March 9, 2017

Nonfat Dry Milk Market Reflects Concerns Over Trade with Mexico

 |  By: Fran Howard

U.S. and Mexico relations have cooled since the election of President Donald Trump due primarily to charged rhetoric over erecting a wall between the two countries and making Mexico pay for it. Trump’s threat that he will also open the North American Free Trade Agreement to benefit the United States and his stepped-up enforcement of deporting undocumented immigrants haven’t helped either, but so far trade between the two countries has remained on an even keel. Or has it?

“Since January, the U.S. nonfat dry milk (NDM) market has been roiled by concerns over potential disruptions in product flow to Mexico, and those concerns have not been eased by the devaluation of the Mexican peso relative to the U.S. dollar,” says Sara Dorland, analyst with the Daily Dairy Report and managing partner at Ceres Dairy Risk Management, Seattle.

Over the same period, the U.S. NDM market has plummeted. Since January 1, the CME spot NDM market has lost more than 20% of its value, tumbling from $1.02/lb. at the start of the year to 81 cents on March 8. NDM futures prices for 2017, which have mirrored the spot market, have dropped from $1.1496 at the start of the year to 91.22 cents as of March 8.

“It’s uncertain whether the current market just reflects of lot of handwringing or whether Mexico will actually begin to reduce some of its reliance on U.S. dairy yet this year,” Dorland says. “Given the sheer volume of what Mexico imports from the United States, it’s doubtful Mexico will be able to expand milk production enough to disentangle it from the United States.”

But it could try. Some politicians in Mexico are now pushing the government to provide support to the Mexican dairy industry in an effort to increase supply so the country can meet more of its internal demand. Last year, Mexico produced almost 5% more milk than the prior year after adjusting for leap day. Total milk output in Mexico last year hit 26.3 billion pounds.

“Over the past decade, Mexico has achieved a 1.6% compound annual growth rate in milk production,” she notes. “Although these are impressive increases, Mexico still relies heavily on the United States to make up the gap between supply and demand.”

Mexico is the U.S. dairy industry’s largest export market. Last year, Mexico imported a total of 285,631 metric tons of NDM or skim milk powder (SMP), an increase of 10.5% from 2015 levels. The United States supplied nearly all, 94% or 267,538 metric tons, of that powder.       

“While Mexico is unlikely to become self-sufficient in dairy anytime soon, growth in domestic milk production coupled with a strategy to diversify imports by increasing import volumes from other regions could reduce Mexico’s reliance on the United States,” Dorland says.  

Under the 2017 Harmonized Tariff Codes, Mexico allows up to 80,000 metric tons of NDM/SMP into the country tariff free from World Trade Organization (WTO) members. For over quota volumes, the tariff rate is 50%. 

“New Zealand, Europe, and Argentina are all WTO members, and the math suggests that if Mexico were to diversify its supply base, it could have a significant impact on U.S. dairy,” she says. “Some of that disruption could land in 2017.”

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