Could tariffs put U.S. dairy exports at risk? In this episode of The Milk Check, special guest Mike McCully, President of The McCully Group, joins us to slice through the uncertainty in today’s dairy market.



With trade tensions rising, could tariffs spook global buyers and push them toward alternative markets? We tackle some of the biggest questions facing dairy exporters today, including:




Will tariffs curdle U.S. dairy exports?



How are Mexico and China adjusting their buying strategies?



What happens if tariffs push global buyers to look elsewhere?




Listen now to the latest episode of The Milk Check to learn what's making waves in the dairy markets.



Special Guest:




Mike McCully, The McCully Group




The Jacoby Panel:




Diego Carvallo



Jacob Menge



Josh White



Miguel Aragón



Ted Jacoby, III



Yara Morales












Intro (with music)



Welcome to The Milk Check, a podcast from T.C. Jacoby & Company where we share market insights and analysis with dairy farmers in mind.



Ted Jacoby, III:



Welcome everybody to The Milk Check. So, today, our topic is going to be tariffs and how that might affect the U.S. dairy industry. We are recording this at 2:00 PM on Friday, February 7th, and we're going to talk about tariffs. Very likely, by the time you listen to this, it might all be irrelevant because who knows what the Trump administration is going to do next? Joining us today from our team is Miguel Aragon, our Director of Latin America's Sales for Cheese; Yara Morales, our Director of International Sales for Dairy Ingredients; Diego Carvallo, our Head of International Trading for our Dairy Ingredients Team; and Josh White, the Head of our Dairy Ingredients Team. Also, Brianne Breed is joining us, Head of our Cheese Team, and Jacob Menge, Head of our Risk Management and Trading Strategy. In addition to that illustrious group, we've got Mike McCully today, the founder of the McCulley Group, who is probably well known to most everybody in the dairy industry, at least in North America. Mike, thanks for joining us today.



Mike McCully:



You're very welcome. Happy to be here.



Ted Jacoby, III:



Mike, where do we stand right now on tariffs, what is the Trump administration doing, and what do we expect them to do next?



Mike McCully:



Had a very different conversation just a week ago when it looked like we were going to start on February 1st with tariffs on Mexico and Canada and retaliation from both countries and then China. But then, 48 to 72 hours, all of it got put on hold. The China retaliation was not on dairy; Canada and Mexico were on hold, so we've basically put all that tariff discussion over in a box, and we're just going to sit and wait here for a while. It's evolving each day. I read something yesterday or the day before: "The best tariffs are ones that are not used." Hopefully, that's where things go, but we'll just have to wait and see. Between this and H5N1 are two very unpredictable elements that we have to deal with in the dairy market, not just this week and next week, but probably for quite some time.



Ted Jacoby, III:



I couldn't agree with you more on that one. Jake, are we expecting anything to happen next in terms of tariffs?



Jacob Menge:



I think something is happening as we speak. Trump talked this morning about, in his own words, reciprocal tariffs on unnamed countries. That is new as of this Friday. Trump and tariffs seem to have a cadence of news on Friday, which Wall Street really loves. That's certainly new. I heard him mention Japan, I think today. So that is just wreaking havoc on equity markets and our markets. It's this unknown. Markets just hate the unknown, and much of it is hanging out there.



Ted Jacoby, III:



Where we stand regarding tariffs, we've postponed putting tariffs on Mexico and Canada or any, let's call it additional tariffs, the 25% tariffs, we've delayed for about a month, the possible 25% tariffs on those countries. But we have put 10% tariffs on China, and then China recently came back with some retaliatory tariffs of their own on U.S. goods, but it did not include dairy at this point, correct?



Mike McCully:



For now. For now, yeah.



Ted Jacoby, III:



For now, yeah, for now. So if we're lucky, things will go quiet for about a month, and they'll work some things out, and we'll never get tariffs. But officially, we can say that at least directly tariffs are not affecting the United States dairy industry's ability to export. Having said that, Miguel, how are our customers in Mexico reacting today? Are they getting prepared to import dairy products from somewhere else?



Miguel Aragón:



The talk about the town last month was to prepare, but also to look somewhere else. They looked at Canada; they looked at Europe. Some purchases were made from Canada and some from Europe, but the volume comes from us. They are of the mind of Let's just wait and see, but let's have another avenue. Of course, in Mexico, you have the volume, but you also have the peso. So if the peso devaluates, then everything's more expensive. It's a wait-and-see approach right now. They trust that the market, that the peso didn't go to 23 or it almost hit 22, but it didn't. They don't think it will be as bad because there is a lot of pressure from the U.S. dairy industry not to do anything to dairy. So we'll see.



Ted Jacoby, III:



So right now, both the U.S. and Mexico dairy industries have their fingers crossed that nothing happens, but obviously, we just don't know.



Miguel Aragón:



That's correct. That's correct. It's a wait-and-see approach.



Ted Jacoby, III:



Yara, what about your customers?



Yara Morales:



Customers think that if that happened, they would obviously think that the pesos would go up to 23 and maybe more. Mexico does all the customers say. Mexico needs the United States products; they want to stay in the United States. They are trying to see other places like Belarus, Poland, Europe, or S&P because they want to stay with the United States. We'll see, like Miguel said, it's early. We don't know what's going to happen. The market for Mexico is the United States.



Ted Jacoby, III:



Are we seeing good demand in Mexico?



Yara Morales:



January was fantastic. Everybody wants product. There's no inventory in Mexico and the final customer, and there's not too much inventory in the border either. So the customer needs the products. Even with all this situation that is happening in Mexico with the new government and what happened in the United States, everybody is cautious about the demand, and the consumption demand is very low. So that's why the customer doesn't need too much product that used to be. It is also slow at the beginning of the year because everyone in Mexico must pay taxes. They named it [foreign language 00:05:41 ], so it's hard, but even though it was hard, I was surprised by the demand; it was really good. Really, really good. We have good sales, and everybody asked for products, but like always, Mexico is looking for prices.



Ted Jacoby, III:



Do you think they're building inventory right now, Yara?



Yara Morales:



No. No, they don't build inventory. They buy only what they need. Building an inventory is hard because the interest rate is high. It's doubled in the United States. I mean, it's so high. So they are buying only the product they need at that moment. They don't want to purchase inventory. No building inventory right now.



Ted Jacoby, III:



With the risk of tariffs making the product more expensive, they still want to live hand-to-mouth.



Yara Morales:



Yeah, and especially now that we see the market is going down, the purchase is going down, yeah, they're paying less than in January. Right now, the market is 1.30, 1.20. They're expecting it to be 1.28. So yeah, they're also waiting to see what will happen with the market. And what happened with the tariffs. No, they’re not building inventory.



Ted Jacoby, III:



Diego, what about China? Let's just speculate and say that China ends up putting tariffs on U.S. dairy products. How will that affect our exports to China? I assume New Zealand will still tend to win most of the bids, but we're still exporting many whey products.



Diego Carvallo:



The U.S. has always been a big exporter of powders to China. So I think overall, if you see a significant tariff in place, you will see a reshuffling, reorganization of international powder flows or pipelines. More products from New Zealand will probably find homes in China, and more products from the U.S. will find homes in other markets where tariffs make the arbitrage more competitive. My first impression is right now, the U.S., we haven't been very competitive to China when it comes to non-pad, but when it comes to WPCs, the whey, the MPCs and other products, higher value products, I think that's where the main risk is right now with those tariffs. So I believe European WPC80 will find a competitive advantage in China, and we'll see more imports flow that way.



Ted Jacoby, III:



That would make sense.



Mike McCully:



And Ted, I'd add on to that. This is one where I've reminded people in the last few months, some of which we've seen in the movie before. You can look at 2018 and what happened when China retaliated against the U.S. whey. There was also African swine fever, which was another part of it. But if you look at the data from 2017 to '18 and '19, there is a very significant drop off in exports of whey products from the U.S. to China. The African swine fever is a part of that, maybe a relatively large part, but there are directionally lower and probably significantly lower exports. If that goes through, Chinese buyers will look for other sources even though there aren't tariffs.



I can tell you that when I talked to folks selling to China on the Friday after the election, they said, "Find me other non-U.S. product sources." Another one,