If American farmers want to avoid future dairy trade tussles with Canada, they should probably support Canada’s supply management (SM) system. That might seem like a bizarre notion, considering that anger and upset with SM is high right now in dairy-exporting U.S. border states, and has drawn the endorsement of no less a champion than President Donald Trump.
But while the future is unknowable, it’s guessable, and I’m guessing that the U.S. would not be a net exporter of dairy products to Canada if free trade in dairy was created. I’d bet that Canada would become a significant dairy exporter to the U.S. and some frustrated American farmers would be looking for ways to block the border, not open it up.
I say this because my experience of 26 years of covering Western Canadian farmers is that their general response to low margins and economic pressure is to try to grow themselves out of it. Getting bigger and having the lowest cost of production per unit is the tried and true method of competing on the world stage for Canadian grains, oilseeds and livestock producers, and I can’t see why it would be any different for dairy farmers.
Sure, if SM was phased-out lots of present producers would also phase themselves out, deciding the intensity of competition and requirement to get bigger and more highly capitalized just wouldn’t be worth the effort. But I’m positive that the response of a solid proportion of today’s farmers would be to scale-up, dig down, and commit to the endless battle of trying to be lowest-cost and highest-quality producers. If a farmer can’t make a living margin for a family by operating with 100 cows, maybe 1,000 would work better, some would conclude. I can see a lot of southern Manitoba farmers doing that. That’s precisely what they do in hog and crops production. It’s what 95 percent of Prairie farmers are doing today with free market commodities.
And look south! It’s the huge American market, with hundreds of millions of hungry consumers just waiting to to be marketed to. Why rely upon Canada’s tiny 37 million consumer market when ten times that many people live just a drive to the south?
Some American politicians assume Canada is a significant dairy market that American milk products are being kept out of by SM restrictions and that a non-SM market would offer an outlet for surplus Wisconsin, Michigan and other northern U.S. producers. The present bubbling-up of upset is based on a group of 75 Wisconsin and Minnesota dairy farmers being told by their local processor that a Canadian action on milk pricing is causing the processor to end their supply contracts, leaving them in a crisis situation with milk cows needing to be milked but perhaps nowhere to send the milk.
This is a sad situation for some very decent Midwestern farmers, but it’s just a product of the closing of a loophole in Canada’s regulations that American processors had been exploiting. Following NAFTA’s exclusion of dairy, the U.S. and others agreed to leave Canada’s SM markets alone in exchange for Canada agreeing to not make substantial exports, and that agreement has held. But the milk ingredients that processors had been shipping north weren’t specifically covered in the agreements, so they could get in regardless of SM’s import restrictions. The Canadian industry has closed the loophole by producing the same products and selling them at world prices, ending any attraction to importing U.S. product.
If this de-loopholed SM system is accepted as trade-Kosher, then it’s probably the end of this dispute for a while, unless something significant happens in the constantly-threatened NAFTA renegotiations. But here’s my little guess: Trump’s and Prime Minister Justin Trudeau’s trade representatives will tussle for a few months, dramatically walk out of meetings a couple of times, hector and make decisive statements, then agree to some minor modifications, including something small for milk access. Canada was going to give up over three percent of the domestic milk products market to Trans Pacific Partnership members if that deal was approved, something the Canadian industry grudgingly accepted, but that deal is dead. Perhaps some of that little piece could be handed over to Trump so he could hold a rally, declare victory, and re-approve NAFTA (and Canada’s dairy system) for a generation.
I don’t have a position on SM. Economically it’s a pretty crazy idea we’d never create today. It gives Western Canada a relatively small dairy industry, relatively high consumer prices, regional disparities and major efficiency problems. It also flies in the face of Canada’s general free trading philosophy. But it’s the system we have, thousands of farmers have built their families’ lives and invested their families’ money on the basis of SM, and it certainly provides stability for farmers and a high quality dairy products system for Canada and Canadians. SM isn’t a great system, but neither is the U.S. system of production subsidies that have promoted overproduction and today’s widespread problems in the U.S.. And around the world dairy farmers are struggling with chronically low prices, so nobody seems to have found a system that’s optimal. It’s hard to argue that Canada’s system is particularly bad when farmers elsewhere are in crisis right now
My argument here is just against the assumption some American dairy interests seem to have that Canada is an easy target ripe for the picking. Getting rid of Canada’s SM would no doubt increase dairy trade, but the milk would probably be flowing south, not north.
(This is the third part of a tripartite argument I have been making about the challenges of U.S.-Canadian agriculture trade. Links to the other pieces are below.)