Chris Lowrey
PONTIAC Oct. 1, 2018
After an eleventh-hour trade deal between Canada, the U.S. and Mexico that was signed Sept. 30, many pundits are poring over the details of the new agreement.
One of the groups with a direct interest in the new deal is dairy farmers.
During negotiations, U.S. President Donald Trump has made it clear that he wanted concessions from Canada on its supply managed dairy sector.
Supply management is a system that tries to closely match the demand for dairy in Canada with Canadian supply through a quota system.
The government does this by selling milk quotas to dairy farmers and imposing a 300 per cent tariff on many foreign dairy products.
When Canada entered into the Trans Pacific Partnership (TPP) in 2015, the agreement opened up 3.25 per cent of Canada’s dairy sector to international producers.
However, when the U.S. pulled out of the TPP, that 3.25 per cent of the market was filled by other countries like New Zealand and Australia.
As a result, U.S. negotiators were pressing the Canadian envoy for more access to Canada’s dairy market since many U.S. dairy farmers are sitting on a surplus of product.
The new trade agreement, the United States-Mexico-Canada Agreement (USMCA), will see Canada open up an additional 3.6 per cent of its dairy market to foreign producers.
“As TPP goes forward, that’s going to stay at 3.25 per cent,” said local dairy farmer Robbie Beck. “This is an additional 3.6 per cent, on top of the 3.25 from the TPP and on top of close to 17,000 tons of cheese that was allowed in on extra import permits from the Canada European Trade Agreement (CETA).”
“It’s going to complicate things,” Beck said. “I think there’s going to be an impact that we’re going to feel at the farm level.”
Beck said he is especially concerned with the elimination of the Class 7 dairy ingredient pricing strategy. Class 7 was designed to solve Canada’s skim milk surplus that’s come with an increased demand for milk fats in recent years.
Class 7 was designed to price-match diafiltered milk – a newly-invented milk ingredient that replaced powdered milk in the processing of things like cheese and yogurt.
Since diafiltered milk wasn’t covered by the original NAFTA wording – and is considered a milk ingredient – it wasn’t subject to the 300 per cent tariff.
Not only that, but since diafiltered milk was invented in the United States, American farmers were the only ones producing it. That made it much cheaper than the Canadian alternative, so processors chose the American product.
Beck said that the main confusion was in how different levels of government classified milk ingredients. He used the cheese standard as an example.
He pointed to the cheese standard for cheddar which states that 85 per cent of the required protein has to come from whole milk. The remaining 15 per cent can come from milk ingredients.
Beck said that the diafiltered milk coming across the border was classified as a milk ingredient. But once it got to the processors, the Canadian Food Inspection Agency classified it as milk since it was a liquid, milky-looking substance.
“So there was no restriction at the border and because it was considered as milk instead of a milk ingredient, the cheese standard restriction didn’t affect the usage of it either,” Beck said. “Essentially, they were able to go way over the 15 per cent.”
This compounded matters for dairy farmers because there was already a surplus of milk protein thanks to the high demand for milk fat associated with an increased demand for products like butter and cream.
“We’re producing more milk because we need all the fat we can get,” Beck said. “But the problem was that we weren’t using the protein that’s produced in the milk at the same proportion.”
With the glut of American dairy protein in the Canadian market, dairy farmers had a surplus of milk protein on their hands. Many of them had to resort to selling their milk protein as livestock feed, which is priced much lower.
As a result, class 7 was developed to price match the diafiltered milk, which limited the amount coming into the country. Although nothing has changed at the border when it comes to diafiltered milk coming from the U.S., Canadian processors have opted to buy the Canadian product instead of the American product.
Beck says he’s worried that the new trade agreement will take dairy farmers back to a pre-2015 landscape where diafiltered milk floods the Canadian market.
“Since 2015, we’ve had some processors invest quite a bit in the expansion of plants and milk protein processors,” Beck said. “I’m hoping that they haven’t created all this extra infrastructure that we didn’t have before and now it’s going to be filled with American product.”
As with any industry, predictability is essential when it comes to making a business plan. Unfortunately for folks like Beck, there is no predictability in the wake of the USMCA.
“There’s a lot of uncertainty yet as to how it will impact us as things proceed from here,” he said. “It kind of has the potential to take us back three years to a problem that we had largely solved with Class 7.”
Beck says this will result in a decrease in the amount of milk Canadian dairy farmers will produce.
“With 3.6 per cent being filled by another country, then automatically that means there’s a need for 3.6 per cent less quota,” Beck said.
As Beck and other Canadian dairy farmers venture into unknown territory, all they can do it wait and see.
“At this point, we just have to take the cards we’ve been dealt and carry on,” he said.