Dairy epicenter of trade friction between leaders

By Sherry Bunting

originally published in Farmshine, June 15, 2018

QUEBEC — Dairy remains at the epicenter of a trade dispute between the U.S. and Canada.

President Donald Trump and his team have been busy renegotiating NAFTA and looking at the TPP, and while progress was being made in many areas, dairy has become a sticking point that has led to friction and word-volleys between President Trump and Canadian Prime Minister Justin Trudeau in the aftermath of the G7 meeting in Quebec in June.

Headlines after the G7 upset proclaimed that the U.S. is demanding an end to Canada’s dairy supply management system. Actually, President Trump is more specifically seeking an end to the 270% tariffs paid on U.S. dairy exports to Canada.

While the tariffs are much smaller on dairy exports that fall within Canada’s quota of 10% of their domestic production, these tariffs rise exponentially to as much as 313% on dairy exports to Canada beyond the import quota amounts.

On the U.S. side of the import/export coin, import license figures show that DFA holds much of the fluid milk import quota exported to the U.S. from Canada. Many other companies also import dairy products from Canada; however, the value of U.S. dairy imports from Canada is just 20% of the value of dairy the U.S. annually exports to Canada.

In other words, the U.S. exports five times the amount of dairy products to Canada that Canada exports to the U.S. (on a value, not volume, basis) even though Canadian tariffs are high, and U.S. tariffs are low.

Who is advising the President on dairy? National Milk Producers Federation? Dairy processing interests in Wisconsin (Speaker Paul Ryan’s home state) and New York (Senate Minority Leader Chuck Schumer’s home state)? Those two states had been selling ultrafiltered milk north of the border through a loophole that ended two years ago when Canada began its Class 7 pricing for milk destined to be used in products that are exported. This allowed expansion of Canadian quota to fill the growing demand for milkfat in domestic products by providing an off-valve to be competitive exporting the skim milk that rides along with that milkfat.

The issue arises from, first, the loss of a market for U.S. ultrafiltered dairy protein to Canadian manufacturers of cheese and other dairy products, which for several years has been exported to Canada — without tariffs — because it wasn’t a product defined in the tariff schedule.

What changed? Canada added its new Class 7, which allows Canadian processors to purchase milk  (skim) from Canadian farms at lower prices when it is used to offset the increase in butterfat demand (the other part of the milk) sold into their domestic market where pricing is governed by producer-run milk marketing boards to support the country’s milk production quota system.

Canada has allowed farms to increase milk production quotas by 4 to 6% annually over the past four years due to greater domestic demand for butterfat. This leaves more skim floating around to be absorbed in their relatively ‘closed’ dairy market.

The new Class 7, in Canada, allows processors to make skim milk powder — and other dairy protein ingredients — at much lower costs to be able to then export the excess at prices below the global market, because the majority of the producer pricing is still based on the stability of milk supply quotas set by domestic use on a milkfat basis. In spite of this, Canada exports less than 5% of the world’s skim milk powder but does export a modest amount of “food prep” products containing dairy.

The loss of an export market for U.S. ultrafiltered milk solids going to Canada is not the biggest concern. The growing U.S. concern is that the Canadian Class 7 pricing scheme has provided the means for Canada to sell increasing amounts of skim solids to Mexico, which is currently the number-one export destination for U.S. skim milk powder, and that this can increase as quotas expand, at the same time reducing the need for butterfat imports from the U.S. (Canada recently showed a sign of good faith by reducing quota by 3% this year even though quota is based on butterfat demand that is increasing. They are trying to manage the skim portion without exporting more than what they are supposed to in their supply-managed system).

Trudeau knows that his party will lose support from Quebec if he does not stand firm on the supply-managed system for dairy. Moreover, this system has been in place for over 60 years, and what makes it work is the protection from imports via high tariffs.

Does the U.S. have the right to demand our ally and trading partner, Canada, give up its dairy supply management system? And if they did give it up through a transitional process over 10 years, could they not become an even more competitive force on global markets?

Multi-national dairy processors have long sought an end to Canada’s dairy supply management system because their growth in Canada is limited by the fact that they must apply for processing quota — allotted for processors to make dairy products only in amounts that reflect Canada’s domestic supply and demand.

Canadian companies — like Saputo and Agropur — in fact, have expanded processing capacity in the U.S., in order to produce dairy products with U.S. milk for the U.S. and global markets.

That said, is it really smart for the U.S. to demand that Canada end its supply-managed dairy system?

When we say “America first” in trade, should we not expect Canada to reply with “Canada first” as they negotiate?

The point here is two-fold. First, the U.S. could learn something by evaluating how Canada is using its new export (Class 7) to price its “growth” milk, mainly the skim milk that rides along with the increased demand for milkfat.

As consumers learn the truth about full fat dairy, both here and around the world, more milk is needed to supply the increased demand for fat, while not all of the skim is in equally high demand until more processing innovations are in place.

This is a new dairy market development both nations must deal with in their respective systems that were designed to accommodate the past 40-years of flawed lowfat diet dogma.

Instead of simply pointing fingers at Canada, should the U.S. not be analyzing its own government-controlled pricing fixtures? After all, the relationship between USDA and NMPF is a tight one. Not only do their economists float from one entity to the other in their careers, the two jointly control the Federal Order rulemaking process from how petitions are submitted to how hearings are administrated to how NMPF member-cooperatives bloc-vote for their farmer member-owners.

We could benefit from better negotiations with our friend to the North, but now we have gotten into a spitting-match over a system that Canada’s dairy farmers have invested millions into and where most seem to oppose dismantling.

Yet Canada has found a way to participate in the global dairy market by making a pricing loophole to gain export sales for their dairy proteins while ending a loophole the U.S. dairy industry was previously exploiting by exporting ultrafiltered milk to Canada — a double-whammy for the U.S.

The U.S. and Canada have a long alliance on many fronts as nations, and also within dairy. One has only to attend the World Dairy Expo in Madison, Wisconsin and other dairy events and exchanges to see a legacy of competitive camaraderie between our nations.

Let’s not allow the agendas of multi-national dairy processors to drive a wedge.

Is the strong rhetoric surrounding this dairy dispute — and the demands about ending Canada’s supply management — just President Trump’s negotiating tactic of laying the whole game on the table before figuring out how to arrange the pieces in a way that both nations can accept?

If I had Trump’s ear on this issue, I would caution him about hidden agendas among those advising him on dairy.

I would ask him to spend time on a dairy farm, with a room full of dairy farmers, to understand that, yes, all is fair in business as they each seek markets and growth opportunities, but that most U.S. producers do not want to prop themselves up by tearing down their neighbors. There are far deeper problems in the U.S. dairy industry at the moment.

I would ask Trump to stand firm on explaining that Canada can’t have it both ways — with supply-managed dairy production and import tariffs on one side, plus selling their Class-7 priced milk powder at globally low prices to obtain new export markets for their excess on the other.

I would ask both leaders to grapple with their nation’s  respective choices: The U.S. has already chosen a global pathway for agriculture and dairy. Canada has chosen a domestic pathway with supply management. We can either compromise and work together to develop a hybrid approach, or we can each accept the consequences of the respective choices our nations have made in this regard.

The U.S. could put tariffs on Canadian milk and dairy products, and develop an export class for pricing our own excess growth milk to compete globally while stabilizing domestic-use prices — similar to Canada’s new construct — or we can convince our neighbors to limit their growth, within their supply-managed system, so as not to continue expanding via the Class 7 export pricing in a way that intrudes on the dairy export markets we have cultivated in other countries, such as Mexico.

A similar spitting-match between our countries ended the U.S. Country of Origin Labeling (COOL) for beef and pork. That was merely a labeling attempt to identify U.S. produced meat from conception to consumption so that U.S. consumers could choose to support U.S. farmers and ranchers. Canada was among the nations that had taken the U.S. to WTO court a few years ago, and the result was that the U.S. Congress ended COOL to avoid fines, and this has hurt U.S. beef producers.

President Trump has said recently that the U.S. is not planning to pull out of the WTO, but it does want treatment that is more fair.

Now, here we go again, with the shoe on the other foot. This time, Canada’s sacred cow — supply managed dairy and high import tariffs — are being questioned. But in reality, the Class 7 pricing policy is the more pragmatic concern.

Instead of both nations trying to have it both ways while our leaders volley back and forth in a spitting-match on tariffs and mandates and the like — maybe we could all concentrate on negotiating outcomes that are focused on the farming side and not so much the multi-national processing side — to make farming great again.

After all, as go our farmers, so go our nations.

Author’s July 14 update: It was reported within the past 10 days that Quebec, Canada’s largest dairy-producing province, may be softening its stance to reconsider the Class 7 milk price policy to ease tensions between the U.S. and Canada. Bloomberg News reported that Quebec Premier Philippe Couillard met with U.S. Ag Secretary Sonny Perdue, noting that the Class 7 pricing policy is the main sticking point — not Canada’s supply management system of domestic milk quotas and import tariffs. In a recent televised interview, Secretary Perdue said: “The U.S. is not about trying to get Canada to ditch its supply management system…” He explained that if Canada is going to have a supply management system, “you’ve got to manage the supply, and not over-produce and not over-quota to where you dump milk solids on the world market and depress prices for our producers.” The Canadian Class 7 export pricing — in place for the past 18 months — has facilitated the export of excess milk proteins while blocking most dairy product imports. The U.S. is not alone in this concern as other countries are also affected by the movement of the lower-priced Canadian skim milk powder (SMP) to markets served by nations that do not have a supply-managed system and which do not place extremely high tariffs on dairy imports. For the first four months of 2018, Canada has doubled its SMP exports compared with year ago and by 95% over the levels prior to the 2017 start of the Class 7 pricing, which allows milk to be priced much lower when used for products that are exported, and this is doable when the main portion of Canadian farm milk pricing is stable and higher because it is matched to their domestic usage on a milkfat basis.