Sunday, September 18, 2016

Free Trade Agreements -What do They Mean for the Dairy Industry?

The news is filled with comments and debates about free trade agreements.  President Barack Obama is pushing congress to approve the Trans-Pacific Partnership (TPP) before his term in office expires.  Hillary Clinton and Donald Trump are both opposed to the agreement.  Donald Trump told the President of Mexico, Enrique Pena Nieto, that he wants to renegotiate the North American Free Trade Agreement (NAFTA).  There are large public protests in Germany against the Transatlantic Trade and Investment Partnership (TTIP).  Five countries, including the U.S. issued a joint letter to Canada objecting to its increased restrictions on dairy trade.

What impact do trade agreement have on the U.S. dairy industry?  In 2014 U.S. dairy producers saw some of the highest dairy prices on record as dairy exports surged and global dairy prices skyrocketed.  In 2015 and continuing into 2016, U.S. dairy prices have seen a reversal of exports and prices have fallen to lows.  What is the impact of existing and new "free" trade agreements on exports and imports of U.S. dairy products?  How does this impact U.S. dairy pricing?

All Free Trade Agreements attempt to level the playing field to allow global competition.  Increased competition typically lowers prices for consumers.  Some countries have advantages with lower labor rates, fewer environmental restrictions, few labor contracts, lower tax rates, and other factors.  If all countries included in the pending new agreements were allowed to trade without duties, tariffs or quota restrictions, would the U.S. dairy industry benefit with increased demand or would prices collapse with the increased competition?

In reviewing other industries, trade agreements do tend to lower consumer prices with the increase in global competition, but some production typically leaves the U.S. and goes to other countries.  Easily sighted examples are the automobile industry and the manufacturing of smart phones and other consumer products.  In these cases, consumers have gotten the advantage of lower cost products, but much of the manufacturing has left the U.S.

Dairy once had shipping restrictions that forced a limited geographical range for production, processing, and sale of dairy products.  The most important dairy product was fluid milk with 88% water and a shelf life that was limited to a few weeks. Today's market has shifted to dairy products with less water and a longer shelf life.  Transportation of products has improved and costs have been reduced.  Dependable refrigeration, where needed, is available throughout the distribution chain.  With more global product standards set through the Codex Alimentarius, and set in trade agreements by the World Trade Organization (WTO), dairy ingredients and products are becoming standardized and commoditized.  Both the Codex Alimentarius organization and the WTO are headquartered in Geneva, Switzerland.  The U.S. is a member of both.

With global competition, additional volatility is introduced.  Exchange rates vary, sometime drastically, changing the financial dynamics of the market place.  Currently, the USD is very strong as the U.S. economy is healing faster than other global economies.  A stronger currency makes U.S. produced dairy products more expensive and less able to compete in the global economy.  World events like the Russian embargo on European dairy products adds supply to the world markets, reducing prices.  Elimination of some dairy quotas in Europe has increased the global dairy supply and lowered international dairy prices.

There are also issues with product standards that can create competitive difficulties.  The Somatic Cell Count (SCC) standard for the U.S. is a maximum of 750,000 cells per milliliter.  The de facto standard for the rest of the world's dairy exporters is a maximum of 400,000 cells per milliliter.   The mathematical processes are different and enforcement is different, however the higher U.S. value suggests a lower quality and puts U.S. dairy products at a competitive disadvantage in the international markets.  Another example is the difference in the standards for skim milk powder and nonfat dry milk.  Skimmed milk powder is defined globally by Codex Alimentarius whereby nonfat dry milk is defined by the FDA/FCR.

For more details on the impact of Free Trade Agreements refer to my recent article published in Progressive Dairyman.  Future posts to this blog will focus on more detail on SCC differences and global vs. domestic dairy product standards.  Dairy has changed from a regional business to a national business and is evolving quickly to an international business.  The process may be slowed down, but it is doubtful that it can be stopped.