Late last month, trade authorities of the U.S., Mexico and Canada have finally agreed to an updated trade deal dubbed the U.S.-Mexico-Canada Act. In Part 1 of a two-part episode, we enlist the help of dairy industry expert Mike McCully as we analyze what's new and what's not under the USMCA.

Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby and Co., where we share market insights and analysis with dairy farmers in mind. Today is October 1, and with us we have industry expert Mike McCully to talk about two timely topics. They will be coming to you in two separate episodes. Up first will be the new agreement between the U.S., Canada and Mexico that will replace NAFTA. The second topic, which will come to you in about a week, will be the new California federal milk marketing order due to start on November 1.

Ted: Are you updated, up to speed, on what the changes are, Mike? Can you give us a little bit of a preview as to how this is gonna effect our UF and blend sales?

Mike: I think on just the initial...well, the initial reaction is I think positive overall that they're gonna eliminate the Class 7 pricing. The actual impact is gonna take a little while to come into effect. What they've said is it's gonna be six months after the new agreement goes into force, and when they're gonna change that. So, you know, if you figure it's not gonna get officially done here until later this year, you're really looking out into middle of 2019 before being able to eliminate that, and we can get back to maybe where it was before.

I think then the next question is, you know, they've increased milk production in Canada a fair bit since then, and whether they're gonna really have that much of a need for U.S. milk out of the U.S. at that time, I think it's directionally positive that there could be some imports starting second half of next year. But I think it's partly still a little too soon to tell whether that's gonna happen or not.

Ted: So how's Canada gonna handle it internally? Now, if they don't have the Class 7, so what are they gonna do? Take a hit on selling powder in the world market?

Mike: That I think that's probably gonna be the early impact of it, and what...they're going to implement to minimum price for the solids nonfat in Canada that will correspond to the U.S. nonfat dry milk price, minus the margin for what they called the Canadian margin. So they have been pegging that class seven price at what they call the world price, which was essentially, you know, I think arguable not compliant with WTO. But this is one of the concessions they made, is they would change the peg to the U.S. NFDM price, which is, you know, to kind of get it back on more of an even footing than what the U.S. price is.

T3: That Canadian margin, Mike, is that kind of like our make allowance? Or what is that, exactly?

Mike: I think that's what they're referring to. There wasn't a lot of elaboration on the notes that I got, but I'm gonna assume that's what it is.

Ted: Okay. Let me see if I got this straight. They're gonna adjust the Class 7, by whatever name, to conform to international indices for milk powder and butter?

T3: No, that's the way it is now. They're going to make it conform to U.S. pricing.

Mike: Yeah. Instead of pegging the class seven SNF price to this, quote, "global" price or world price, they're going to now take it to U.S. nonfat dry milk price.

T3: The reason that it wasn't working before, from the U.S.'s point of view, was because, basically, by dumping powder onto the world market, Canada was actually driving down the world price, and then using that price they were driving down to lower their own milk price.

Ted: Right.

T3: Now they're gonna use the U.S. price, which is, you know,