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An update on China, USMCA trade agreements

Progressive Dairy Editor Dave Natzke Published on 07 February 2020

You’re busy milking cows, squeezing in a final extension meeting or two and wondering if your manure lagoon is big enough. With that in mind, Progressive Dairy looks at issues in the news impacting you and your dairy business.

In recognition of your time, we’ll attempt to summarize recent events or actions making dairy headlines and reported in our weekly digital newsletter, Progressive Dairy Extra. Then we’ll try to put that news into perspective and briefly describe how it might affect you.

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U.S.-MEXICO-CANADA AGREEMENT

What happened?

The U.S.-Mexico-Canada Agreement’s (USMCA) long journey finally made it through Congress and has been signed by President Trump. Trade negotiators from the U.S., Mexico and Canada had released initial provisions of the agreement – created to replace the North American Free Trade Agreement – in late 2018.

What’s next?

The agreement, ratified by Mexico last December, was scheduled to be considered by the Canadian Parliament in late January (after Progressive Dairy’s press deadline).

Bottom line

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U.S. dairy is seen as a winner. According to the International Trade Commission, U.S. dairy exports are projected to increase by more than $314 million a year. USMCA strengthens the relationship between Mexico and the U.S. and establishes new protections for products that rely on common cheese names, such as Parmesan and feta.

Among top priorities for the U.S. industry is the elimination of Canada’s Classes 6 and 7 milk pricing programs within six months after the agreement takes effect. Canada will ensure that the price for skim milk solids used to produce nonfat dry milk, milk protein concentrates and infant formula will be set no lower than a level based on the U.S. price for nonfat dry milk.

To assist with monitoring implementation of Canada’s new program, the U.S. and Canada have agreed to review the agreement after five years and every two years thereafter.

Canada will phase in new tariff rate quotas – over a period of up to 20 years – exclusively for U.S. milk and U.S. dairy products, which should provide market access gains. Those tariff rate quotas will affect fluid milk, cheese, cream, skim milk powder, butter and cream powder, concentrated and condensed milk, yogurt, whey and other products. Preliminary calculations estimated the U.S. will have access to about 3.6% of Canada’s dairy market, up from the current 1%. The U.S. will provide reciprocal access on a ton-for-ton basis for imports of Canada dairy products through first-come, first-served tariff rate quotas.

While U.S. dairy leaders celebrated passage of USMCA, Canadian dairy leaders have opposed the agreement since it was first negotiated. If enacted, the agreement would transfer the equivalent average production of some 520 Quebec dairy farms to the U.S., according to Pierre Lampron, president of the Dairy Farmers of Canada (DFC), a national policy, advocacy and promotional organization.

Last fall, Canada’s federal government unveiled a compensation package to offset the negative impact of two previous trade agreements – the Comprehensive Economic and Trade Agreement (CETA), the Comprehensive and Progressive Trans-Pacific Partnership Agreement (CPTPP) – on the country’s dairy farmers. DFC estimated CETA, CPTPP and CUSMA, in addition to other market access granted through the World Trade Organization, will result in the annual loss equivalent to more than 8% of the country’s milk production.

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U.S.-CHINA ‘PHASE ONE’ AGREEMENT

What happened?

“Phase One” of a trade agreement between the U.S. and China was signed in mid-January, making advances primarily on non-tariff issues. The deal addresses China’s facility and product registration steps that have stymied U.S. exporting firms, improves the regulatory pathway for exports of infant formula and fluid milk (including extended shelf life milk), and creates new transparency and due process obligations regarding geographical indications and common food names. The agreement includes a commitment by China to buy more U.S. agricultural goods, including dairy products.

What’s next?

According to U.S. dairy leaders, the agreement does not address the retaliatory tariffs, which remain an impediment to dairy exports. U.S. and Chinese trade officials say tariffs will be part of future negotiations. Leaders of the U.S. Dairy Export Council (USDEC) and National Milk Producers Federation (NMPF) stress that trade negotiations with China will not be complete until the tariffs are fully lifted.

Bottom line

The full benefits for the U.S. dairy industry remain unclear. In addition to the cloud of retaliatory tariffs, left to be fully resolved is how China will fulfill its purchasing commitment.

According to USDEC, China remains a valuable export market for U.S. dairy products, despite retaliatory tariffs. Over the 12-month period spanning December 2018 to November 2019, U.S. dairy exports to China totaled $377 million in sales. However, retaliatory tariffs on U.S. dairy products have steeply disadvantaged the U.S. industry compared to its competitors and contributed to 47% decline in U.S. exports to China over that same period.

The governments of China and the U.S. have imposed billions of dollars in retaliatory tariffs during the two-year trade dispute, which has put a drag on America’s dairy industry. According to the International Dairy Foods Association, U.S. dairy export value to China peaked in 2017 at $576 million, fell 13% to just over $499 million in 2018 and was $343 million through the first 11 months of 2019 – a 26% drop over 2018.

China bought 33% of U.S. whey exports by value in 2018. However, through November 2019, with retaliatory tariffs still in place, the export value of U.S. whey exports to China were down 38% from 2018 and 53% lower than pre-tariff 2017. The value of U.S. cheese exports to China were also substantially lower.

“The importance of the Chinese market to the dairy community grows by the day,” said Brody Stapel, president of Edge dairy cooperative and an eastern Wisconsin dairy farmer. “Within the next few years, China will surpass the United States to become the world’s largest dairy market, reaching a value of $114 billion a year by 2024.”

MARKET FACILITATION PAYMENTS

What happened?

Despite the trade agreements cited above, the U.S. Ag Secretary Sonny Perdue confirmed a third and final round of direct payments would be made to dairy, hog and crop producers negatively impacted by trade and tariff wars. The payments, through what’s called the Market Facilitation Program (MFP), make up a vast majority of the USDA’s three-part $16-billion 2019 Trade Mitigation Program (TMP).

What’s next?

The final 5-cent-per-cwt payment to dairy farmers – scheduled to be distributed early in 2020 – was calculated on annual milk production history recorded with the USDA Farm Service Agency (FSA). To be eligible for the dairy payment, producers must have been operating on June 1, 2019. Signup for the direct payments closed Dec. 20, 2019.

Bottom line

Through Jan. 6, 2020, USDA had distributed about $10.77 billion in MFP payments. Of that total, about $409.6 million was distributed to dairy and hog producers.

According to the Ohio Ag Law Blog, MFP payments must be taken as taxable income in the year they are received. As these payments constitute earnings from the farmers’ trade or business, they are subject to federal income tax and self-employment tax.  end mark

Dave Natzke
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