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June 20, 2018

Are Dairy Markets Over-reacting to Tariff Fears?

 |  By: Jim Dickrell

University of Wisconsin dairy economists Bob Cropp and Mark Stephenson both say dairy markets are likely over-reacting to the threat of tariffs on U.S. dairy products by Mexico and China. They note the tariffs are more threat than reality at this point, and not a single tariff has been imposed—yet.


They made their comments on their monthly podcast released Wednesday. “The tariffs don’t take place until July, and we don’t know if they will happen,” says Cropp.


“We may be reacting more strongly than we should…I think it’s an over-reaction,” adds Stephenson.


Absent those the tariff, market fundamentals are extremely strong. Dairy exports are at record highs, now accounting for nearly 19% of U.S. milk production. Exports were up 31% over a year ago in April. May milk production was up less than 1% and lower than historic trend, and producers to top dairy states are milking fewer cows. California is down 18,000 head from a year ago, Wisconsin is down 5,000 head and Michigan is down 4,000 cows.


Nevertheless, market reaction to the threat of tariffs has been strong, with barrel cheese down 27¢/lb since the beginning of June, block cheese down a time, and butter down 8¢. All of that has driven futures prices south as well.


Just a few weeks ago, Class III futures were in the $16 range and flirting with $17 later this fall. Now, they’re in the $15 range and struggling to reach $16. “I think that’s an over-reaction” to the threat of tariffs, says Cropp. He says Class III prices should rebound into the $16 ranges this fall based on strong fundamentals.


“I hope next month brings more clarity,” says Stephenson. “We’ll see if tariffs are binding, or were more talk than reality.”

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