On May 31, Mexico announced retaliatory tariffs on U.S. cheese, and then on June 16, China announced retaliatory tariffs against most U.S. dairy products.

During June, Class III milk futures covering the second half of 2018 fell by more than $1.00/hundredweight (cwt), while Class IV milk futures fell by more than $1.50/cwt. Casual observers of the market, and even some who are more than casual observers, were attributing the price drop to the announced retaliatory tariffs. Was that a justified belief or just an opinion?

At any point in time there are hundreds of things impacting dairy prices, and I would argue that softening global demand has played a bigger role in the recent price weakness than the tariffs have. Certainly the tariffs are bearish for U.S. prices, but our analysis suggest the impact on milk prices is only about 17 to 71 cents per cwt.

Global dairy demand fluctuates

The hardest variable to comprehensively track, model and forecast in the dairy markets is arguably demand. We put a lot of effort into our demand-side analysis. It was very clear by April that global demand was running unsustainably strong. Global milk-equivalent imports from January to April were up 8.1% from last year, which was the fastest pace since the 19% growth we saw in 2014.

We have been expecting good global demand this year, forecasting about 5.3% growth for the full calendar year, but the 8.1% pace that we were seeing was unsustainable. The strong imports were driven by good economic growth in developing countries, higher oil prices and countries stocking up at relatively low prices.

The strong demand helped to push dairy prices higher during the first half of the year, but importers were not going to continue loading up at those higher prices. We figured the demand side would slow down in June or July.

We don’t have much hard data for June yet, but New Zealand’s milk-equivalent exports in June were down over 25% on a milk-equivalent basis, despite plenty of product estimated in inventory. We think that is pretty good evidence that the demand side did drop off significantly in June. We’re talking about demand for dairy products from all the major exporters, not just demand for U.S. products. This weaker demand is showing up as lower dairy prices across all the major exporters, not just the United States. 

Global economic growth concerns

Technically, the retaliatory tariffs on U.S. products should be mildly supportive for Oceania (New Zealand/Australia) and European Union dairy prices. China will be relying more heavily on those exporters for product now that U.S. product is less competitive with the retaliatory tariffs in place.

I’ve seen some argue that the tariffs are raising concerns about global economic growth going forward, and that is causing the drop in global dairy prices. The International Monetary Fund has now adjusted its forecasts to account for the tariffs, which had only a minimal impact on its global gross domestic product projections. At this point, there is no reason to think the tariffs will reduce global economic growth enough to justify the drop in prices that we’ve seen.

Dairy prices worldwide were set for a correction on weaker demand in June or July even if the tariffs hadn’t been announced. I can’t say that I know for sure prices would have dropped without the tariffs, but it is a justified belief and not just opinion.