NAFTA TRADE TALKS: Whose is Glass Half Full? Whose is Half Empty?

Successful trade talks and glasses of milk. Can they be compared? Is it all merely political rhetoric? Perhaps both will end up going down the drain. Does it matter?

While logic says there is more at stake than a glass of milk, NAFTA trade talks certainly stir up endless arguments regarding the state of dairying in the North American Free Trade Agreement negotiations.

Is It Clear What We Are Arguing About?

The optimist says the glass is half full and there is hope for expanded dairy market opportunities. The pessimist says the glass is half empty and regulations must prevent countries, such as Canada, from reducing what is available for others. The pessimist says the glass is twice as big as it needs to be and that dairy markets need to cut production. The realist says the glass contains half the required amount of liquid for it to overflow and says until supply and demand in the entire dairy market is analyzed, the resulting decisions will fail to achieve profitable results.

What Does Class 7 Pricing Mean at the Farm Gate?

Canada’s Class 7 pricing program has hit the headlines and, of course, depending which side of the argument you fall on it seems to inspire this half-full, half-empty debate. As of May 9^th, the NAFTA discussions have not mentioned dairy issues. However, USA industry leaders are confident Class 7 will be addressed before the deal is done. Michael Dykes, CEO of the International Dairy Foods Association feels that dairy will probably be one of the last things discussed. He says, “I remain optimistic we’ll get something done on Class 7.” This stems from his feeling that the Trump Administration understands both the short and long-term impacts that Class 7 has on American dairy farms. The example is given of the way Trump defended Wisconsin dairy farmers early in his administration (Trump Fabricates False Dairy war with Canada). Once again, the side you choose depends on where your farm-gate profits are made. Your perspective changes as your real profits change.

If Markets Improve for One Side, Is it Always Bad News for Everyone Else?

From the Canadian side of the market, there are signs that things are looking brighter for Canadian farmers. Of course, you must remember the relative size of the two marketplaces. The entire Canadian dairy is only one-tenth of the size of the US market. I recently heard the comparison that, “All of the Canadian dairy is the same as the state of Wisconsin and the Chicago market.” However, it is perceived as threatening, when simple percentages are quoted which note that Canadian milk production is expected to increase this year by 4% to 21.6 billion pounds. When that statistic follows three consecutive years of growth in Canadian milk production this summation of Canada having its cake and eating it too, is supported with more statistics: “Since 2014 Canada’s milk production has grown by more than 16%”. This is undoubtedly a glass-half-full analysis that might inspire a cynical look at Canadian competition. Is there any value in wanting all layers of the market to operate at a profit?

Red Flags. Milk Powder. Lost markets.

It would be so simple if the dairy market dealt with fluid milk only. But it doesn’t. The vast majority of milk is consumed in solid form. Furthermore, the principal point of comparison is now becoming concerns over the exporting of skim milk powder. Globally dairy farmers may be partly to blame for the oversupply of solid milk products. Now that butterfat has a renewed life with support for the idea that fat does not cause heart disease and fat gives dairy product their taste. The US is almost balanced on fat produced and consumed. However, the fact remains that there is too much powder. IfIf the components of the milk produced were 4.5% Fat and 3.0% Protein, instead of the current 3.8% Fat and 3.0% Protein, there would be proportionately less powder. Of course, that assumes that less milk would be shipped. An added benefit of more concentrated milk would be less transport costs per unit of solid. Demanding less milk volume but the current level of solid would be a three-way winner: less stress on the cow; less fossil fuel used and less environmental impact.

It’s Not Fair! What is the Measure of Fairness?

Both the amount of the Canadian exports and the cost-of-production concern Mr Dykes who notes that Canada has “gone from [exporting] about 20,000 MT to last year they did 70,000 MT of skim milk powder.” From his perspective “It defies logic when the highest cost milk producer in the world can land skim milk powder in Mexico three cents cheaper than we can in the U.S. Skim milk powder is a thinly traded product, even a one cent difference can mean the loss of a sale.” When it comes to competition for non-fluid milk products, lawmakers urge Lighthizer to press for elimination of Canada’s Class 7 pricing program.

What’s the Point of It All?

There are points to be made on the plus and minus sides for all parties involved in the dairy negotiations. It is probably redundant to consider that the point of trade agreements is to reach an agreement…. Something that works for all the parties involved. There is an assumption that there will be give and take. However, especially in the news headlines, dairy producers want to see themselves aligned with the government that provides them with more “take” than “give”.

To Deal? Or Not to Deal? That is the Question

Canada gave up 3% of its production in the CETA (Comprehensive and Economic Trade Agreement) negotiations between Canada and the EU. In the twelve countries TPP (Trans-Pacific Partnership), the Trump administration pulled out of TPP in January 2017. The US would have had the opportunity to compete in the Canadian market if it had stayed in TPP. The remaining eleven countries have signed the TPP, now known as CPTTP. So the 3% share of the Canadian market is open to countries like New Zealand and Australia. Obviously, with multiple trade deals being considered simultaneously, the issues are not simple to resolve.

Not all Production is as Simple as Produce a Product and Then Sell it.

There are many layers in between the farm field and the grocery store shelves. Processors play a crucial role in dairying. Their profits change the playing field every day. “Processors never ship at a loss.” This is a key factor that, long before trade negotiations, has a significant impact on US producers’ bottom lines. Canada’s supply management is intended to avoid the problems of over-supply — but it’s not seen as the answer to problems facing small to medium sized US milk producers. Additionally, NFU (National Farmers Union) in the US recently reported that dairy farmers receive 20% less of the retail food dollar compared to 2014. The dairy industry needs to find out and take action in dealing with the root cause of this decline.

The NAFTA agreement has much to work out.

There are thirty-two identified chapters to be negotiated in the NAFTA agreement. At the end of April 2018, only six were concluded. If trading parties can’t effectively negotiate to open markets between themselves, they will be forced to look at the even bigger world market, which also has its own what’s-in-it-for-me perspective on dairy trading. All countries get wrapped up in the blame game, but when you’re dairying 24-7, the real discussion always comes down too how to effectively sustain a profitable dairy industry. The glass half full or half empty is only relevant as long as the milk producers remain relevant.

The Bullvine Bottom Line

Let’s hope that throughout the bombardment of upcoming headlines, the milk consumer opportunist says, “Thanks, folks! While you are debating whether the glass is half full or half empty, I drank it!”