Is The U.S. A Reliable Trading Partner?
The global dairy market is becoming smaller and more interconnected over time. For the last decade, the U.S. was the largest dairy exporter to Mexico and Mexico was our most significant dairy export market accounting over 40 percent of total U.S. dairy exports. The majority of the exports to Mexico consisted of SMP/NFDM, cheese, whey products, and fluid milk. The U.S. dominated Mexican SMP/NFMD imports capturing between 90 percent and 98 percent of the total monthly volume very recently.
In 2017, as the U.S. pulled out of the Trans-Pacific Partnership (TPP) and demanded NAFTA renegotiation, our trade partners became weary and started to look outside of the U.S. for their agricultural commodity imports. The total annual value of U.S. dairy exports to Mexico is approximately $1.2 billion. Dairy exports are small compared to total U.S. exports to Mexico, which exceeded $231 billion in 2016. Nevertheless, U.S. dairy exports are vital for the balancing of the U.S. dairy market. About 15 percent of U.S. milk production is exported in the form of finished dairy products, with Mexico accounting for nearly one-third of all U.S. dairy trade. Even small changes in the balance can cause big commodity price swings that translate directly to the farm gate milk prices. During the second half of 2017, U.S. share of total Mexico NFDM/SMP imports fell below 70 percent. In July 2017, U.S. NFDM/SMP market share dropped to 68 percent, as Mexico’s combined SMP imports from Spain and Italy tallied over 20 percent. As the perception of the U.S. as a potentially unreliable trading partner grew, Mexico diversified its supply base. Fortunately, by October U.S. SMP/NFDM exports to Mexico rebounded to 86% of the total. Still, it is clear that Mexico has already forged new trade relationships even though there has yet to be any changes to the NAFTA agreement.
So what’s next? As the dairy industry stands at the crossroads, it needs to look outside the box and seek new markets. U.S. dairy production is expected to increase between 1.4% to 2% annually, creating an exportable volume of dairy products equivalent to 32 billion pounds of milk. With the U.S. domestic demand growth at around 1.5 percent, the export market is the path to sustain future growth of the industry.
Hopefully, rational thoughts abound in the latest rounds of talks among Canada, Mexico, and the United States. In a recent Reuter’s poll, only four of the 45 economists polled said they thought the deal would be terminated, with the rest expecting an updated trilateral agreement that would not differ radically from the current one.