In the last year, there have been threats made by the Trump Administration to exit the North American Free Trade Agreement (NAFTA). This free trade agreement (FTA), was signed in 1994 and effectively eliminated tariffs on most agricultural goods between the United States, Canada, and Mexico. Since the implementation of NAFTA, these three countries have formed a North American market, trading increasing volumes of agricultural products and becoming irreplaceable trade partners. In many instances, such as cattle and soybean crushing, NAFTA has enabled intra-industry efficiencies where products are easily traded across borders.1 Additionally, the interconnectedness of FTAs means that open access to Canada and Mexico has indirectly allowed the United States preferential access to several global markets.2
The benefits the U.S. agriculture industry have derived from NAFTA cannot be overstated. Indeed, coalitions such as Farmers for Free Trade have been formed to underscore the importance of maintaining NAFTA, and over 80 agricultural industry groups and corporations – representing every sector of the food industry – penned a joint letter to Secretary Ross pointing out how much the United States has gained from this relationship. Since NAFTA was enacted, exports of food and agricultural products to Mexico and Canada have grown to over $43 billion in 2016. This is a four time increase from the $11 billion the United States exported to the two countries in 1993.3 While the percentage of domestic production destined for exports has grown in general over time, the growth in exports to the North American market is impressive – approximately 28 percent of U.S. exports were destined for Canada and Mexico in 2016, up from 19 percent prior to the agreement.4 The United States is such a major trading partner for Canada and Mexico that it currently holds a 65 percent market share for agricultural products in the NAFTA region.5
Currently, Canada and Mexico are the second largest and third largest markets, respectively, for U.S. agricultural products ($6.5 billion).6 Canada’s imports of U.S. food products have increased over 40 percent since NAFTA was signed, and Mexico is the largest market for several U.S. agricultural products. This growth has stemmed directly from the elimination of tariffs in most goods, and those tariffs will be reinstated at the most favored nation (MFN) rates if the United States leaves the agreement. Going back to those prohibitive tariffs – Canada’s MFN tariff rates range from 1-10 percent, while Mexico’s MFN tariff rates range from 20-40 percent7 – would significantly hinder U.S. exports. A study done by ImpactECON calculated that a return to MFN tariffs would not only lead to significant job loss in the United States, but would also cause a $13 billion drop in the gross domestic product.
Threats to leave NAFTA could not come at a more compromising time. Most major agricultural products are currently oversupplied in the domestic market. The United States has seen record corn and soybean crops coupled with a dip in exports to major markets.8 Certain industries have already seen Mexico turn to other countries to source grain due to the rhetoric and threats to disassemble the agreement.9 Both beef and pork production are forecast at or near all-time highs in 2018, and recent profit-driven expansion would now be rendered moot with diminished export demand. Dairy products have been oversupplied for a year, causing depressed prices in certain products, while Mexico and Canada look to enter FTAs with countries touting significant dairy production. As stated, Mexico is already looking to other countries to supply agricultural products because of the political climate.10
Mexico and Canada are key export markets for U.S. grains and oilseed products. By both value and volume, Mexico is the largest market for U.S. corn, rice, and wheat, and the second largest market for soybeans and sorghum. It is also a highly significant market for byproducts like soybean oil and soybean meal, and both Canada and Mexico are in the top ten export destinations for distillers’ dried grains (DDGs). In addition to being a significant importer of processed food products made in the United States, Canada is the largest market for U.S. ethanol.11 Much of the growth in Mexico as a destination for U.S. grains and oilseed products would not have been possible without NAFTA.
Canada is also an important market for many U.S. agricultural crops, especially in products where a cohesive North American industry has been formed. In soy crushing, many whole beans are imported into the United States from southern Canada, then crushed domestically, and re- exported. Additionally, the United States and Canada engage cooperatively in the production of processed foods like bakery products, cereals, and pastas.12 The vast majority of the U.S. oat supply – used for milling to meet domestic and export demand – is imported from Canada.13 Imposing tariffs on the raw materials used to produce these products would create an economic disincentive for this free movement of goods, where the United States acts as a value-added producer.
WHEAT: Prior to its implementation, the Mexican government’s intervention into the wheat sector made it difficult for the United States to export product there, but removal of tariff and non-tariff barriers has led to Mexico emerging as the top customer of U.S. wheat.14 However, due to the nature of milling, where processors need to ensure supply for a long period of time, Mexican wheat millers have begun to look elsewhere to source their wheat. In late 2017, the Mexican government announced a purchase of 30,000 metric tons of Argentine wheat into Mexico.15 Once millers and bakers formulate recipes based on certain wheat specifications, that relationship is solidified and is difficult to break into, meaning sales today are indicative of future 15.00% capture market share in Mexico should MFN tariffs apply to U.S. wheat.
SOY: NAFTA has allowed the expansion of U.S. soy exports to Mexico. Since implementation, Mexico’s imports of U.S. soybeans have grown from just over $400 million in 1993 to nearly $1.6 billion in 2017, a 300 percent increase. When factoring in soy products, U.S. sales to Mexico reached $2.49 billion in the last year,17 which represents a quadrupling since the beginning of NAFTA.18 Over the same period, South America – namely Brazil and Argentina – emerged as serious global producers of oilseeds. Argentina is now the largest exporter of soybean oil and soybean meal, and Brazil and the United States compete each year to be the first and second largest exporter of soybeans. Given its geographic placement, Mexico could look to South America to supply their soybean, meal, and oil needs.19
CORN: As stated, Mexico is the largest market for U.S. corn. In 2017, the United States exported $2.7 billion worth of corn to Mexico, in addition to a multitude of corn byproducts like high fructose corn syrup (HFCS) and DDGs. The corn industry stands to lose significantly if NAFTA is shuttered and exports to Mexico and Canada drop or cease. Analysis suggests that, in the short term, the price of corn domestically could drop anywhere from 2 cents per bushel20 to 50 cents per bushel.21 Exports of HFCS would suffer, leading to a loss of about $500 million per year in export value.22 Together, Canada and Mexico account for 96 percent of U.S. HFCS exports, meaning there are few other markets for the United States to turn to as HFCS customers. Over the long term, withdrawal from the agreement could cause corn production to fall, over time, by 150 million bushels annually (a 10 percent reduction in production).23
The United States is already seeing the impact of potential withdrawal. The uncertainty in the terms of the agreement has caused Mexican customers to find new sources of supply. This has resulted in a 4 percent decline in corn exports (7 percent in terms of value) year to date compared to last year.24 South America is poised to capture market share in the Mexican corn market.
RICE: Rice is a commodity grown globally, though its price is often distorted by government controls in the form of subsidies or import restrictions. Mexico represents a unique import market for U.S. rice, since it can be readily imported without tariffs. Without the Canadian and Mexican markets – which together account for about 30 percent of U.S. rice exports – the United States will have to find buyers, amid rising world rice stocks, for the rice product that now stays in North America.25
FEED: If there is reduced North American demand for meats and dairy, there will in turn be a reduced demand for feed. Currently, Mexico and Canada are the first and third largest, respectively, markets for U.S. feed.26 As Mexico’s demand for additional protein continues, their need for animal feed will also rise. The United States is equipped to meet this demand, and is the natural partner under the current agreement. Mexican feed millers and livestock producers can utilize the geographic advantages of the United States under a “just in time” system, but that will become more expensive under MFN tariffs.27
The U.S. livestock market depends on export demand for its products. In fact, the United States exports a significant percentage of its domestic livestock production, from about 10 percent of beef production to 25 percent of pork production.28 Growth in export demand has caused the United States to increase its production of red meat – specifically pork – to at or near record levels. That growth is the culmination of years of planning, and cannot be easily curbed. The impact of the absence of strong export demand would take years to work itself out of the domestic livestock market. Additionally, any contraction of U.S. meat exports would mean a reduced need for animal feed, which could have a ripple effect on corn and soybeans – nearly 40 percent of U.S. corn goes to the feed market,29 and almost half of U.S. soybeans are crushed into meal and oil, where 75 percent ofU.S. soymeal production is used for animal feed.30
BEEF: Over the past 5 years, the United States has exported an annual average of roughly 1.2 million tons of beef globally – about 10 percent of domestic production. Of those exports, approximately 10 percent of U.S. beef exports are exported to Canada, making Canada the fourth largest international market for U.S. beef. Nearly one-fifth is destined for Mexico, making it the second-largest export destination for U.S. beef. In the early- to mid-2000s – about 2004 through 2008 – the United States was exporting over 30 percent of its beef to Mexico. During the last decade, Mexico has imported an average of $957 million worth of beef annually, and Canada has imported almost $900 million worth of beef per year. Interestingly, Canadian imports of U.S. beef tend to be valued (per ton) much higher than the global average. For example, the 2016 average price of U.S. beef exports was $5,348.47 per ton; Canada’s imports of U.S. beef were valued at $6,520.54 per ton. Therefore, despite the fact that Canada makes up for only 10 percent of U.S. beef exports, the monetary value of those exports is respectively higher than that of most other U.S. trade partners. Conversely, Mexico imports certain beef cuts like offal that do not have other viable destinations. Upon withdrawal from NAFTA, tariffs in Mexico would rise to over 20 to 25 percent, leaving the United States with a short-term oversupply and ultimately cause a reduction in U.S. beef production.31 Eliminating trade with these two countries would leave a surplus of 250 million pounds in the U.S. market.
PORK: The United States exports a quarter of its pork production, and Mexico is by far the largest export destination for U.S. pork by volume, importing over 730,000 tons of U.S. pork in 2016 – almost the same amount as Japan and China, combined.32 Over the last 20 years, Mexico has imported between 20 and 35 percent of U.S. pork exports, while Canada consistently imports about 10 percent of U.S. pork exports. Together, these NAFTA partners import well over $2 billion in U.S. pork on an annual basis, accounting for about 40 percent of the value of U.S. pork exports.33 As is the case with beef, Canada’s per-ton value of U.S. pork exports is much higher than average. Canada pays approximately $1,000 more per ton of U.S. pork than the average trade partner.
Pork production in the United States has increased dramatically in recent years to meet domestic and export demand, and is expected to be at record highs in 2018. The hog production cycle cannot be abbreviated quickly enough to absorb the dramatic decrease in export demand, so the United States will face an oversupply issue. In the long term, the United States’ withdrawal from NAFTA coupled with the opening of Canada and Mexico to other pork producing countries would lead to a decrease in U.S. pork production. Mexican demand for pork is increasing, and the United States is well poised to fill that demand if NAFTA remains. However, Mexico is also pursuing an FTA with the European Union, home to several countries with significant pork exports.34 A study by Iowa State University concluded that the destinations for U.S. pork are relatively limited, and the loss of Canada and Mexico as tariff-free customers would cut domestic pork production by 5 percent and reduce the live hog market by 10 percent. On the whole, this translates to a loss of $14 per hog – a total impact of over $1.5 billion.35
As is the case with grains and livestock, the U.S. dairy market depends on North America to buy its products. The Mexican market has grown from a market of $150 million annually at the start of NAFTA to be the largest market for U.S. dairy products, accounting for approximately one-fourth of all U.S. dairy exports in 2016 and totalling over $1 billion.36 This growth has added an average of $1.25 per hundredweight to U.S. farmers’ milk prices.37 In fact, last year, Mexico accounted for almost half of total U.S. skim milk powder exports, about one-third of cheese exports, and 10 percent of butter exports.38 These products would face high tariffs if
NAFTA is abandoned and Mexico returns to MFN status. Skim milk powder would face a tariff of up to 45 percent and cheese tariffs would vary from 20 to 60 percent.39 The United States supplies most of Mexico’s dairy imports, but New Zealand and the European Union are also significant origin markets.40
Canadian imports of U.S. dairy have also grown since the implementation of NAFTA. U.S. exports to Canada in 1994 were just over $35 million, and that has grown nearly 10- fold to hit over $300 million in 2017.41 However, Canada is still a challenging market for international dairy products, as the government sets supply using pricing and import controls. The U.S. dairy industry sees NAFTA as an avenue for negotiating access to the Canadian market.42
Several factors complicate the dairy situation as it relates to NAFTA withdrawal. Over 2017 and into 2018, the United States has seen an oversupply in most dairy products.
Nonfat dry milk inventories are currently running 40 percent higher than normal and are expected to remain elevated, and butter prices remain muted due to inventories and the slight increase in production. Increasing milk production in both the United States and European Union, coupled with extremely high levels of cheese and powder inventories places pressure on global dairy prices.43 Without the key
North American market, oversupplies in the United States will continue to climb and prices can become further depressed. The United States dairy system is not set up to quickly adjust and export to different markets, mainly because of the product specifications to which the domestic market currently produces to satisfy the demand of existing partners. In order to find alternative export markets, the product specifications used by the entire industry are likely to change. Compounding that are the potential free trade agreements that Canada and Mexico are pursuing with other dairy producing countries. The European Union is in active dialogue with Mexico regarding an FTA, and both Canada and Mexico are involved in Trans-Pacific Partnership (TPP) talks with dairy exporting powerhouses New Zealand and Australia. If Mexico and Canada develop favorable trade relationships within these FTAs while the United States withdraws from NAFTA, the U.S. dairy industry will face a dramatic hit.
The U.S. agriculture industry has made it clear that NAFTA is a key component to a robust agricultural export program, and that anything adversely affecting trade with Mexico and Canada would cause tremendous negative impacts for many U.S. agricultural producers. The NAFTA situation is further complicated by the emergence of tensions and potential tariffs affecting U.S. commodities in China, and the forward momentum of the CPTPP (formerly TPP) without the United States’ involvement. Most agricultural sectors – including grains, livestock, and dairy – will be significantly impacted by a U.S. withdrawal from NAFTA, and those impacts may be compounded by other trade decisions made by the current administration.
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