Have you ever had that person who hears what they want to hear, thinks they know everything, and then they want to tell you how to solve all the world’s problems? Well the US has that guy as their President, and it’s causing a massive issue across the globe. One area where it certainly is happening is in the North American dairy industry. The challenge is that it’s causing huge problems and “The Donald” needs to be fired.
In order to fully understand what is going on, you first need to know how this all started. For many years there was never a significant issue with Canada having a supply managed dairy industry, because it was not a large enough exporter to have any effect on the US system, and the US system had a relatively adequate demand for its milk. However, then came an ever-increasing supply of milk and decreasing demand and of course “The Donald”.
The Economics of the Problem
No matter what system you have, it comes down to supply and demand. When supply outpaces demand, prices fall, and when demand outpaces supply, prices increase.
Typically when there becomes an oversupply of a product, the prices drop enough that profit for the companies producing the product decrease so much that they have to decrease production or go out of business. The challenge in the process of this happening is that those companies, or in this case farmers, who can not compete on the lowest cost of production go out of business. Hence what we are seeing in the US, where many operations which cannot either cash flow their losses or compete for the lowest cost go out of business. It’s simple economics as the market is correcting itself. The challenge is, instead of overall production decreasing, currently, in the US we are seeing supply increase as many larger producers are getting even bigger using their economies of scale and leverage at the bank to increase production at this time. This has resulted in a prolonged market depression as supply is not decreasing, and milk prices continue to see record low prices.
Trump Lights a Fire on the Problem
To say that Donald Trump is not your conventional politician is an understatement. He comes from no political background and has no understanding of how international politics works. While some see that as a strength, there are also challenges with this unencumbered perspective.
“The Donald” prides himself on not acting like a typical politician. Other than his love for a good headline, Trump has no regard for how international politics works. He cares more about getting a good headline than he does about solving the problem. Moreover, that alone is the biggest crux of the problem with the US and Canada in these trade negotiations.
Trump is looking at this issue as a typical business agreement. In such, all parties should have equal access to the market to ensure that all companies have the best chance to succeed. The challenge with this particular issue is that it’s not a simple market. The complexity of how modern agriculture works does not allow it to operate on an apples to apples, oranges to oranges comparison. Instead, every country has a different strategy on how to ensure their food production is sustainable and safe. In the United States and many European countries, farmers receive subsidies from the federal government instead. But since Canada’s comes with a system that is perceived to be anti-trade, Trump has made it his big sound bite, to help struggling US farmers solve all their problems by freeing up the North American dairy industry. The challenge is this will not solve anything.
It’s Not Trade Agreements It’s Over Production
Something many don’t realise is that each of Wisconsin and California produces more milk on a daily basis than all of Canada. Let’s say that again. Two states in the US produce more milk than ALL of Canada. So even if Canada got rid of supply management, it would not solve the US problem of oversupply, as there is not enough demand to stop the trend of overproduction. The US would simply continue to produce more milk.
What is causing many farms in the US to go bankrupt is not world trade agreements but rather too much competition and no production controls. Unfortunately, most US producers are all driving to the bottom with minimal or no profit as opposed to trying to protect one another. One could argue this is where the government needs to step in and access the controls and put a system in place in order to ensure a healthy marketplace. But instead of answering the tough question. Trump is chasing the sound bite and looking for his win there.’
But Trump is not the only politician missing the boat. Take a look at Governor Andrew Cuomo from New York State. Cuomo extolled the growth of the dairy industry, prodded by tax credits and expansion financing.
Milk production increases in New York State vastly outpaced the national average — 2.2 per cent in 2013 versus 0.4 per cent growth nationwide. The following year the governor boasted that the sector, so crucial to his economic growth plan, had reclaimed the number three spot in the rankings of the country’s milk production. Yet a Greek yogurt maker wooed with $14 million in tax credits, lasted little more than two years. Overproduction has massively depressed milk prices and last month, Gov. Cuomo announced a $30-million fund to assist dairy farmers.
The Bullvine Bottom Line
To solve the issue of overproduction long-term stability requires a structural overhaul. The funny thing is, it’s not the removal of Supply Management in Canada that will solve the problem, but rather adding supply controls in the US that will lead to the resolution of this issue. The US needs to implement its own version of Supply Management. And that’s where the problem lies. US President Donald Trump is unwilling to look at an internal solution to this issue. Instead, he chases the press and sound bites. For that reason, he needs to be “Fired”.