May 5, 2017

Can Washington Fix Canada and Mexico?

 |  By: Mike Opperman

Whether or not the North American Free Trade Agreement (NAFTA) gets reworked or stays the same, it’s evident that any trade agreement involving two of our three largest trading partners—Mexico and Canada—is critically important to the near and distant future of the U.S. dairy industry.

“Right now Canada and the U.S. are in a position of telling one another that ‘if you don’t stop doing this, I’m going to do this,’” says Andy Novakovic, ag economist at Cornell University. “We’re not in an environment of ‘let’s both win.’”

Dairy producers in Wisconsin are seeing this play out in real time. A change in the way the Canadian dairy industry prices ultrafiltered milk created a ripple effect felt across the Upper Midwest. In Minnesota and Wisconsin, 70-plus dairy producers were forced to find new markets for milk. In New York, the change didn’t have a direct effect on producers but had a significant impact on processors who had contracts to sell ultrafiltered milk into Canada.

“Companies in New York still have sales of ultrafiltered milk into Canada but they are a fraction of what they were and buyers have been told that they won’t be long term,” says Jodi Smith, senior dairy market and policy analyst at Upstate Niagara Cooperative.  “The pricing change and subsequent lack of orders from Canada pushed back over 3 million pounds of weekly milk volume that has to find a new home.”

The politics around trade issues usually demand that for every negative action a retaliatory action must take place. That was evident when President Trump slapped a 20% tariff on softwood lumber entering the U.S. from Canada. While officials don’t tie the decision directly to the dairy situation, the timing suggests the two issues are closely correlated.

Given the current climate, it’s probably best if both countries have a cool-down period before sitting down at the negotiation table. Clearer heads need to prevail before short-term decisions create long-term damage. “With any trade negotiation it depends on what brings the two groups to the table, and what their expectations are when they get there,” Novakovic says. “We need to get to a win, win scenario.”

South of the border, Mexico and the U.S. have enjoyed trading bliss for a number of years, with the two countries working harmoniously to build consumer demand for dairy products and domestic supply to support it. But the relationship, while still strong, is certainly strained. Recent rhetoric on Capitol Hill is making Mexico feel like the U.S. may not be committed to a long-term relationship.

“Different export markets act differently,” says Ted Jacoby III, president at T.J. Jacoby & Company, a family-owned dairy products trading company. “Mexico wants a close relationship, it’s how they do business. Right now all they are hearing is ‘we’re going to build a wall.’”

Early in 2016 Jacoby said some of their sales to Mexico dropped as customers chose to purchase from the EU. “They told us they were going to buy from Europe because the price is about the same and they needed to diversify their supply,” Jacoby says. “They made a conscious business decision to diversify their supply base because they were nervous about the news coming out of Washington.”

Thankfully the U.S. has a distinct advantage because of its location which makes for great customer service. “We have warehouses on the border, and if a customer places an order they can literally have a shipment within a day,” Jacoby says. That’s a big advantage, and one that should, over time, normalize the market.

“As long as we make the assumption that we won’t do anything drastic in Washington, everything should go back to normal,” Jacoby says. “The nervousness about whether we will continue with NAFTA or withdraw will continue for a while.”