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The Economic Impact of Tariffs on the Dairy Industry

Aug 23, 2018

The Economic Impact of Tariffs on the Dairy Industry header

Did you know you can trade Dairy derivatives with Straits Financial? We are proud to be one of only three US FCM clearing members of the New Zealand Exchange. To find out more, contact one of our futures trading specialists in the US at +1 312 462 4499 or in Singapore at +65 6672 9669.

Global Dairy Trade

Dairy is a significant part of everyone’s lives as a source of calcium and a staple ingredient in many different foods. Europe and New Zealand lead global dairy production and account for more than 50% of global milk exports. New Zealand alone produces more than 21% of the worldwide milk exports followed in line by Germany, Netherlands, and France as seen in the graph below. New Zealand’s massive milk exports are one of the many reasons Straits Financial recently became a full clearing member of the New Zealand Exchange: to provide traders and investors with access to manage dairy exposure through New Zealand’s only registered futures exchange.

Milk Exports by Country

US Dairy Exports and Global Trade

Dairy is a robust global industry that has recently felt the impact of global trade wars. The US dairy market is particularly vulnerable after China and Mexico issued 25% retaliatory tariffs on dairy in response to the US President’s tariffs on steel and aluminum. According to the US Department of Agriculture, US Dairy Exports grew 15% in 2017 to $5.4 billion, but since the tariffs from China and Mexico were issued, the USDA reports a mixed outlook for US exports as of July 2018. While the USDA signaled uncertainty, the US Dairy Export Council said that June marked the eighth consecutive month of export growth.

Pricing

The biggest news in the dairy industry right now are the retaliatory tariffs on US dairy exports by China and Mexico. Since the dairy tariffs from Mexico and China took effect the first week of July, global dairy futures have plummeted. This price action indicates to some traders that there may be more pressure and volatility for the dairy industry in the months ahead. Since Mexico and China are among the top 4 markets for US Dairy exports, US dairy-producing states are concerned about their future, and more than 60 dairy associations asked the US President to suspend tariffs on Mexican steel and aluminum. It is also being reported that in June, Wisconsin lost 54 dairy farms in addition to 78 that were lost in May.

US Production

Wisconsin is considered the heartland of US dairy production. Based on data by the Wisconsin Department of Agriculture, Trade and Consumer Protection, the dairy industry is worth nearly $90 billion to Wisconsin's economy and provides more than 413,000 jobs. This many jobs is equivalent to almost 12% of the state’s employment. Since dairy plays such a pivotal role in Wisconsin’s economy, and Mexico is the largest consumer of US dairy exports, Wisconsin is exceptionally vulnerable to Mexico’s retaliatory tariffs. In 2017, Mexico consumed more US Dairy than any other country as illustrated below.

US Dairy Exports, Top 10 Markets

Hedging Dairy Risk with Straits Financial

The current situation in the global dairy market presents a challenge for dairy farmers, and participants control the pricing risks in the market. By accessing US dairy futures at CME Group and the dairy futures at New Zealand Exchange, traders and investors have access to both markets to manage volatility and capitalize on pricing discrepancies between markets.

Straits Financial is one of the most experienced agricultural and commodity clearing members in the industry. Our expertise in dairy and other listed and OTC markets help our clients access the liquidity and financial markets they need to manage risk and hedge their portfolio. When volatility from tariffs spills over from agricultural and industrials to sector holdings, and eventually index products, Straits Financial is here to support both farmers and traders.

To hear more about our membership at the New Zealand Exchange and to request more information, please contact Straits Financial in the US at +1 312 462 4499 or in Singapore at +65 6672 9669.

DISCLAIMER: This document is issued for information purposes only. This document is not intended, and should not under any circumstances to be construed as an offer or solicitation to buy or sell, nor financial advice or recommendation in relation to any capital market product. All the information contained herein is based on publicly available information and has been obtained from sources that Straits Financial believes to be reliable and correct at the time of publishing this document. Straits Financial will not be liable for any loss or damage of any kind (whether direct, indirect or consequential losses or other economic loss of any kind) suffered due to any omission, error, inaccuracy, incompleteness, or otherwise, any reliance on such information. Past performance or historical record of futures contracts, derivatives contracts, and commodities is not indicative of the future performance. The information in this document is subject to change without notice.  The impact on market prices due to seasonal or market cycles and current news events may already be reflected in market prices.