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June 23, 2017

NAFTA Negotiations As Critical As It Gets

 |  By: Dairy Talk

If there’s one issue worth losing sleep over, it’s what the Trump, Trudeau and Nieto administrations do re-negotiating the North American Free Trade Agreement (NAFTA).

Dairy is extremely vulnerable. About 15% of U.S. milk production is exported. Mexico and Canada buy 45% of U.S. dairy exports—Mexico buys nearly a third of those exports, Canada an eighth.

Some states are even more trade dependent, with California, Wisconsin, Michigan and New York exporting 20 to 30% of their milk production. “A shake-up in trade flows will disproportionately affect those states,” say Rabobank dairy analysts Tom Bailey and Aga Dobrowolska Perry.

Earlier this month, Rabobank released an analysis of NAFTA and the prospects of renegotiating the 23-year agreement. Most likely, renegotiation will result in a soft landing, say the analysts, where the U.S. dairy industry sees more upside than downside, increased risk for Canada and status quo for Mexico.

But none of this is a given. “History tells us that it will take at least 2 to 4 years to renegotiate the deal,” says Perry, “and all that assumes all three nations will be able to agree.”

Worst-case scenario

A worst-case scenario, where NAFTA is dissolved, would be tumultuous, with $3.7 billion in dairy trade lost. “For dairy, it would take years to recover, as milk supplies would be forced lower due to a drop in milk prices [approaching those of 2009] and weakened economic growth slowing farmgate investments,” say the analysts.

The U.S. eventually would likely regain markets elsewhere, picking up sales displaced by European and Oceania exports to Mexico. But that reshuffling would take time, and would likely be at lower prices due to longer transportation routes and other marketing costs.

“The very threat of the loss of NAFTA should be a wake-up call to the U.S. dairy industry’s lack of market differentiation and overdependence on one single market,” say Bailey and Perry.

One of the trickier aspects of the negotiations will be gaining greater access to the Canadian dairy market. Canada has already negotiated a new, bilateral agreement with the European Union, granting some additional limited access to its dairy markets. But that has come under increasing scrutiny in recent weeks as the reality of what that access will mean to Canadian dairy farmers.

Creating even more access for U.S. dairy farmers won’t be easy, if it comes at all. "We are making big progress on opening things up," the President said week ago during a trip to Wisconsin. He was referring to the most recent trade dispute with Canada’s cessation of milk protein concentrate imports. But no details were provided, and none have followed in the days since.

The President claims to be the world’s consummate deal maker. He needs to put those skills to use because failure would be a nightmare.