By Alan Levitt and William Loux
Like signposts on a road, the U.S. Dairy Export Council anticipates these eight markers will guide global dairy markets this year.
Every January, the U.S. Dairy Export Council compiles a list of factors that are most likely to influence dairy trade in the year ahead. We call them our “signposts.”
These signposts are developments to expect and questions to be answered in 2020. Much like signposts on the road, we anticipate these eight markers will help guide the direction of global dairy markets and influence U.S. dairy export performance in 2020.
Our eight signposts for 2020:
Impact of USMCA and Japan trade deals (and further talks with Japan)
The implementation of a Phase 1 trade agreement between the United States and Japan on Jan. 1 and the impending implementation of the U.S.-Mexico-Canada Agreement (USMCA) both bode well for U.S. dairy export prospects in 2020 and beyond. This year we will get our first inklings of their benefits.
USMCA preserves our No. 1 market—Mexico—and its implementation should put to rest business uncertainty in that market over the past two years due to retaliatory tariffs, threats of border closure and worries over a unilateral withdrawal from the North American Free Trade Agreement.
It also has the potential to generate new business in Canada and, crucially, closes the loophole that allowed Canada to distort global milk powder trade for the past few years. That system, implemented in stages in late 2016 and early 2017, saw Canada’s skim milk powder (SMP) exports soar to an average of 68,000 metric tons in 2017 and 2018—nearly six times the average annual volume from 2011-2015—exacerbating what was already a depressed global SMP market. While Canada’s SMP exports are down 31% through the first 11 months of 2019, it is still shipping about 4,000 tons per month, compared to about 1,000 tons per month prior to 2016.
Across the Pacific, the U.S.-Japan Phase 1 trade agreement went into effect on Jan. 1, 2020, putting the U.S. on equal footing with Europe and New Zealand in terms of market access.
That is very good news given that U.S. suppliers have been operating at a disadvantage that would have only grown without the Phase 1 deal. Over the past year, the EU and Oceania enjoyed market access benefits via their respective trade deals with Japan: the EU-Japan Economic Partnership Agreement and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.
As noted in a Meros Consulting study commissioned by USDEC in early 2019, without a similar agreement, U.S. cheese exports could fall by 80% by 2027. Conversely, the study found that if the United States were on equal market access terms, U.S. cheese market share would rise from 13% in 2017 to 24% in 2027, with dollar sales tripling to more than $450 million.
That is significant since Japan is the largest cheese buyer in the world, importing about 300,000 tons in 2019, and forecasts suggest its appetite will continue to grow.
While Phase 1 of the U.S.-Japan agreement is a very welcome move in the right direction, a comprehensive U.S.-Japan trade deal remains essential for long-term U.S. competitiveness in that country. The U.S. Trade Representative’s Office previously stated that the administration would begin negotiations on Phase 2 around April and it remains imperative to follow through on those talks to build on the market access gains achieved in Phase 1.
Depleted EU intervention stocks, U.S. reclaiming share
For the first time since 2015, we are starting the year with zero SMP in EU intervention. That reflects a market in better balance. More importantly, it also means the EU will not be able to repeat its SMP export overachievement from 2018-19—and that spells opportunity for U.S. dairy suppliers.
Through the first 10 months of 2019, EU dairy suppliers exported 845,385 tons of SMP—172,451 tons more than January-October 2018. That’s a number that far exceeds any volume the EU has shipped in any previous January-October.
Intervention SMP stocks supported inflated EU SMP exports in 2018-19.
It was a gain made possible only through the dispersal of intervention stocks that had grown for over two years beginning in mid-2015 before slowly starting to decline at the start of 2018. Not coincidentally, EU intervention stocks were 175,805 tons at the end of 2018—almost matching that 172,451-ton increase through October.
In other words, EU SMP exports in 2019 are not at all reflective of what the EU will have to sell in 2020. In fact, we think EU exports this year could be down by more than 100,000 tons vs. last year.
USDEC expects U.S. suppliers should gain most of that business. Even if current SMP price levels take the edge off demand growth in some regions (see pricing signpost below), the United States is the only supplier capable of meeting that kind of volume.
Progress to resolve the U.S.-China trade war
This week, the United States and China are expected to sign Phase 1 of a trade agreement. The details of that agreement are still confidential. USDEC’s expectation is that U.S. Dairy’s voice has been heard by U.S. negotiators and that issues such as facilitating plant registrations, the importation of infant formula and defending common food names are included in the agreement. But the final product remains to be seen, as does China’s implementation follow-through and, critically, whether we will see a rollback of its damaging retaliatory tariffs on U.S dairy products.
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