By Tim Will

The U.S. dairy industry is going through many changes and facing many challenges. Domestic milk consumption per capita continues a decline that has now lasted decades, and alternative milk products are crowding supermarket shelves.[1] Additionally, as domestic demand has slowed, milk production has, and continues to, increase per cow as a result of technological advances.[2] Beyond supply and demand, current geopolitical events have also added new challenges. For example, this past summer China issued retaliatory tariffs on $110 billion of U.S. goods, including dairy products. This contributed to U.S. dairy exports to China dropping fifty-four percent in the first half of 2019.[3] Overall, the decrease in domestic demand, global events, and an increased supply of dairy has resulted in the shuttering of farms and production facilities alike, with a thirty percent decline in the number of dairy farms in the United States over the last decade and the recent bankruptcies of two major fluid milk producers.[4]

There is a consensus that the success of the U.S. dairy industry over the next decade will require an increase in exports of dairy products.[5] This need for an aggressive push comes at a challenging time, as international competitors are seeking to increase their market shares and trade tensions between the United States and its major trading partners are providing these international competitors with opportunities to increase trade with these major trading partners.[6] USMCA will address a number of major roadblocks that limit the competitiveness of U.S. dairy products abroad with one of these main trading partners, Canada.[7] This includes increasing access to U.S. non-milk dairy products in the Canadian market and preventing subsidized Canadian dairy products from unfairly competing with U.S. dairy products abroad.[8]

In 2017, Canada instituted a new pricing policy for a certain categorization of milk, Class 7, which artificially incentivized domestic Canadian manufacturers to use domestic milk for non-milk dairy products rather than using internationally sourced milk ingredients which, until 2017, were largely supplied by U.S. dairy farmers.[9] USMCA requires the elimination of the Class 7 pricing policy, which industry analysts have cited as being a “roadblock to U.S. goods and disadvantag[ing] U.S. producers.”[10] Though there is the potential that the benefits of this change could be limited through unfair implementation, this change will likely increase the access to and use of U.S. dairy products in the Canadian market.[11]

In addition to this increase in access to and use of U.S. dairy products in the Canadian market, USMCA will require Canada to monitor its exports of certain categories of dairy products.[12] If exports of these dairy products exceed certain thresholds, Canada will be required to impose surcharges on such products for the remainder of the year, limiting Canada’s ability to export these products in amounts that would threaten the viability of the U.S. dairy industry.[13]

For the U.S. dairy industry, USMCA is a much needed sign of brighter times ahead and provides a template for future negotiations to further strengthen the U.S. dairy industry.

[1] See Amelia Lucas, 5 Charts that Show How Milk Sales Changed and Made it Tough for Dean Foods to Avert Bankruptcy, CNBC (Nov. 13, 2019), https://www.cnbc.com/2019/11/13/5-charts-that-show-how-milk-sales-have-changed.html

[2] See Andrew Arnold, How Smart Tech and the Digital Age is Benefiting the Dairy Industry, Forbes (Jan. 2, 2019), https://www.forbes.com/sites/andrewarnold/2019/01/02/how-smart-tech-and-the-digital-age-is-benefiting-the-dairy-industry/#7910c29862f7.

[3]  Lydia Mulvany & Leslie Patton, Trade War Means U.S. Dairy is Missing Out on China’s Demand Boom, Bloomberg (Aug. 26, 2019), https://www.bloomberg.com/news/articles/2019-08-26/trade-war-means-u-s-dairy-is-missing-out-on-china-s-demand-boom.

[4] Emma Newburger, ‘It Crushes Me’: Dairy Farmers Struggle to Survive Trump’s Trade Wars and Declining Milk Demand, CNBC (Jan. 4, 2020), https://www.cnbc.com/2020/01/04/us-dairy-farmers-battle-extinction-trump-trade-wars-lower-milk-prices.html; Olivia Rockeman & Lydia Mulvany, Milk Processors are Going Bankrupt as Americans Ditch Dairy, Bloomberg (Jan. 10, 2020), https://www.bloomberg.com/news/articles/2020-01-10/distaste-for-dairy-sends-milk-processors-to-bankruptcy-court.

[5] E.g., Fran O’Leary, U.S. Dairy Exports will be Critical in Next Decade, Wisconsin Agriculturalist (Aug. 15, 20180, https://www.farmprogress.com/dairy/us-dairy-exports-will-be-critical-next-decade.

[6] See O’Leary, supra note 5, and Newburger, supra note 4.

[7] See generally Laurent Belsie & Sara Miller Llana, Too Much Milk: Two Nations’ Travails with Dairy Policy, The Christian Science Monitor (Oct. 16, 2019), https://www.csmonitor.com/Business/2019/1016/Too-much-milk-Two-nations-travails-with-dairy-policy.

[8] U.S.-Mexico-Canada Trade Agreement: Likely Impact on the U.S. Economy and on Specific Industry Sectors, Inv. No. TPA 105-003, USITC Pub. 4889 (Apr. 2019) (Final).

[9] Joel L. Greene, Cong Research Serv., IF11149, Dairy Provisions in USMCA, https://fas.org/sgp/crs/row/.

[10] Letter from U.S. Dairy Export Council to Congressional Representatives (June 10, 2019), http://www.usdec.org/Documents/HouseUSMCALetter.pdf.

[11] U.S.-Mexico-Canada Trade Agreement, supra note 8.

[12] Id.

[13] Id.