When US President Donald Trump launched scathing attacks against the Canadian Dairy industry last week, the world took notice. But does this battle between these two countries really exist or are there other issues underneath the surface that most don’t realize? In true Bullvine style, we decided to take a closer look and find out the story behind the story.
Earlier this month, Grassland Dairy Products Inc. of Wisconsin, which produces and sells UF (ultra-filtered) milk, announced that it would be canceling 75 of its contracts with US dairy farms starting May 1 because “the Canadian government has put in place several regulations to prevent this trade from continuing.” Diafiltered milk, also known as ultrafiltered milk in the US, is milk that has been finely filtered through a membrane in order to target its protein content. The resulting product has a similar consistency to coconut milk and has a very high protein content (greater than 40 percent).
One of the key issues is that the Americans, Australians and New Zealanders insist that this new pricing class has locked them out of the Canadian dairy market. All three have mentioned that they plan on challenging the new pricing regulations at the World Trade Organization. In recent months the U.S. dairy industry has started a fierce letter-writing and lobbying campaign, both at the state and federal level, to urge their representatives to take action against Canada. Canada’s dairy industry has repeatedly said that the strategy meets their WTO trade obligations.
What really happened was that the US had been taking advantage of a loophole in the NAFTA trade agreement. Most dairy products when imported to Canada are subject to substantial tariffs, but ultra-filtered milk from the U.S. wasn’t subject to those tariffs because it did not start getting used until after NAFTA was approved in 1994. This meant that for many years American dairies could send their ultra-filtered milk north of the border without being subject to tariffs. Until last year when Ontario dairy farmers agreed to sell ultra-filtered milk to Canadian processors, such as Saputo Inc. and Parmalat Canada Inc., at prices competitive with international rates. Other Canadian provinces soon followed suit. The move by Canadian producers has cost U.S. farms upwards of US$150 million, according to a report from the Washington Post.
Part of the challenge with this is that Canada has a supply management system. The supply management system in Canada is administered by the Canadian Dairy Commission (CDC). The CDC, a crown corporation, serves as a secretariat to the Canadian Milk Supply Management Committee (CMSMC), which measures consumer demand for milk and sets the national target for production (of butterfat) accordingly. Each farm owns a number of shares in this market (quota) and is required to increase or decrease production according to consumer demand. Because production is in sync with demand, overproduction is avoided. Farmers can earn a predictable and stable revenue directly from the market, not from subsidies. Often producers will have as much equity tied up in quota as they do in the rest of their operation combined. With this supply managed system, Canada does control the amount of total milk production there is in the country. They also control how much and what types of milk products can be imported into the country and any applicable tariffs. The result is dairy producers in Canada receive a fair and stable milk price and agree to not export subsidized milk into foreign markets. The benefits of this are that while many farmers around the world are losing money at current milk prices, Canadian producers can maintain operations and their livelihood.
Trump, the controversial US president who loves to see his name in the headlines, was as much posturing for his America First agenda as he was for truly standing up for the American dairy farmers. You see “The Donald” loves to fly off on any subject he thinks will advance his agenda. So even if he is ill informed, if he sees a chance to promote his agenda he will certainly take it. A few facts that he is missing is that Canada opens 10% of their market to imports while the US only allows 3%. The US has a $445M trade surplus in dairy with Canada. Some other key metrics are that there are 41,809 herds in the USA with 9,520 of them in Wisconsin alone. In comparison, Canada has 11,280 herds.
While I feel for the forty-four, Wisconsin dairy farms producing about 500,000 pounds of milk per day, that are still hunting for a market home for their milk, the US needs to look inward to solve these issues. Currently, the world dairy market is oversupplied with milk thanks. This is a result of overproduction in many countries and relative declining consumer demand for fluid milk because of the rising popularity of beverages like almond milk and soy milk. You see despite all the rhetoric you might hear, the fact remains that Canada is not putting tariffs on this milk but rather Canadian producers decided to cover domestic demand, and they agreed last year to sell ultra-filtered milk to Canadian processors at prices competitive with international rates. Canadian milk processing businesses are still free to choose their suppliers, just like American companies do.
The issue is that the US has an oversupply of milk, especially in fluid form. In March the National US milk production was up yet another 1.7%, year over year, despite decreased demand and price. This over production will only cause greater pressure on US farm gate milk prices and create more hardships for US dairy farmers. The issue is not that Canada is putting tariffs on milk imported from the US, but rather the US continues to produce more milk than its domestic demand and is now running out of foreign markets to export to or to sell the surplus milk products to. The 75 herds affected by this changed represent less than 0.8% of the US marketplace. That means that the US increase year over year in production alone would account for the difference.
It is not the fault of the forty-four producers (twenty-six have found alternate processors) who are finding themselves without a place to ship their milk to. The fact remains that the US dairy market needs to right size. There is no question that most Dairy farmers around the world are struggling. Recently Australia approved a $450 million bailout package for its dairy industry. In July, the European Union has offered its dairy farmers €500 million in additional support. Sonny Perdue, the new United States, agriculture secretary, who grew up on a dairy farm, was recently grilled with questions during his confirmation hearing about how a government could help ease the hardship of their dairy farmers, who are experiencing historically low prices. The challenge is that the American agricultural industry is heavily subsidized. In 2012 the U.S. paid out $3.84 billion in direct payments to producers as was reported in WTO filings. Also, the U.S. has several dairy price support programs that have paid out millions in support for the sector.
The Bullvine Bottom Line
If this right-sizing does not occur, more finger pointing headline news will be coming. Processors have reached their limit in processing capacity and just don’t have a market for the excess milk. Yes, US President Donald Trump will continue to make outlandish comments. However, the dairy industry including the marketplace needs to find long-term solutions. In the EU, governments have started to develop programs that actually encourage less production not more. But from what I hear from my American friends is that they do not want government doing their farming for them.