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President Donald Trump has threatened placing tariffs on a variety of products coming out of the European Union (EU), including cheese, butter and yogurt. While the U.S. does not export many dairy products to the EU, the two countries rely heavily on each other.

In 2018, 76% of U.S. cheese imports came from Europe, which accounted for 16% of EU exports, making the U.S. Europe’s largest customer, according to Nate Donnay, director of dairy market insight with INTL FCStone. Of the cheese imported last year, the tariffs would impact about 72% of those imports, which covers about 55% of total imported cheese from the EU. Assuming a 30% tariff rate, import quantities could potentially fall by 7,000 to 10,000 metric tons per year, according to Donnay.   

“Theoretically, with lower imports due to the higher total cost, U.S. prices should rise,” Donnay says. “The problem is that Europe will still need to do something with that 7,000 to 10,000 tons of cheese which probably means dropping their prices enough to find a buyer on the world market.” 

That will make it harder for U.S. cheese companies to compete on the world market, which could hurt U.S. prices, he adds. If U.S. production of specialty cheese increases and takes milk away from bulk cheese production to make up for lower imports, Donnay says the tariffs would boost U.S. cheese prices by 0.5 to 1.5 cents per pound. 

While the impact on cheese could be minimal, Donnay says butter could be a different story. 

About 88% of U.S. butter imports came from the EU last year, accounting for 21.6% of EU butter exports. Most of the butter coming from Europe is different from butter produced in the U.S. due to specific product attributes (i.e. grass fed, higher fat content, etc.), so Donnay says it’s hard to say if consumers will be willing to substitute away from European butter to U.S. produced butter, or if they will just pay more for the imported butter. It's also possible the importers will absorb all or most of the tariff in order to maintain recently won market share.  

The level of the tariff will impact how much product is imported, which will ultimately determine any impact on price. Consumers will have a say as well. If they decide to switch from imported to domestically-produced utter, then reducing imports and preserving demand would add price support, Donnay says. But if consumers don’t make the switch, the impact on prices would be considerably less.  

Another factor weighing on business transactions between the EU and the U.S. is Brexit. When the United Kingdom decides to leave the EU, products from that area would not be susceptible to these additional tariffs, Donnay says. 

“Most of the butter we’re importing comes from Ireland,” he says. “The U.K. is already a net importer of cheese, so they probably wouldn’t be sending much more cheese to the U.S. after Brexit.”

A decision on Brexit has been postponed until October 31, 2019. 

Despite other countries where U.S. tariffs have resulted in retaliatory tariffs placed on U.S. products, Donnay says he doesn’t expect the EU to retaliate with tariffs on U.S. products. “Even if they do choose to target dairy, we don’t send enough product to them to have any impact on U.S. prices from it.”

“Reprinted by permission of Farm Journal media, April 2019”

This story originally appeared online on the Farm Journal's Milk webpage.

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