Business & Real Estate

How Trump's trade war is hurting California's largest agricultural sector

Greenhouse gas rules prompt California dairies to build methane digesters

The Van Warmerdam dairy in Galt is one of just 15 in California with a methane digester to turn manure into clean power. Hundreds more will need digesters to comply with a new state climate change law.
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The Van Warmerdam dairy in Galt is one of just 15 in California with a methane digester to turn manure into clean power. Hundreds more will need digesters to comply with a new state climate change law.

California's dairy farmers, stewards of the single largest sector of California agriculture, have struggled in recent years because of a steep slide in prices. Now they're in danger of becoming casualties in the Trump administration's trade war with Mexico.

Mexico's government slapped import tariffs Tuesday on many types of cheese, and a host of other American-made goods, in retaliation for President Donald Trump's decision to levy duties on Mexican steel and aluminum.

"Of course it's troubling," said Case Van Steyn, a Galt dairy producer and vice chairman of Dairy Farmers of America. "Tariffs on our product ... is going to hurt local dairymen."

The United States supplies about three-quarters of all of the cheese that Mexico imports. California is the country's leading dairy producer, and the tariffs represent the latest setback for California's dairy industry. Dairy remains the king of California agriculture, just ahead of grapes with more than $6 billion in revenue in 2016.

But these are tough times for dairy farmers in California and other leading dairy states such as Wisconsin and New York. After peaking in 2014, prices dropped by 40 percent a year later, in part because of declining sales to markets such as China and Russia.

In California, dairy producers' revenue plunged by more than one third. Dairy farming in general in California has turned unprofitable, said Annie AcMoody, director of economic analysis at the Western United Dairymen trade association.

"It's been three very difficult years," AcMoody said. "This is something we didn't need to see."

About 230 dairy farms have disappeared in California the past five years, a decline of 15 percent, she said.

Tensions are growing with Mexico as Trump, on the eve of the G7 summit opening Friday in Quebec, signaled he might widen his trade war by imposing duties on goods from Canada and the European Union.

At the same time, the United States is in the middle of contentious negotiations with Mexico and Canada over the future of the North American Free Trade Agreement, or NAFTA, which significantly lowered trade barriers among the three countries in 1993.

Mexico's new tariffs aren't limited to dairy products. But they do seem to have a political quality to them. Analysts noted that the Mexican government targeted industries — including bourbon and pork — that are produced in Republican strongholds in an effort to put political pressure on Trump.

As far as California dairy is concerned, Mexico's tariffs hit producers at a vulnerable spot: About 43 percent of California's dairy production is turned into cheese, AcMoody said. An estimated one third of that cheese gets exported, with much of it going to Mexico, she said.

AcMoody said the tariffs vary according to the type of cheese but most will range between 20 percent and 25 percent. The tariffs cover a wide variety of cheeses, including grated and powdered.

"It's going to cause disruption in the markets," said Van Steyn, who runs a farm with 1,200 dairy cows. "I'm hoping it's a political thing and it's going to get settled. ... In my opinion they're going to need our product."

A comprehensive trade war with Mexico could hurt other California industries, said Sacramento economist Jock O'Connell, an international trade consultant with Beacon Economics. California ships a lot of electronic components and aerospace parts to Mexico, he said.

"If this starts getting nastier, the impact will become more acute on California industry and likely spread beyond agriculture," O'Connell said. "Generally, Mexico is California's top export market."