July 2021 HoogWegt Horizon

The Biden administration has made repairing and enforcing existingtrade relationships a U.S. priority following four years of the Trumpadministration’s controversial “America First” policy. Trade policyunder former President Donald Trump focused on eliminating thetrade gap with China as well as with close allies such as the EuropeanUnion, South Korea, and Japan.

President Joe Biden’s newly instated trade team consists ofSecretary of Commerce Gina Raimondo, who is responsible forinvestigations under Section 232 of the 1962 Trade Expansion Actincluding additional tariffs on steel and aluminum, and U.S. TradeRepresentative (USTR) Katherine Tai, who is responsible for 301investigations, which provided the rationale for Trump’s punitivetariffs against China as well as the threat of tariffs in the recentlyresolved aircraft dispute. The team has already made progress.

Aircraft Dispute Resolved for Now

In mid-May, the United States and Europe agreed to end the 17-yeardispute over aircraft subsidies. The agreement suspends for five yearsthe threat of billions of dollars in punitive tariffs and demonstratesBiden’s resolve to repair relations with the European Union as heenlists the region’s help to contain Chinese ambitions. This couldbenefit European cheese and butter exporters who saw volumesdecline under the 25% retaliatory tariffs.

Frosty trade relations between the United States and China alsoappear to be warming. Tai and other economic officials held a seriesof meetings in recent weeks with their Chinese counterparts. Whilethese talks were a good start to stabilizing strained relations betweenthe two countries, China’s adherence to its Phase One commitmentswill be key to future relations. In the first five months of this year, theUnited States exported considerably more dairy products to Chinacompared to the same period over the last four years.

Elsewhere relations have become more strained. In May, the UnitedStates requested and established a dispute settlement panel underthe U.S.-Mexico-Canada Agreement (USMCA)—the first enforcementaction under the deal—to review measures adopted by Canada.According to the USTR website, in Canadian notices to importerspublished in June and October 2020 and May 2021, Canada set asideand reserved a percentage of these tariff rate quotas (TRQs) forprocessors and “further processors,” contrary to the country’sUSMCA commitments. Canada’s actions undermine the value of itsdairy TRQs for U.S. farmers and exporters by limiting their access toin-quota quantities negotiated under USMCA.

Meanwhile, across the pond, the Trade and Co-operationAgreement (TCA), implemented last year between the UnitedKingdom and European Union, has spurred the United Kingdomto redouble its efforts to seek new trade relationships, includingwith the United States and Australia, to mitigate volume lossesto Europe.

The China-Australia trade relationship, meanwhile, continues todeteriorate, and New Zealand recently sided with Australia in thetrade spat, which sunk to new lows earlier this year whenAustralia called for a global inquiry into the origins of Covid-19.In recent months, China has moved to restrict imports ofAustralian barley, wine, and beef, and the World TradeOrganization recently said it would establish a disputesettlement panel to resolve the barley dispute. Dairy has notbeen on the restricted list, and so far, China has continued toincrease dairy imports from Australia.

World Comment

After a long period in which the global dairy complex showed more bulls than bears, theplaying field is now more or less back to equal. The upward sentiment has cooled down foralmost all products; whether it is cheese, butter or non-fat dry milk. China was the maindriver behind the upward sentiment, mainly on the powders. But they now seem to haveenough stocks and short term it seems unlikely that the Chinese demand will push themarket up further.The EU milk production is up after a slow start of the year, current outlook for the full year2021 is +0,6% YoY. Globally, the top 12 producing regions are expected to produce 1,5%more milk YoY for 2021. The southern hemisphere is expecting a good start of the season, forecast for the full year 2021 is +3%. The milkproduction in the USA is quite strong as well, the effect of the recent heat wave has been surprisingly modest. The logistical challenges arepreventing stronger USA export numbers. On the demand side, in these still uncertain times, buyers are buying mainly hand to mouth. Sentiment is causing an increased price volatility.

So, global milk production is looking healthy, the big question mark is how consumption will develop with the various regions re-opening intheir own pace?

Buyers Need to Rely on More than One Supplier

In its latest outlook, the Organization for Economic Cooperation andDevelopment (OECD) projected global gross domestic product (GDP)growth in 2021 to reach 5.8%, up from December’s forecast of 4.2%.OECD also raised its forecast for 2022 global GDP to 4.4%, up from3.7% in its December outlook. However, recovery will be uneven, andpublic health policies to control COVID and vaccination strategies willprove essential to growth while uneven distribution of vaccines—both among and within countries—will put the global recovery at risk.

COVID’s impact on trade will linger into 2021 and could even spill into2022 as the global supply chain continues to experience periodicdisruptions and rolling shortages of various ingredients and products,causing some countries to “buy local” or source products fromsuppliers who are confident in their ability to deliver. Ocean transportation also remains constrained, and according to someforecasts, demand for global freight could triple by 2050. That couldforce some buyers of dairy products to diversify their traditionalsupply base in an effort to mitigate these challenges.

Moreover, with the global population expanding and environmentalregulations expected to tighten in major dairy regions, importingcountries will need to constantly evaluate their trade policy to ensurethey have access to dairy products from all regions. A country thatfails to develop multiple relationships could face higher prices whendemand outpaces the ability of its supply region to meetcommitments.

While many trade relationships are longstanding and entrenched,such as China’s reliance on New Zealand for whole milk powder, thelast two years of the pandemic proved that supply chain disruptionscan have devastating consequences for local markets. Governmentswere not prepared for unexpected shortages and periodic chaos insupply chains. Going forward, however, lessons learned during thepandemic will surely influence future trade relationships.