I anxiously awaited the Liberation Day announcement thinking we would finally “know” what was going to happen, but I quickly realized that the announcement made that day was just the first move in a long and intense chess game, or it was just the lighting of a fuse and we have no idea how long that fuse is or what it is attached to. Either way, no one can know exactly what is going to happen or how this will play out. I would love to leave it at that, but I’m not paid for vague and uncertain statements, so I’ll do my best to outline the risks with hard numbers.

I think the current risks around the trade war break down into four bearish items and three bullish items, at least for short- and medium-term impacts. On the bearish side, increased tariffs will lower U.S. exports, slow global economic growth and reduce total demand for dairy products. They also could reduce U.S. economic growth and damage domestic demand and the threat to put additional fees on Chinese-owned or built shipping vessels also threaten to lower U.S. exports and prices.

On the bullish side, tariffs on imports will slow imports of dairy products into the U.S. However, there is a risk that the U.S. government steps in to buy commodities to support farmers during the trade war. There also is a chance that the U.S. quickly negotiates new trade agreements that lead to stronger demand for U.S. products.

The negative impact of retaliatory tariffs on U.S. exports is probably the item that comes to mind first. It’s important to recognize U.S. exports won’t drop to zero. The U.S. supplies about 20% of the globally traded dairy products and the share is even higher for some items (like whey products). The question is how far do U.S. prices need to fall to find enough demand to balance the market? When I work through the modeling, if a significant number of countries hit the U.S. with 20% retaliatory tariffs, it could knock 2.5% to 7% off U.S. dairy prices with the impact depending on how many countries put retaliatory tariffs on and how high the tariffs are.

The second bearish impact potentially comes from reduced global economic growth. The tariffs will reduce economic growth in many countries. It’s hard to estimate an exact impact at this point. Every 1% change in global gross domestic product (GDP) growth drives a 9% change in dairy prices in my model. I’m going to stay conservative and say the likely impact of slower global economic growth is probably in the 5% to 10% range and this will be a hit to dairy prices across the major exporting countries, not just the U.S.

The third bearish impact is reduced economic growth in the U.S. I’ve seen various estimates of the impact, anywhere from a 0.7% hit to GDP up to a 2.4%. That would knock somewhere between 2% and 10% off U.S. dairy prices depend on how big of a hit to GDP we actually see. Like with exports, it’s important to recognize that we may not see an actual drop in consumption because even in a recession people need to eat. Yet, consumers will shift away from food service and toward retail and will become more price sensitive, which will push down prices.

The fourth and last big bearish impact may come from increased docking fees for Chinese- owned and built ships. The Trump administration is proposing additional fees between a half-million and $1.5 million dollars for these ships entering U.S. ports, although there are some indications that the final fees may end up being lower than that. A rough estimate is that the increased fees would drive up shipping costs enough to reduce U.S. dairy exports by 4%. If that were to happen, it would reduce U.S. prices by 4.5% to 7%.

I find the bullish risks harder to quantify. The U.S. has put 20% additional tariffs on all dairy products being imported from the EU and 10% additional tariffs on dairy imports from New Zealand, which are the two largest sources of U.S. dairy imports. However, the dairy products coming from those countries are primarily branded and higher end cheese, butter and whey products. When the U.S. put additional tariffs on EU dairy products during the Boeing-Airbus dispute, we did see imports of European cheese slow, so there will likely be some impact on imports. On the high end the U.S. tariffs on imports might boost U.S. prices by 2.5% to 4%.

The second bullish risk is that the government steps in to support the market by buying dairy products. The food box program in 2020 and 2021 was extremely disruptive for the market and contributed to the record-breaking volatility in cheese prices. You can’t rule out something similar happening again, but the administration looks focused on providing direct assistance to farmers instead of buying dairy products, so I’m putting low odds on this unless there is a significant recession and a jump in unemployment.

The last bullish risk is that trade deals get done quickly and trading partners lower their tariffs on U.S. dairy products. If you assume that trading partners believe the reduced tariffs will stay in place and that the U.S. is a reliable trading partner, then lower tariffs from U.S. trading partners could add roughly 1.5% to 3.5% to U.S. dairy prices.

So, if we add up all of the bearish impacts to the market, it comes out to a 14% to 35% drop for U.S. dairy prices. If you add up the bullish risks, it would add back 4% to 7.5% plus the risk of wild price moves if the government steps in with another food box-like program. The other bullish risk is that a lot of the bearish scenario has already been priced into the market. If trading partners don’t put retaliatory tariffs on the U.S. and the global and U.S. economies turn out better than expected, we could see dairy prices bounce higher. But, for now, the risks seem weighted to the downside.

The trading of derivatives such as futures, options, and over-the-counter (OTC) products or “swaps” may not be suitable for all investors. Derivatives trading involves substantial risk of loss. Past results are not necessarily indicative of future results.