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Why Trade Agreements Matter: The Case for U.S. Dairy
Sharon SydowOffice of the Chief Economist, USDAGlobal Dairy SymposiumOctober 6, 2016
Photo credit: DATCP
Presentation Overview
•USDA Supply and Demand Outlook for U.S. Dairy
•Structural Change in the U.S. Dairy Sector
•Why Trade Agreements Matter for U.S. Dairy
Office of the Chief Economist
USDA Dairy Market Outlook
• U.S. milk production in 2016 estimated to increase from 2015. Record production is projected for 2017.
• U.S. dairy exports projected to rebound, while U.S. dairy imports start to decrease slightly.
• Some improvement in price forecast for 2017 for cheese, NDM and whey; butter prices projected to decline.
• Ending stocks for 2016 and 2017 reflect relatively high stocks of butter and cheese; 2017 ending stocks projected to decline slightly from 2016 forecast levels (both fat basis and skim-solid basis).
Office of the Chief Economist
USDA Dairy Market Outlook: U.S. Production
Office of the Chief Economist
Source: September 2016 WASDE
2012 2013 2014 2015 2016F 2017F
Billion pounds
Milk 200.3 201.7 206.1 208.6 212.2 216.1
Million metric tons
Milk 91.0 91.3 93.5 94.6 96.3 98.0
USDA Dairy Market Outlook: U.S. Trade
Office of the Chief Economist
Source: September 2016 WASDE
2012 2013 2014 2015 2016F 2017F
Billion pounds, fat basis
Exports 8.8 12.4 12.4 8.8 8.7 8.9
Imports 4.1 3.7 4.3 5.7 7.0 6.9
Million metric tons, fat basis
Exports 4.0 5.6 5.6 4.0 3.9 4.0
Imports 1.9 1.7 2.0 2.6 3.2 3.1
USDA Dairy Market Outlook: U.S. Trade
Office of the Chief Economist
Source: September 2016 WASDE
2012 2013 2014 2015 2016F 2017F
Billion pounds, skim-solid basis
Exports 33.3 38.5 39.0 37.3 37.6 38.1
Imports 5.7 5.3 5.6 6.0 6.6 6.3
Million metric tons, skim-solid basis
Exports 15.1 17.5 17.7 16.9 17.1 17.3
Imports 2.6 2.4 2.5 2.7 3.0 2.9
USDA Dairy Market Outlook: U.S. Prices
0.00
0.50
1.00
1.50
2.00
2.50
2012 2013 2014 2015 2016f 2017f
Cheese Butter NDM Whey
Office of the Chief Economist
Source: September 2016 WASDE; 2016 and 2017 forecast prices are midpoints of the forecast
$ per lb.
U.S. Dairy Sector and Structural Change
• Increased productivity through economies of scale; lower cost of production and improved competitiveness
• Well-developed processing sector known for product innovation
• Shift in U.S. dairy support programs from market price support to margin protection
• Increasingly export-oriented; well positioned to respond to increased overseas demand and new market openings through trade agreements (including FTAs)
Office of the Chief Economist
U.S. Milk Yield and Cow Inventory
10,000
12,000
14,000
16,000
18,000
20,000
22,000
24,000
9,000
9,500
10,000
10,500
11,000
11,500
19
80
19
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86
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00
20
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20
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20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
Avg. Number of Cows Milk per Cow
1,000 cows lb. per cow
Office of the Chief Economist
Source: USDA.
Changing structure of U.S. dairy: The shift to larger herds…
101140
275
570
900
61 78 99133 144
0
100
200
300
400
500
600
700
800
900
1000
1992 1997 2002 2007 2012
Midpoint herd size
Mean herd size
Number of cows
Note: Half of all milk cows are in herds that are larger than the midpoint size, and half are in smaller herds. Source: USDA, Economic Research Service using USDA, National Agricultural Statistics Service, Census of Agriculture data.
Office of the Chief Economist
…with lower costs of production
Office of the Chief Economist
0
5
10
15
20
25
Less than50
50-99 100-199 200-499 500-999 1000+ All farms
Feed Costs Other Costs
$/cwt
2015 operating costs. USDA/ERS
Source: Mark W. Stephenson, PhD, University of Wisconsin
Office of the Chief Economist
Dairy production concentrating in new areas: emerging “cow islands”
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
5-Yr CAGR Yield Per Cow US Population Growth
Cow Productivity Gains Outpace U.S. Population Growth Rate
Office of the Chief Economist
Cow productivity gains outpace U.S. population growth rate
Source: Dr. Marin Bozic, University of Minnesota.
Cow Productivity Gains Outpace U.S. Population Growth Rate
Office of the Chief Economist
U.S. consumption of dairy products is also changing
Source: USDA/ERS.
Dairy margins recently fell within MPP coverage levels
-
50
100
150
200
250
300
350
400$US/MT
Office of the Chief Economist
Source: U.S. Department of Agriculture, Farm Service Agency.
$11 million in payments for 2016Out of $20 million in premiums
Office of the Chief Economist
U.S. moves from net dairy importer to net exporter
Office of the Chief Economist
$11 million in payments for 2016Out of $20 million in premiums
Office of the Chief Economist
Source: USDA
U.S. dairy exports account for nearly 15% of production
Office of the Chief Economist
$11 million in payments for 2016Out of $20 million in premiums
Office of the Chief Economist
Source: USDEC (calculated on a total milk solids basis)
Global dairy market growth is in Asia
Office of the Chief Economist
$11 million in payments for 2016Out of $20 million in premiums
Office of the Chief Economist
Source: USDA/ERS macroeconomic database. *Asia excludes Japan
Why FTAs and Trade Liberalization Matter
• U.S. dairy exports to FTA partners have grown from $476
million in 2000 to $2.8 billion in 2015. The rate of growth
in trade with FTA partners has exceeded that for U.S.
dairy exports to all markets.
• According to NMPF/USDEC, this increased trade from
FTAs helped bring an additional $8.3 billion to the U.S.
dairy industry over 10 years and contributed to higher
U.S. milk prices and incomes during that period.
• Many U.S. FTA partners are developing countries, where
demand growth is expected to be the strongest.
Office of the Chief Economist
Why FTAs and Trade Liberalization Matter
• Most U.S. FTAs are with partners in the Western Hemisphere region.• NAFTA, CAFTA-DR, Colombia, Peru, Panama, Chile
• Australia, South Korea, and Singapore the only U.S. FTAs in Asia-Pacific region
• Other dairy exporters are negotiating (or have implemented) preferential trade agreements in the Asia-Pacific region.
• Not only do these other agreements provide preferential access, they also affect how certain rules are written (SPS, GIs).
Office of the Chief Economist
Gains from Further Liberalization - TPP
• The Trans Pacific Partnership (TPP) was concluded on Oct. 5,
2015 and signed on Feb. 4, 2016.
• The agreement covers 12 countries, many of which are in Asia
and are new FTA partners – Japan, Malaysia, Vietnam, Brunei,
and New Zealand.
• The agreement grants significant new and enhanced market
access into these markets. It also provides new access into
Canada, an existing FTA partner.
• Most tariffs will be eliminated; for sensitive products there will
be longer transitions and some TRQs and limited safeguards
Office of the Chief Economist
Gains from Further Liberalization - TPP
• TPP goes beyond past FTAs to establish strong rules for
trade in agricultural products:
• SPS: enforceable rules
• Geographical Indications (GIs): stronger due process
and transparency disciplines
• Agricultural Biotechnology: first time covered in a FTA
• Organic Agriculture: encourage mutual recognition
Office of the Chief Economist
TPP Dairy Analysis• Several quantitative studies of U.S. dairy trade effects
resulting from TPP
• OCE preliminary results: butter, cheese, whey, powder
• American Farm Bureau Federation: butter, cheese, whey, powder;
net exports
• U.S. International Trade Commission: all dairy products
Office of the Chief Economist
Sources: USDA/OCE preliminary analysis (forthcoming); AFBF, “The Trans-Pacific Partnership, Working for the United
States,” Feb. 2016; and USITC, Trans-Pacific Partnership Agreement: Likely Impact on the U.S. Economy and Specific
Industry Sectors, May 2016.
Study U.S. Exports U.S. Imports
$million
OCE 150-275 38-97
AFBF 131 na
USITC 1,846 349
Other Dairy Trade Issues
• SPS/TBT Issues• China (new infant formula regulations)
• Geographical Indications (GIs)• Restrictions on the use of common food names in the EU and other
markets
• Domestic policies and regulations in other
countries that affect trade• Canada’s special milk class pricing system
Office of the Chief Economist