A guide to understanding the dairy dispute between the U.S. and Canada
High tariffs, ultrafiltered milk and supply management play key roles in the dispute
Dairy cows are shown in a barn on a farm in Eastern Ontario on Wednesday, April 19, 2017.
Sean Kilpatrick/THE CANADIAN PRESS
Why are U.S. dairy farmers mad at Canada?
Canada
has long maintained a high tariff wall on most dairy products. The duty
on milk is 270 per cent. That keeps most imports from the United States
and elsewhere out of Canada, while helping to prop up higher domestic
prices. One notable exception is ultrafiltered
milk and other protein-rich dairy ingredients used to make dairy
products such as cheese and yogurt. North American free-trade rules do
not cover these ingredients, so they enter Canada duty-free. And in
recent years, U.S. dairies have developed a booming business selling
these low-cost products to dairies in Canada ($133-million last year).
That all changed about a year ago, when Canadian dairy farmers and
producers moved to close the breach in the tariff wall with a new
"ingredients strategy." They persuaded regulators to create a new
lower-priced class of industrial milk as an incentive to get dairies to
produce protein substances in Canada, using Canadian milk. The result
was predictable: U.S. imports fell in 2016, and are declining sharply so
far this year.
What is ultrafiltered milk?
Milk
is made up of three main components – milk fat, protein-rich solids and
water. New technology has made it easier to separate milk into its
component parts and concentrate them by reducing water content. This
makes protein substances easier and cheaper to ship compared with raw
milk. It also increases the efficiency of cheese production,
particularly if the ingredients include cheaper U.S. milk.
What is supply management?
Supply
management is the uniquely Canadian regime that governs virtually every
aspect of milk, chicken and egg production. The system depends on three
"pillars" – a tariff wall to block imports, strict quotas that
determine how much each farmer can produce and fixed prices paid to
producers. The system was created in the 1970s to help stabilize
farmers' incomes. But as the food industry has gone global, supply
management has faced mounting internal and external pressure, including
persistent trade complaints from the United States, Europe, Australia
and New Zealand. The World Trade Organization has ruled that the high
prices paid to Canadian farmers are subsidies, making exports very
difficult. For Canadian consumers, supply management also means
consistently higher retail prices for dairy, chicken and eggs.
Will the United States push for an end to supply management in renegotiating NAFTA?
Not
likely. When U.S. President Donald Trump rails about the "very unfair
things" Canada is doing to U.S. dairy farmers, he is mostly talking
about issues such as ultrafiltered milk.
The Trump administration set out its priorities for renegotiating the
North American free-trade agreement (NAFTA) in a recent letter to
members of Congress. In it, the administration said it would seek to
reduce various non-tariff barriers to agricultural trade, including
rules limiting imports and "unjustified trade restrictions" on new
technologies. That is an apparent reference to Canada's
ingredients-pricing scheme. But the letter also pledges to "eliminate
all export subsidies on agricultural products," which could be
interpreted as a challenge to the pricing regime that underpins Canada's
dairy industry. That has prompted speculation that Canada could trade
away supply management for free trade in softwood lumber.
Why did Donald Trump choose Wisconsin to deliver his dairy tirade against Canada?
Wisconsin
is a major dairy-producing state. It is also a state Mr. Trump won
narrowly in the November election. And it is home to Republican House
speaker Paul Ryan, a key ally for the President's legislative agenda in
Washington. The tough talk on dairy is also a sop to key Congressional
Democrats such as Senate leader Charles Schumer of New York, who has led the charge against Canadian dairy policies. Mr. Trump will likely need the support of Mr. Schumer and other key Democrats to renegotiate NAFTA, but also on tax reform and health care.
Why is supply management so entrenched in Canada?
The
dairy industry's political clout should be waning. Just 13 federal
ridings have more than 300 dairy farms – eight in Quebec and five in
Ontario. When the supply-management system was created, Canada had
nearly 140,000 dairy farms. Today, it has fewer than 12,000, and every
year, a few hundred disappear as farmers leave the business and sell
their quota. And yet, all three major political parties (and virtually
every MP) have vowed to support the system. The industry is heavily
concentrated in Quebec and Ontario, which together produce about 70 per
cent of the country's milk. Quebec alone is home to nearly half of
Canada's dairy farms – 5,894 – and pockets nearly 40 per cent of
dairy revenues.
How is the growing global milk glut exacerbating Canada-U.S. trade friction?
Canadian ambassador to Washington David MacNaughton
has insisted that a global oversupply of milk, not Canada, is to blame
for the problems of U.S. dairy farmers. And yet, Canadian dairy farmers
have been struggling to contain a deepening crisis that is threatening
the long-term survival of the carefully calibrated supply-management
regime. That balance has been upended by the surge of milk-protein
imports, a glut of skim milk and underinvestment in dairy processing.
Canada is producing too much milk, but not enough butter, and that is
putting downward pressure on overall farm incomes. U.S. farmers,
meanwhile, are suffering from overproduction and falling global milk
prices. The United States enjoys a large dairy trade surplus
with Canada.
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