The word is Class; the number is 7

MERIDIAN, Idaho — One word and one number form the crux of the dairy stumbling block in ongoing negotiations for a new North American Free Trade Agreement.

Class 7, Canada’s recently developed pricing policy for milk protein concentrates, has reduced American milk exports to Canada at a time when U.S. milk prices are low and the country’s markets are oversupplied.

“The whole beef is with Class 7. We did have decent access to a Canadian market through ultrafiltered milk,” said Idaho dairy farmer Allan Huttema.

“Now we directly compete … with Canadian product in the international markets and they come in significantly below our costs. How is that possible? The highest milk price in the world and they can come in significantly under our prices, with a disadvantage on freight and everything else, and come in and drive our prices down?”

Huttema, his wife, Mary Jo, and sons, Chris and Jeremy, operate Almar Dairy near Parma, an Idaho town along the Oregon border, where they milk about 800 cows.

Huttema was among those who met with Canadian Agriculture Minister Lawrence MacAulay in Boise, Idaho, last year and told him Class 7 would create problems on both sides of the border.

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“I know at the time, a year ago, if they would have backed off and stopped Class 7 it would have been enough for the dairy thing to go away (in NAFTA negotiations.) And they were warned many times.”

Huttema sees Class 7 as a far bigger issue than supply management in general, high Canadian tariffs on imported dairy products or the possibility of increased U.S. access to Canadian markets like those negotiated in recent trade agreements with the Pacific Rim and Europe.

“There’s just no way that, when you have a milk price that is that high, that you can turn around and compete like that without calling it dumping. So if it doesn’t get resolved through NAFTA, there will be a WTO (World Trade Organization) complaint,” Huttema said.

Bob Naerebout, former lead at the Idaho Dairymen’s Association, also mentioned the possibility of a WTO challenge if issues with Class 7 aren’t addressed in NAFTA negotiations.

“I don’t think any dairyman in Idaho, that I know, is afraid to compete on a level playing field,” he said.

“It’s when the playing field is no longer level, particularly when you’re looking at that export market, that it becomes an issue. And I don’t think you’re WTO compliant with your Class 7.”

U.S. objections to Class 7 are not a revelation. It was on the American industry’s radar even before its implementation last year as part of Canadian dairy’s National Ingredient Strategy. As recently as Sept. 9, U.S. Agriculture Secretary Sonny Perdue said the Canadian policy has flooded export markets with product offered at a low price.

“Class 7 has to go. It can’t be renamed or called something else,” Perdue said on C-SPAN television.

U.S. President Donald Trump has frequently tweeted comments about the “unfairness” of Canadian dairy policy, a stance commonly thought to have been solidified when Grasslands Dairy Products, an American processor, abruptly cancelled more than 75 milk contracts with Wisconsin producers and cited Class 7 as the cause.

In Idaho, dairy exports to Canada aren’t a major market factor, but the amount is beside the point, said dairy producer Ted VanderSchaaf, who milks about 1,200 cows near Kuna, Idaho.

“They’re watering down our prices. They’re going to say it’s a small amount of product but it doesn’t really matter. Once the price has been set, then we all have to try to compete with that. It doesn’t really matter what the volume is.”

Dairy producer Pete Doornenbal of Caldwell, Idaho, agreed. Idaho producers and processors may not have lost any market because of Canada’s Class 7, but those in Minnesota, New York and Michigan may have done so.

“I’m OK with supply management if a country is going to implement that,” said Doornenbal.

“But when they form a new class of milk and start exporting it, and it’s subsidized and there’s no way that U.S. producers can compete with it, that’s where things get a little bit sticky. That’s where I feel that it’s unfair. We want Class 7 to go away.”

Huttema said he understands the Canadian dairy industry’s move to expand production and circumvent what he described as the constraints imposed by supply management on Canadian producers.

However, supply management was a choice the industry made, producing for the domestic market in return for stability and price.

Other than population growth, Class 7 is the only way to expand dairy markets in Canada, he said.

“The reason you can’t export to the U.S. is because your price of milk (other than Class 7) is twice as much,” he said.

“It’s got nothing to do with any kind of barriers or anything. It has to do with the high cost of product. So why would we import anything from Canada as far as dairy goes? It’s not affordable.

“Class 7 is priced the lower of all world prices and world products. It’s not a publicly derived price.”

The Canadian dairy industry describes Class 7 as a domestic policy that is not designed to block imports or restrict American access to the Canadian market.

Milk in that class, called diafiltered or ultrafiltered milk, is used mostly in Canada to make cheese, and the U.S. dairy industry has been exporting it to Canada. Because it is deemed a protein ingredient, it is not subject to the high tariffs imposed by Canada on other dairy imports.

Ultrafiltered milk arrived on the scene after the current NAFTA agreement went into effect, so it wasn’t subject to tariff rate quotas, either. That allowed American product to flow into Canada, displacing similar Canadian product.

Class 7 was created to market that Canadian product and has reportedly resulted in additional investment by Canadian processors on both sides of the border.

The Aug. 31 Daily Dairy Report distributed in Idaho said Canadian milk production was almost 21 percent greater in January through June 2018 compared to the first half of 2014, before Class 7 was implemented.

The report said the U.S. and other countries have objected to “Canada’s increasingly protectionist policies (that) are diverting trade with attendant global price-depressing impacts.”

Huttema sounds an alarm if Class 7 and supply management remain intact in current NAFTA negotiations.

“I wouldn’t be so certain that it’s going to be dairy that gets thrown under the bus. They’re going to throw another industry under the bus. They’re so scared of dairy,” he said of the Canadian government’s stance.

“Some other industry will take the fall for dairy.”

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