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Dairy to take $2.7b hit from Mexico, China trade tariffs

As the tariffs currently stand, U.S. dairy sector is poised to lose significant export shares in China and Mexico.

Retaliatory tariffs by China and Mexico could lower dairy exports by $2.7 billion and depress dairy farmers' revenues by $16.6 billion over the next several years unless they are rolled back. Moreover, U.S. economic output tied to the dairy industry would fall by more than $8 billion and 8,200 U.S. jobs would be imperiled through 2023.

Those are the findings of a study commissioned by the U.S. Dairy Export Council (USDEC) and conducted by Informa Agribusiness Consulting that estimated the economic impact of ongoing trade disputes on the U.S. dairy industry. The study only examined current tariffs, meaning the damage would worsen if other proposed duties take hold, as China has threatened.

In response to the U.S. imposing tariffs on selected imports from Mexico and China following the release of two U.S. Section 232 investigations and a U.S. Section 301 investigation, these countries retaliated against certain U.S. exports, including dairy products. China imposed an additional 25% tariff on U.S. exports in response to the Section 301 investigation. As a result, total tariffs on selected U.S. dairy products range from 27% to 45%. Mexico imposed tariffs on most U.S. cheeses that range from 20% to 25%.

In considering a shorter time horizon during which the industry may be forced to endure the impact of the retaliatory tariffs, the study forecasts losses to dairy farmers at $1.5 billion this year alone and at roughly $3 billion in 2019. Those losses are the result of anticipated drops in exports due to retaliatory tariffs of $530 million by the end of next year.

"The damage is real, and it is being felt by dairy farmers, dairy businesses and dairy exporters every day," USDEC president and chief executive officer Tom Vilsack said. "Exports hold tremendous potential for our industry and the struggling rural economy, but we must address these tariffs immediately for that potential to be realized."

The situation in China is particularly problematic, according to Informa. Tariffs have now reached 45% on some U.S. dairy products, which puts America at a great competitive disadvantage to suppliers from Europe, Australia and New Zealand that don't face the same barriers and, in some cases, have free trade agreements with China.

Lost sales in China are predicted to cost U.S. dairy farmers $12.2 billion by 2023 if retaliatory tariffs remain in place. The impacts to dairy farmers due to lower exports to China are expected to tally $1.1 billion in 2018 and $2.2 billion in 2019.

Prior to July's tariff increase, sales to China were growing -- up 49% from 2016 to 2017 -- thanks to industry investments in education, customer development, partnerships and infrastructure improvements.

"We've spent years cultivating overseas markets, and those investments are slowly eroding," USDEC senior vice president Jaime Castaneda explained. "We are losing market share, and once it's lost, it is very hard to reclaim. We need our government to bring these tariffs to an end immediately with Mexico and find solutions going forward with China."

Mexico announced duties of up to 25% on U.S. dairy products on May 31 in retaliation for U.S. steel and aluminum tariffs. This announcement was good news for Europe, which had just concluded a trade deal with Mexico and was eager to absorb America's lost dairy sales.

"The future is uncertain for U.S. dairy farmers, making it difficult to plan any distance into the future with realistic expectations," the Informa report concluded. "What is for certain is the U.S. dairy sector will continue to suffer under Chinese and Mexican retaliatory tariffs for as long as they are in place."

U.S. dairy product exports combined could fall by $115 million in 2018 and by $415 million in 2019. From 2018 to 2023, U.S. dairy product exports combined could fall roughly 7% from baseline projections worth $2.7 billion, the executive summary notes.

The reduction in exports creates a surplus in the domestic market, leading to a reduction in price that negatively affects farmer revenue. The report's executive summary noted that farm-gate prices are expected to fall roughly 64 cents/cwt. to average around $16.44/cwt. through 2023 compared with the baseline price forecast of $17.09 through 2023. Lower farm-gate prices are projected to reduce farm-gate revenues by roughly $1.5 billion in 2018 and roughly $3 billion in 2019.

From 2018 to 2023, the lower farm-gate prices are projected to reduce farm-gate revenues by $16.6 billion. Lost exports to China account for the bulk of the impact on farmers. Of the total $16.6 billion loss in farm-gate revenue, $12.2 billion, or roughly 73%, can be attributed to China's tariffs. Lost exports to Mexico account for the remainder of approximately $4.4 billion, or 27%, of the total loss.

Read the executive summary here.

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