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Analysts lay out NAFTA scenarios for dairy

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Renegotiation of NAFTA would likely bring more upside than downside to U.S. dairy, increased risk to Canadian dairy and an effective status quo for Mexico, according to a new report by RaboResearch.

Dissolution of the deal is a significant cause of concern for the three countries’ dairy industries, which have become somewhat interdependent, according to a new report by RaboReseach analysts. But continuing business as usual or renegotiating the trade pact would also have implications for the U.S. dairy industry.

The report lays out the likely effects of those three possibilities.

From the perspective of the U.S. dairy industry, NAFTA is extremely important, the analysts said. The majority of U.S. dairy exports are shipped to Mexico and Canada. In addition, U.S. milk production is highly reliant on Mexican labor, accounting for more than 50 percent of dairy farmworkers, most of whom are undocumented, the analysts stated.

Loss of those export channels — particularly to Mexico, which accounted for 32 percent of U.S. dairy exports in 2016 — would force the U.S. to develop other markets, incurring a 2 to 5 percent increase in export costs and resulting in overall lower returns.

Losing access to Mexico and Canada is not as simple as redirecting products to new markets, the analysts said.

“The share of U.S. exports into non-NAFTA markets is still relatively small and these markets have different tastes and preferences, meaning products need to be tailored to buyer requirements. There is also more competition from other exporters, and longer distances mean higher transportation costs to contend with,” the analysts stated.

Loss of Mexican labor, which could play out in any scenario without a viable guestworker program, would also increase production costs 5 to 7 percent. That’s on top of a 16 percent increase in labor costs since 2010.

“It is clear that the U.S. dairy industry has a lot at stake when it comes to NAFTA,” the analysts stated.

If NAFTA were terminated, U.S. producers would face lower milk prices, as domestic supply accumulated, they said.

Under any scenario, the analysts expect Mexico to seek diversification in import suppliers and pursue other trade deals to avoid over-dependence on the U.S.

As for the effects on trade with Canada, that country has remained a protected dairy market for five decades, but has relied on small volumes of U.S. milk on an ad-hoc basis to help balance its dairy market.

The U.S. industry has long called for more access to Canadian dairy markets, but recent policy changes are limiting access even further. Canada’s a new ingredient milk class price to undercut imports of unfiltered milk has harmed U.S. exports, with shipments from Wisconsin, Minnesota and New York falling 30 percent in the first quarter of 2017.

Termination of NAFTA could further harm U.S. exports to Canada, whereas renegotiation of the trade deal could result in greater access.

The new class price, however, is likely to be an issue decided by the World Trade Organization.

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