Trade disputes and their impact

By Sofia Omstedt

THE BEGINNING of spring has routinely seen a flurry of activity, both on farms and throughout the wider dairy supply chain.

Global markets remained subdued over winter but have now started to see increased activity.

While the outcome of the spring flush will act as the main supply-side driver to prices, ongoing disturbances are unsettling otherwise stable dairy markets.

Punitive tariff measures and abrupt, politically driven trade policy changes are becoming a more prominent feature of global trade than any time in recent history. So how does this impact the Australian industry?

Following a year of falling milk production in most regions, Australia’s dairy exports dropped 2.6 per cent to 819 000 tonnes in 2018–19.

This was predominately driven by a decrease in exports to Japan and various Southeast Asian countries. In Japan, Australia has faced increased competition from European manufacturers, with cheese exports from the European Union (EU) growing strongly.

The EU–Japan Economic Partnership Agreement entered into force in 2019 and is set to reduce tariffs on cheese for EU exporters. This agreement also contains a protection clause for a wide range of Geographical Indicators (GIs) on different dairy products, such as feta.

This has hampered Australian exporters ability to sell products to the Japanese market under these familiar generic names. As Brexit negotiations continue, many countries, especially Ireland, are looking to Japan to replace the UK as a future trade partner for cheese exports.

The new trade agreement, combined with the uncertainty caused by Brexit, will likely sustain the increase in export competition to Japan.

Closer to home, a trade dispute is brewing that could add further volatility to global dairy markets. Indonesia, Australia’s third most valuable export market, has announced intentions to limit dairy imports from the EU and to increase tariffs for EU dairy exporters.

This move is in retaliation against the EU’s plan to impose anti-subsidy duties on biodiesel made from palm oil. Currently, this is a temporary restriction but might be permanently implemented in 2020, which would intensify the dispute. The Indonesian trade minister has urged dairy importers to look for new suppliers outside the EU.

If this disagreement continues it could temporarily increase demand for dairy products from other markets, including Australia.

The most commonly referenced dispute over the year must be the US–China trade war, which is changing global trade dynamics. Following new tariff announcements from the US, implemented in September and December, China announced intentions to cease purchases of all US agricultural products.

Since March 2018, when this trade dispute started, US dairy exports to China have contracted substantially, down 16 per cent in the first year. With the US decreasing their share of the Chinese market, other regions, including Australia, have seen growing demand for dairy products.

Australian exports to China grew 6.5 per cent to 245 000 tonnes in 2018–19, predominately led by an increase in milk, SMP and condensed milk exports.

Trade disputes can create a temporary opportunity for Australian exporters, but overall, the key impact is the injection of uncertainty into global markets. A reduced presence of US dairy products in China has seen Australian share of imports grow; however, it has also resulted in intensified competition from the US in Southeast Asian markets.

As a result, Australian exports to key Southeast Asian markets have decreased over the year.

Changes to existing trade patterns increase the disruption and enhance the risk of greater price-based competition on the global marketplace as exporters race to secure sales.

At a time when Australian processors are paying record farmgate prices, and farmers are hoping fervently for stabilising returns to recover financially, this may ultimately prove an unwelcome turn of events for the Australian dairy industry.

- Sofia Omstedt, Dairy Australia