December 3, 2018

USMCA, Tarriff Truce Dominate Market Activity

 |  By: Robin Schmahl

There have recently been two positive events that have taken place during the past week. One was the signing of the U.S.-Mexico-Canada agreement (USMCA) which replaces the former NAFTA agreement. This was a long time in the making and has finally been accomplished. USMCA maintains the trading structure between the U.S. and Mexico that was a part of NAFTA. Some concessions had to be made on the part of Canada with their Class 7 pricing system as well as opening the door further for greater access to their markets. Dairy organizations in Canada are not overly happy about some of the concessions that were made in order to accomplish the agreement. 

The other positive event was the agreement of the U.S. and China of a 90-day truce on tariffs. This truce was not the elimination of current tariffs, but the delaying of a possible increase of tariffs to 25% on $200 billion of Chinese goods that would have taken place on January 1st. During this period, Beijing agreed to purchase a substantial unspecified amount of agricultural, industrial, and energy products. Mainly, all this does is extend the time period for the U.S. and China to work on some form of trade agreement. It was basically kicking the can down the road due to the inability of the U.S. and China to work anything out previous to the G20 meeting. 

These two events sparked a positive attitude in the markets across much of the complex. The USMCA agreement probably was more positive for the dairy industry than the 90-day truce on tariffs. It may take some time to work through the issues associated with the USMCA agreement in order to see a strong resumption and continuation of dairy trade. The truce with China may not really result in much impact with an increase of dairy exports to the country as current tariffs remain in place and have not been removed.  

It will be up to supply and demand to dictate the strength of dairy prices. Increasing milk futures based on positive news in the market needs to have physical support under it in order to maintain gains. This still may be an uphill battle based on current dairy industry fundamentals.