Tariffs & Cheeseheads

As the United States wraps up year one of its intrepid trade war, cheese—Wisconsin Cheese—is a central pawn on the battlefield. Since leveling tariffs on many imports coming from countries around the world in June last year, the U.S. has felt the sharp sting of retaliatory tariffs on its most valuable exports, including Wisconsin’s cherished cheese.

The tariffs couldn’t have come at a worse time for Wisconsin’s cheese industry and the dairy farmers who depend on it. Since the end of 2014, when budding oversupply sent milk prices on a five-year slide, Wisconsin has seen its number of dairy farms fall precipitously as well. Now, with the tariff tit-for-tats, especially between the U.S. and Mexico and China, Wisconsin’s cheesemakers are sharing in the pain.

“Wisconsin dairy is really caught in the crossfire,” said John Umhoefer, executive director of the Wisconsin Cheese Makers Association. Once the U.S. imposed tariffs on steel and aluminum from Mexico and on a variety of intellectual and material goods from China, Canada and Europe, those countries’ return volley was aimed at America’s Dairyland, where our president found refuge in November 2016.

According to Umhoefer, Mexico—the largest importer of Wisconsin cheese—decreased its orders by 25 percent in the second half of 2018, from $31.6 million to $24.7 million. January 2019 sales were just 35 percent of the previous January’s sales, continuing the downward trend into the new year. China, though not a large importer of Wisconsin cheese, is normally a heavy importer of Wisconsin’s whey (a milk protein byproduct of cheesemaking, used primarily in China as agricultural animal feed), which makes up 90 percent of the state’s dairy exports to China. In the second half of 2018, Wisconsin whey exports to China dropped by 40 percent, driving up overhead costs for exporters.

Umhoefer points to anecdotal evidence from many in the industry who are saying they have been sharing the cost of the tariffs with their foreign customers, or effectively paying the whole tariff themselves. This means they are essentially “selling without profit to keep the market moving,” he said, in hopes that the trade tensions are short- lived. As of this writing, the lifespan is anybody’s guess while the U.S. threatens another layer of import tariffs, with planned resolution talks between the U.S. and its large trade partners hovering in on- again, off-again air space.

It’s a waiting game for now, but there is reason for guarded optimism. Everyone agrees, according to Umhoefer, that the key is to advance negotiations as fast as possible to end the tariffs. He said that although the Wisconsin Cheese Makers Association does not have a seat at the negotiating table, the U.S. Dairy Export Council in Washington D.C. has been very effective in advancing this agenda.

“There are some opportunities for increased sales into Canada” as well, said Umhoefer. These opportunities are not as crucial in terms of trade deals, but all sales opportunities are crucial right now for the state’s dairy and cheese industry.

However, dairy’s current challenges are only partly due to trade wars. The longer view reveals the deeper—and cyclical—difficulty of how to solve the Goldilocks paradox. The industry always suffers when farmers produce more milk than consumers demand. Unfortunately, the critical decisions by farmers that govern the balance of supply and demand require the finest of crystal balls. If you want to have milk today, you need to have a heifer calf two years ago. If you don’t want milk today, just go ahead and don’t have that calf 730 days ago. “Just right” on the dairy industry’s abacus is as long-lasting as “horizontal” on a roller coaster.

But after years of too many calves, “there are indications that milk production is tightening,” said Umhoefer. “For the first time in five years, milk production notched down in March, a necessary adjustment to get supply and demand in balance.” Ultimately for the benefit of dairy farmers in Wisconsin, this shift in production may be much more significant than the outcome of trade talks.

Ironically, consumer demand for cheese is increasing—U.S. per capita consumption of cheese has more than doubled since 1975 and continues to swell. And Wisconsin converts 90 percent of its milk into cheese. If milk production continues to move toward demand’s happy place, as it ever-so-slightly did in March, Wisconsin may yet retain its goofy moniker.

The world calls us “Cheeseheads” for a reason. Our Dairy State’s agrarian ancestors came from many countries that could claim the same title: Germany, Norway, Poland, Austria, and every other frozen tundra of the cheesemaking Old World, and from a few more temperately cheesy regions, too, like Italy and France.

Our ancestors had already learned from their ancestors of the culinary shock and awe that cheese can be. Milk itself only lasted so long, especially before pasteurization and refrigeration came about. But fiddle with it a little, add a cup of culture, a splash of enzyme, a shake of salt, a few short months in a cave, and voilà! You’ve got a savory, relatively long-lasting, rib-sticking, yummy food of higher value for your dining pleasure. This fiddling over time created a valuable commodity that drives a large chunk of Wisconsin’s economy, at 3.4 billion pounds in 2018, which is more than 25 percent of all U.S. cheese production.

So how has the trade war affected Wisconsin’s approximately $14 billion cheese industry? Significantly for sure, and not in a positive direction, particularly in our business with Mexico and China. But trade wars, while painful and deadly, are temporary. It’s hard to say how this one will play out, how long it will last, or how much will be lasting. Coping, hoping and stasis is the state of things now.

When you trace the veins of the industry all the way back to its heart, to the Wisconsin’s family dairy farmer, you will find anguish and tears streaming in tracks from the 1930s, the 1980s, and the years just before the recent tariffs began. The Great Depression and two subsequent economic farm crises fell harder on family farms than on fiddlers. Today, there are about 600 fewer dairy farms in Wisconsin than a year ago, but the overall number of cows in our state has not decreased. Using milk from fewer but larger farms, Wisconsin’s cheesemakers produced slightly more cheese in 2018 than they did in 2017.

Experience has taught us it’s easier to predict the arc of our farm families. Those still standing will plow forward, unreasonably optimistic, driven by love for this life, until the bank ledgers say stop. If their debt load is small, that time will be longer, maybe down generations for the fortunate few. If debt is high, no matter the size of the farm, little can save it, because balance in an industry with too much milk requires a pouring out from one side of the scale.

It feels cruel to peer through such a cold lens, but it has always been so on our dairy farms, and no one, no matter their passion, has ever been able to negotiate lasting peace there.