Escalating US-Canada dairy trade issue

US-Canada dairy dispute brings NAFTA to the fore.

For decades, Canada and the United States have been sparring over dairy and poultry access. President Trump this spring waded into the agricultural trade issue, notably charging that what Canada “has done to our dairy farm workers is a disgrace.” He has argued that “dairy farmers in Wisconsin and upstate New York are getting killed by NAFTA (North American Free Trade Agreement).” In response, Canadian Prime Minister Justin Trudeau told Bloomberg News in an interview: “Let’s not pretend we’re in a global free market when it comes to agriculture. Every country protects, for good reason, its agricultural industries.” And in a letter to the governors of New York and Wisconsin, David MacNaughton, Canada’s ambassador to Washington, affirmed: “Canada does not accept the contention that Canada’s dairy policies are the cause of financial loss for dairy farmers in the United States. The facts do not bear this out.” The envoy instead laid the blame on “US and global overproduction” and low world dairy prices. He has also pointed out that the current trade balance favors the United States by five to one. The US dairy trade surplus with Canada is estimated at US$400 million. At the center of the dispute is a regulatory decision impacting on the substantial increase of US exports to Canada in the past few years of ultrafiltered milk, used to make cheese. These exports, in fact, are not governed by any tariffs under NAFTA. US dairy farmers can sell their ultrafiltered or diafiltered milk duty free to Canadian processors. Such exports tripled between 2011 and 2016 to nearly US$100 million. Large diafiltered production plants have been established along the Canada-US border in states like New York and Washington in recent years to service demand from Canadian processors. Key Issue Over Ultrafiltered US Milk The key issue of the conflict revolves around the implementation in April 2016 of a new class of milk (Class 7) authorized by the Canadian Dairy Commission to price ingredients like protein concentrates, skim milk and whole milk powder. The change in pricing meant that Canadian milk protein would be competitive with imported US products. In this regard, Australian, New Zealand as well as US dairy industry circles insist the new pricing class is driving them out of the Canadian dairy market and want the new regulations challenged at the World Trade Organization. Canadian dairy industry circles counter that the regulations do not run against Canada’s WTO trade obligations. Drawing considerable public attention was the announcement by a leading US producer, Grasslands Dairy Products, of cancelling milk contracts with some 75 Wisconsin producers starting May 1. It is not the first time that Canada has been accused of being overly protectionist on agricultural issues. A supply management system in place since 1966 tightly controls production and imports to support prices. Farmers operate with determined quotas and guaranteed prices. This system has survived trade deals like NAFTA and the more recent Canada-European free trade accord expected to enter force by the end of this year. Dairy Farmers of Canada Responds to Critics Meanwhile, the Dairy Farmers of Canada industry lobby group maintains that “Class 7 is a domestic policy, the sole purpose of which is to allow the Canadian dairy sector to be able to respond to a changing Canadian market environment.” “To be clear,” says Isabelle Bouchard, the group’s director of communications, “the implementation of Class 7 does not block imports or restrict American access to the Canadian market. Canadian businesses are still free to choose their own suppliers, just like American companies do.” Bouchard asserts that struggling US dairy producers “incorrectly laying the blame on an unrelated Canadian domestic policy will not improve their situation.” In a commentary released this month by the Dairy Farmers of Canada, Matt Platt, a dairy farmer in Manitoba, goes into some detail with his personal experiences. And while expressing great solidarity with US farmers coping with excess supply and turbulent markets, he encourages “every dairyman in the US, whether milking 30, 300 or 30,000 cows to look closely at implementing supply management. “Why should farmers not have the same market power as other businesses do?” Platt asked. “Why not meet the market with the correct supply at a stable equilibrium price rather than depress your margins through overproduction?” However, industry observers have remarked, so far, little political support south of the 49^th Parallel to adopt the Canadian concept of supply management.