Canada, and China, which will likely fall into one of the three following scenarios:

 

1. Mexico, Canada, and/or China decide they need your dairy products and demand remains the same, with little (if any) change in price. This would more likely be the case if there were no other countries selling dairy or no non-dairy substitutes. This scenario is unlikely, given statements from those countries, and knowing there are no non-dairy substitutes.
2. Mexico, Canada, and/or China decide to retaliate by placing tariffs on goods imported from the U.S. If this were to happen, the price of dairy in those countries would rise to some degree equal to the tariffs, which might also have an impact on the global price of dairy. However, the overall rise in price might decrease demand for dairy, as some consumers look for alternatives to the higher price of milk.
3. Mexico, Canada, and/or China look to alternative markets to supply their dairy needs, likely in tandem with retaliatory tariffs. As U.S. dairy becomes overpriced in those countries, imports will decrease (from the current 50%), causing greater supply in the U.S. due to diminished overseas demand. This could bring the potential for falling prices in the U.S.

 

While rising global prices may at first seem advantageous, it’s on the back of a less competitive U.S. market. This means the supply in the U.S. could actually increase, depress prices domestically, and pressure prices downward globally. But this is all theory. The 2018 trade war with China alone during the first Trump administration can give us some insight into the impact of tariffs on dairy.

 

 

 

The Impact of the U.S. – China Trade War Was Falling Exports and Price

 

In 2018, China responded to the tariffs put on Chinese goods by placing a 45% tariff on U.S. dairy products, 25% higher than any other tax borne by other countries. Per USDEC, U.S. dairy imports to China decreased by 43% that year. However, the tariffs didn’t last forever.  By early 2020, the U.S. and China signed the U.S.-China Economic Trade Agreement (Phase 1), releasing the tariff pressure on dairy products and setting up the possibility for the record-breaking exports of U.S. dairy products in 2022.

Let’s take a look at how the tariff war played out. The chart below shows dairy exports during the first Trump term. The red line represents 2018. We can see that exports started off very strong through the first 6 months of the year before falling to 4-year lows by September.

 

 

Subsequently, milk prices also fell because of the trade war. At the start of 2018, Class III milk closed at $13.40/cwt in January, then saw a strong rally which brought prices to a high for the year of $16.64/cwt, and eventually plummeted back down to $14.31/cwt to close out the year.

 

 

 

 

A Trade War with Mexico, Canada, and China Could Have a Serious Downward Effect on U.S. Dairy

 

As you might recall from the start of the article, China imports about 8% of U.S. dairy exports while Mexico and Canada import a combined 42% of U.S. dairy exports. As a result, the multiplied potential damage of a trade war to the U.S. dairy farmer is potentially up to 5 times greater if a new trade war launches. This, clearly, has real-life implications to you. What steps can you take?

 

1. Now is a great time to make sure you are protected. Do you have dairy insurance? Do you have a marketing plan that prepares you for a downward shift in the market without sacrificing potential gains?
2. Make sure you talk with your advisor to keep ahead of any market shifts. Total Farm Marketing is here to help!
3. Stay alert and be prepared to act when the market demands it. Especially important, if you tend to turn your phone off by day, now might be a good time to be available for a call from your advisor.

 

 

 

This year, Total Farm Marketing is celebrating our 40th year helping farmers.

Give us a call at 800.334.9779 to discuss your situation and how we can help you achieve marketing success.

 

 

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