January 4, 2019

Mexico Remains Key Market for U.S. Dairy Amid Trade Conflict

 |  By: Fran Howard

If nothing else, 2018 was unpredictable, and it looks as if uncertainty for the dairy industry will continue into 2019. In late December, President Donald Trump and his advisers were reportedly considering withdrawing from the North American Free Trade Agreement (NAFTA) in an attempt to push its replacement agreement—the U.S.-Mexico-Canada Agreement (USMCA)— through Congress. If the United States were to pull out of NAFTA, Congress would have six months to approve the USMCA to prevent tariffs from going into into effect on $1.3 billion in goods traded between the three countries.


Monica Ganley, analyst with the Daily Dairy Report and owner of Quarterra consulting in Buenos Aires, says “it is critical for the United States to continue to defend its market dominance in Mexico.” If enacted, USMCA would continue the privileged tariff treatment that existed under NAFTA for dairy product trade between the United States and Mexico, but little progress has been made in terms of ratification by the three countries party to the agreement, she adds.


Despite last year’s heated rhetoric from the Trump administration around trade negotiations and border security, 2018 turned out to be a very strong year for dairy trade between the United States and Mexico, according to Ganley. For the first 10 months of the year, Mexico imported 27% more U.S. skim milk powder and nonfat dry milk than it did in the comparable period in 2017.


According to data from the United Nations Food and Agriculture Organization (FAO), Mexico was on track to import 4.4 million metric tons (MMT) of dairy products in milk equivalent terms in 2018, up 11.3 percent from 2017 levels. Increasing import volumes from the United States drove much of the year-over-year increase, making Mexico the world’s second largest dairy importer, Ganley says.


Mexico’s growing dairy market makes it a key target of competitors. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) took effect December 30. The CPTPP gives participating countries tariff-free access to limited amounts of dairy imports to Mexico. “Important dairy exporters such as New Zealand and Australia have signed on to the CPTPP,” Ganley notes. “And they will look to compete head to head with the United States on dairy.” In January 2017, the Trump administration pulled out of the trade agreement, which at that time was called the Trans Pacific Partnership (TPP).  


Mexico’s tariff-free quotas under the CPTPP will open at 25,000 MT for milk powder, 4,250 MT for cheese, and 1,500 MT for butter, and then steadily increase over the next 11 years. “These volumes represent only a fraction of Mexico’s total demand, but they provide a new source of competition for American suppliers,” Ganley notes.


Going forward, Mexican demand for imported dairy products is expected to remain robust. According to USDA’s recent Dairy: World Markets and Trade report, Mexico is expected to produce 1 percent more milk this year than last as higher productivity offsets a small decline in the country’s dairy herd. However, because milk prices will likely remain relatively low compared to production costs, on-farm investments will be small, while strong demand for cheese, yogurt, and other products will help boost processing use and encourage more imports of processed dairy products, the report states.


“The U.S. dairy industry has come to rely heavily on the Mexican market for dairy exports in recent years,” says Ganley. “Although this strategy has paid off so far, the United States needs to protect its advantage and expand its influence if it hopes to continue to grow dairy exports.”