April 9, 2019

U.S. Dairy Export Crisis Averted, For Now

 |  By: Fran Howard

Last week’s announcement that President Donald Trump would delay shutting down the U.S. border with Mexico for one year deescalated what could have quickly become an export crisis for the U.S. dairy industry. That said, not everything is running smoothly at the border for U.S. dairy exporters, according to the U.S. Dairy Export Council (USDEC). 

“The administration appears to already be slowing trade by shifting border staff from customs to immigration responsibilities. In response, USDEC is hearing reports that U.S. truck shipments to Mexico are also being slowed,” USDEC notes. Some news outlets have reported that trucks entering the United States from Mexico have been delayed for up to 12 hours. 

Trump’s recent threats to shut down the border were motivated by his frustration over what he sees as Mexico’s failure to prevent Central American migrants from reaching the U.S. border. However, Mexico is one of the United States’ most important trading partners and the single largest market for U.S. dairy products. In 2018, the United States exported $1.4 billion worth of dairy products to Mexico, according to USDA’s Foreign Agriculture Service. Skim milk powder (SMP) and nonfat dry milk (NDM) accounted for nearly half of the value. In 1994, the year the North American Free Trade Agreement (NAFTA) went into effect, dairy exports from the United States to Mexico totaled just $181.7 million. 

“Dairy trade between the two countries has grown dramatically in recent years, aided in part by tariff-free product movements under NAFTA, which has since been renegotiated—but not implemented—as the U.S.-Mexico-Canada Agreement (USMCA),” says Monica Ganley, an analyst for the Daily Dairy Report and the principal of Quarterra, a food and agriculture consulting firm in Buenos Aires.
Despite the current trade dispute between the United States and Mexico that led to Trump placing tariffs on steel and aluminum and Mexico retaliating with tariffs on some dairy products, dairy demand from Mexico has continued to be strong right into this year. U.S. exports of dairy products to Mexico in January, the most recent month for which data are available, were up 20% year over year in value terms. Shipments have likely remained robust in recent weeks, driven in part by Mexico’s re-export of U.S. dairy products as food aid to Venezuela, says Ganley.

“How the mechanics of a closed border would work is unclear, but presumably, if Trump were to ever follow through on his threat to close the border, exports of U.S. dairy products would cease immediately. Product inventories would grow and ultimately put downward pressure on both retail food prices and farmgate milk prices,” Ganley says. “The effect at the farm level would be devastating. Even if processors and traders were to aggressively search for alternative markets, it is unlikely they would be able to find buyers for all of the excess product.”

Clearly, the effects of a closed border would be profound for both countries. Moody’s Analytics has estimated that a shutdown of more than several weeks would be enough to push both the United States and Mexico into recession. Even though the crisis has been averted for now, Trump has said he is now considering placing tariffs on automobile imports from Mexico. “If that were to happen, the Mexican government would likely retaliate—perhaps even placing tariffs on imports of NDM from the United States,” Ganley says.