Wednesday, 31 May 2017 04:02

US sees red over Canada's regulated market

Written by  Steve Spencer

There’s been plenty said about the first 100 days of the Trump presidency – more about what didn’t happen in comparison to the campaign promises rather than tangible achievements – but in the recent weeks the dairy industry has been drawn into some of the posturing.

While Trump’s promise to tear up NAFTA – a 23-year-old free trade deal with Canada and Mexico – and send home a large number of illegal immigrant farm workers have the US dairy industry deeply concerned, the recent dramas stem from some other issues.

Canada has retained some strongly protectionist policies to support its dairy farmers. It hangs onto a supply management system created in the 1970s that regulates farmgate milk prices based on different end-use categories, and controls access to the higher-value parts of that pricing structure via quotas for individual farmers. Sounds familiar – NSW and Queensland ran something similar prior to deregulation of farmgate arrangements in 2000.

The Canadian supply management system is one of the most reviewed and ridiculed pieces of farmgate regulation anywhere in the world, and has faced mounting internal and external pressure, including persistent trade complaints from the US, EU, Australia and New Zealand. The WTO has ruled that the high prices paid to Canadian farmers are subsidies that would help make exporting easier.

Canada also maintains a high tariff wall on most dairy products, which keeps most imports from the US (and others) out, helping to prop up higher domestic milk and cheese prices. Exceptions to these are ultrafiltered milk and other protein-rich dairy ingredients used in cheese and yogurt, which enter Canada duty-free and hence land at a much lower cost to manufacturers.

In recent years, US dairies have expanded exports of these low-cost products to plants. In 2016, the Canadian industry (well…farmers) convinced the government to close the loophole in dairy tariffs with a new lower-priced class of milk as an incentive to get dairies to produce these protein ingredients using Canadian milk. That door shut. US imports of these products have crashed.

With the slowdown in access to this market, some US processors have recently found they had too much milk, and blamed Canada for the need to cut contracts to about 75 farmers, who have since been rescued by a host of other companies. The brewing political furore drew in Trump - a profound protectionist who complained of Canada being far too protectionist! Pot kettle black. In truth (if there is such a concept for Trump), he probably got involved to shore up support in dairy-rich Wisconsin where his support base held a marginal win over Democrats in the 2016 election. The milk volumes involved in this fracas are small. The milk effect of US exports of protein products in the past year is estimated at 220 million litres, or 0.23% of US milk output - less than a day’s worth of production.

The other complaint from the US dairy industry is that Canada is more aggressive in selling its increased output of skim milk powder, which included making cheap offers to the important Mexican market, and into other regions. This reopens a large old sore - a dispute made by a number of other exporters including Australia - with the charge that Canada was cross-subsidising its cheap skim milk powder exports by the high milk prices paid to farmers under supply management.  

Again the numbers are not huge. Canada almost doubled skim milk powder exports in the year to February 2017 – to 27,000t – while the US shipped more than 612,000t in the same period. It’s the threat that the Canuck exports may grow to 50,000-100,000t, as rumours from its industry suggest, which has heckles raised.

Trump has threatened to tear up NAFTA to sort out these and a host of problems, and address a growing overall trade deficit with the two countries. That would have spelt a major disruption for the US dairy industry – about a quarter of national SMP output is trucked into Mexico, and it is also the country’s biggest cheese export market. 

He was forced to back down from that threat in late April after a chorus of business and industry leaders – and others in his party - pleaded for a rethink, resorting to a renegotiation of the agreement. Trump claims his national neighbours talked him down.

The reality is that both US and Canadian dairy industries have a glut of milk at a time when the world market has an increasing oversupply and weak demand, and have each cried to their governments to solve the problem. The US problem is more acute in some regions with milk regularly dumped as it exceeds the capacity of available factories. 

It seems a strange situation in the US, as steady growth in milk output has long been a feature of the industry, yet there is a barrier to investment in new cheese plants. Cheese production has grown faster than total milk output in the past 15 years. Quite a contrast from New Zealand where new plants are installed ahead of milk supply, but the economics in manufacturing are quite different.  That’s a whole other story!

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