Only Modest Benefit from Dairy from China Deal

Nate Donnay, INTL FCStone Financial, Inc.

Nate Donnay

The phase one trade deal with China looks like a bit of a disappointment. Chinese officials say they will buy American goods based on market conditions, but they aren’t doing anything to shift those market conditions (like dropping tariffs). US spot dairy prices have been all over the place. My theory is milk production in the UMW is weak and cheese makers there have shifted some milk out of Cheddar and into European style cheeses which has tightened the block cheese market. At the same time, production in the Western US is strong, resulting in ample butter, NFDM and barrel supplies. Despite the problems in Australia, the overall supply outlook across the major exporters looks OK and should be improving. Next week we’ll get US milk production for December, my forecast is +0.8%.

I’m jumping on the bandwagon with the people who are skeptical that China will live up to commitments made in the Phase One trade deal signed this week. I guess I need to qualify the statement, though, because there are parts of the agreement that likely will be implemented. The dairy fact sheet released with the trade agreement text lists a number of changes for US-China dairy trade, the biggest being:

  • China will recognize US food safety standards as being equal to their own so that individual dairy plants don’t have to be inspected by Chinese officials before they can export to China. I believe over 200 plants were already approved, so most of the people who want to export to China were probably already approved.
  • China will allow US imports of US sheep/goat dairy products, which they haven’t in the past.
  • Permeate will be approved for human consumption. I’m not sure what percentage of US permeate production is even food grade… There were also some changes around Infant formula and liquid milk regulations.

My guess is these changes to the sanitary rules around US-China dairy trade will be implemented and will help to boost US dairy exports to China a little over time. The skepticism is around China’s agreement to increase purchases of US goods.

China has agreed to buy $12.5 billion more agricultural products from the US in 2020 than they did in 2017, and $19.5 billion more in 2021. There are supposedly specific targets that have been laid out for the major commodities, but those details are being withheld from the public.

 

 

When you look at historical US agricultural exports to China and the proposed 2020 and 2021 numbers, it looks a bit ridiculous. For all U.S. ag commodities, Chinese imports go from $14.2 billion in 2012 to a projected $33 billion in 2020 and over $40 billion in 2021. But China is importing somewhere around $130 billion worth of agricultural goods from all countries. Could they shift dairy from buying $220 million of that from the US to $240 million? Sure, they could, if the price was right or if their will to make the shift was strong.

But the will does not seem strong and the price (currently) isn’t right. During the press conference after the signing ceremony the Chinese Vice Premier Liu He indicated that Chinese firms will buy American goods “based on market conditions”. So it doesn’t sound like the Chinese government is going to make a big push to get Chinese companies to buy US goods and the Phase One deal doesn’t remove any of the existing tariffs which make most US products uncompetitive based on price.

So China won’t be importing more US dairy products by government fiat, and as long as the retaliatory tariffs stay in place, they won’t be importing substantially more US dairy products based on prices either.

Be the first to comment

Leave a Reply

Your email address will not be published.


*